Brazil’s Real Tumbles Amid Slow Growth

By Maria Lopez Conde, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The Brazilian real reached its lowest point in four years last week as disappointing first quarter financial results indicated sluggish economic growth and prompted the Brazilian Central Bank to intervene in the currency market for the first time since March.

On May 31st, the currency tumbled to R$2.1443 per dollar, its lowest value since 2009, while the Brazilian stock exchange, the IBOVESPA, fared no better, closing at 56,506 points, its weakest performance since mid-April.

The volatility of the real to dollar exchange rate, which tilted in favor of the dollar on the heels of positive employment figures, rising home prices and signs of a steady economic recovery in the United States, spurred the Brazilian Central Bank to intervene last Wednesday.

The dollar climbed 7.04 percent in relation to the real just in May, the largest monthly increase for the U.S. currency since September 2011.

Faced with an increasingly strong dollar, the Brazilian Central Bank sprang into action last Friday, selling 17,600 out of 30,000 currency swap contracts worth US$877 million, increasing the availability of dollar-hedged bonds for investors. This operation, which guarantees an exchange rate agreed to at the start of the contract, is a tool used to prevent exposure to currency fluctuations. However, the swap did not keep the real from plummeting later that day, spurring rumors of a second swap.

The improving economic picture in the United States fueled rumors of a possible increase in U.S. interest rates, kept low during the recession to encourage growth. This, according to Brazilian Finance Minister, Guido Mantega, strengthened demand for the dollar and caused “most currencies to devalue.”

Last Wednesday, Mantega also said it is in Brazil’s best advantage for the real to depreciate because it makes the country’s products and prices more competitive outside Brazil. “We are having an exchange fluctuation with the least intervention possible from the government, so it’s the market which is acting this way, and that is positive, because it benefits Brazilian exports.”

The plummeting real was just one of the symptoms of the country’s listless economic recovery. Last week, IBGE data showed the GDP had only risen by 0.6 percent in this year’s first quarter.

The low financial growth disappointed many, especially government officials who were banking on a 3.5 percent rate and economists who predicted a three percent GDP growth this year, after 2012’s meager 0.9 percent expansion. As a result, economists and experts revised their 2.93 percent outlooks for 2013 to 2.77 percent, according to a Central Bank weekly survey of financial institutions released this week.

David Rees, emerging markets economist at London-based macroeconomic research firm, Capital Economics, told The Rio Times that both external and internal factors are driving Brazil’s less-than-stellar growth.

“Weaker external demand and lower commodity prices contributed” to the GDP results, explained Rees, referring to China’s slowdown, among others. “But Brazil’s low investment rate means that it has local supply problems. Local industry is not very competitive and it also faces many infrastructure issues,” Rees explained, adding that Capital Economics expects to see a 2.8 percent GDP growth in 2013.

While the real made some headway against the dollar last Monday, finishing at 2.1265, another round of disappointing financial data released on the same day by the Ministry of Development, Industry and Trade showed Brazil had posted a trade surplus of US$760 million in May, the lowest since 2002. Brazil’s trade recorded a deficit of US$5.4 billion in the first five months of 2013, the worst ever deficit recorded for the time period.

Government officials blamed Petrobras’ oil purchases for the large deficit, warning that the country’s recovery this year would be hindered by the Chinese economy’s deceleration and Europe’s mounting economic crisis. Last Wednesday, Brazil’s Central Bank also unanimously decided to lift the SELIC, the country’s benchmark interest rate, by 0.50 percent to eight percent, a sign that the government is making good on its promise to curb another economic woe: inflation.