Not just an IMF mirage, Brazil forex risk fading
Reuters, Wednesday, November 11, 1998 at 17:44
By Joelle Diderich
BRASILIA, Nov 11 (Reuters) - With an IMF lifeline almost
within reach, Brazil's currency, the real, appears less in need
of one than it has in a while.
Once the most likely candidate for a Mexico-style currency
implosion, the real has been depreciating quietly and swiftly,
for reasons having little to do with the upcoming International
Monetary Fund-led credit line.
Brazil's real was estimated to be dangerously bloated by as
much as 30 percent. And the upcoming IMF balm coupled with
Brazil's tough fiscal tonic have fostered investor confidence
and clearly eased pressure for a large devaluation.
But falling consumer prices and a weakening dollar have
been serendipitously furthering Brazil's controlled devaluation
and taking some of the froth off the currency.
"I would think that the majority's opinion is that (the
real) is improving as we speak as inflation is falling," said
Siobhan Manning, Latin American debt strategist at PaineWebber
in New York.
"I think it would be (overvalued) around the 10-15 percent
range just based on deflation," she added.
The real was sandbagged after Russia devalued in August,
triggering massive capital flight in emerging market nations.
Brazil went through around $30 billion of its foreign currency
reserves and jacked up interest rates to defend its currency
from a speculative blitzkrieg.
But it was also quietly getting some mileage out of
Brazil's lower prices. The Central Bank devalues the real by
7.5 percent to 8 percent a year, but generally inflation eats
into that reduction.
With forecasts of zero inflation or even deflation this
year, that devaluation will bite harder than it would have. And
with a recession on next year's horizon, Brazil should again
see lower prices and another substantive devaluation.
In addition, the dollar, the currency against which the
real's downward progress is measured, has itself fallen roughly
10 percent since April against the mark and the yen, giving an
added push lower to the real.
Amid this improving outlook, some economists now believe
the real is overvalued by only 8 to 15 percent.
"In combination, these two factors -- inflation and the
dollar -- paint an encouraging picture," said Neil Dougall,
Latin America economist at Dresdner Kleinwort Benson, in a
report.
The real's overvaluation against the dollar had declined to
less than 8 percent from 21 percent in January, he said.
"By the end of 1999, all of the real's current
overvaluation will have been eliminated -- moreover, without
any change in the current depreciation rate of 7.5 percent a
year," he concluded.
The IMF-sponsored package of $30 billion to $45 billion is
expected this week, and along with a fiscal package promising
$84 billion in budget cuts over the next three years has
quelled the market storms for the moment.
Dollars started trickling back last week and stocks jumped
25 percent, reaching their highest level since the Russian
crisis hit, after the government announced the sweeping fiscal
cuts to qualify Brazil for international aid.
A Reuters poll of economists last week found that the risk
of a steep, sudden devaluation of the real fell thanks to the
fiscal austerity plan and expectations of an IMF-led loan.
The probability of a once-off devaluation of more than 15
percent between now and the end of 1998 fell to 6 percent from
13 percent last month, while chances of a devaluation in the
first six months of 1999 fell to 17 percent from 22 percent.
"We have successfully devalued the currency without stoking
inflation," said Carlos Kawall, chief economist at Citibank in
Sao Paulo. He predicted the real would end 1998 overvalued by 7
to 8 percent, down from 19 percent at the end of last year.
joelle.diderich@reuters.com))
Copyright 1998, Reuters News Service |
