Brazil 'Took Away the Banquet' to Counter Currency Wars -Minister
By Dow Jones Business News, December 28, 2012, 06:39:00 AM EDT
--Brazil is avoiding inflows of speculative capital, says Brazil finance minister
--At current level, Brazilian real points to 'natural equilibrium,' he says
--Finance Minister Mantega sees Brazil's economy expanding between 3% and 4% in 2013
--Investments and industrial activity will recover in 2013, the minister says
By Rogerio Jelmayer
SAO PAULO--Brazil is better positioned to face a global currency war as it's no longer a vacation resort for short- term capital, according to Finance Minister Guido Mantega.
Global finance leaders have in recent weeks highlighted the risks of further efforts to depreciate currencies in the developed world as they seek to lift themselves out of economic stagnation. That creates problems for emerging economies, the other side of the depreciation coin, a situation first described as a global currency war by Mr. Mantega in late 2010.
"The currency war is not over, but I can say that we are better positioned and we reversed a trend that was bad for Brazil, avoiding the inflow of speculative capital," Mr. Mantega said in an interview with the GloboNews television channel. "We took away the banquet."
Brazil's sky-high interest rates and relatively open currency market made it a favorite haven for investors that could borrow money at rock-bottom rates in Europe, the U.S. or Japan, and invest in relatively low-risk Brazilian government bonds.
In response, the central bank cut the Selic base rate so that it is at an historic low level of 7.25% compared with 12.5% in mid-2011. It also intervened in the foreign exchange market while the government introduced limited capital controls. At the same time, economic growth slumped and is expected to expand just 1% this year, while inflation remains relatively high at around 5.6%.
The government, led by Mr. Mantega, has also sought to engage multilateral institutions in the debate, securing acceptance of capital controls from a previously-reticent International Monetary Fund, and seeking to bring the World Trade Organization into a debate over currencies.
As a result, the Brazilian real has weakened to around BRL2.0405 per dollar compared with a peak of BRL1.60 in July 2011. This makes Brazilian industry more competitive, he said.
"The currency is floating and at this point, with an interest rate that doesn't attract as much speculative capital as in the past, the tendency is that there will be a natural equilibrium for the exchange rate," Mr. Mantega said. "And I believe it is showing that the natural equilibrium is in this range where it is today."
The swing in capital flows has been dramatic: net inflows into Brazil have slumped to $16.4 billion, down from a record of $65.3 billion in 2011. The currency has weakened sharply, particularly in the run-up to year-end, and has now raised some concerns that too much weakness could put pressure on inflation. Indeed, such has been the swing that the government has started to remove some of the capital controls.
The minister didn't indicate whether any more barriers will be removed.
Regarding economic performance in the next year, Mr. Mantega said he expects a recovery in investments and also in industrial activity.
"This year we saw our economic performance hurt by a drop in investments and also in industrial activity. We already saw signs of reversion of this trend in the second half of this year; and in the next year, Brazil's economy may expand between 3% and 4%, with investments expanding up to 10% and industry rising up to 4%," he said.
In addition, Mr. Mantega said he expects an expansion in loans by private-sector banks.
"This year, public-sector banks led the volume of loans. I asked [private-sector banks] to increase lending due to the improvement in conditions, with a reduction in the default rate and the reduction of interest rate and taxes," he said.
The minister also said that the government is evaluating more tax reductions, mainly those linked with payrolls.
--Matthew Cowley contributed to this article
Write to Rogerio Jelmayer at rogerio.jelmayer@dowjones.com |
