By Paulo Prada and Guillermo Parra-Bernal
RIO DE JANEIRO/SAO PAULO, Aug 26 Two short years
ago, Brazil had a terrible problem with its currency - it was
far too strong.
Local factories, unable to compete with Chinese imports made
cheaper by the real's appreciation, were closing their doors.
Fernando Pimentel, the trade minister and a close adviser to
President Dilma Rousseff, declared that "Brazil has joined the
team of countries with strong currencies" and urged industries
to adapt to the new reality.
Now, as global investors shed assets in emerging markets
worldwide, Brazil's problem has abruptly turned upside-down.
The real, along with India's rupee, has weakened more than
any other major currency since May. Its tumble of 16 percent is
forcing businesses, policymakers and consumers to prepare for
consequences including inflation and costlier foreign financing.
The decline has become another symbol of Brazil's fall from
grace among investors and produced a severe case of whiplash
among producers who complain that the basic pillars of Latin
America's largest economy have constantly shifted under
Rousseff's left-leaning government.
Consequences will be felt everywhere from fuel pumps in Sao
Paulo to retail outlets in Miami and New York City, where
Brazilians were such prolific shoppers during the
strong-currency years that the U.S. Travel Association referred
to them as "walking stimulus packages" in 2012.
The depreciation, Finance Minister Guido Mantega told a São
Paulo newspaper over the weekend, "isn't good for anybody."
"It changes the calculation for just about everyone," says
Neil Shearing, chief emerging markets economist at Capital
Economics in London. "What makes sense when you have a strong
currency no longer does at a weaker level."
Until this year, the real was on a tear.
A decade-long period of steady growth appeared to put Brazil
on the fast track toward first-world status, attracting record
amounts of foreign investment and making the real one of the
most coveted currencies in the world.
Since May, when investors turned back toward developed
markets amid bets of a U.S. recovery, the real has tumbled,
trading Monday at 2.39 per dollar. Last week, it approached a
five-year low which,compared with a peak of 1.54 per dollar in
mid-2011, represents a fall of 37 percent.
HIGHER COSTS AND HIGHER UNCERTAINTY
The biggest threat of a weaker real is that of inflation,
especially in a country with a long history of dramatic price
increases. Annual inflation at the end of July was at 6.27
percent, just below the ceiling of the government's target band.
With a weaker real, the cost of imported food, industrial
supplies, consumer goods and other goods rises. Over the past
year the price of wheat flour, a staple that is Brazil's biggest
food import, spiked 29 percent according to central bank data.
The higher costs pose operational challenges for companies
with big dollar expenses and those who need affordable access to
foreign capital. Airlines, who import jet fuel, are so worried
that last week they asked Brazil's government for tax breaks.
The government was surprised by the sudden fall, which could
further complicate an expected re-election bid by Rousseff next
year. Her approval ratings, until recently among the highest of
any leader worldwide, fell sharply after mass protests in June
against everything from poor public services to rising prices.
Yet economists say there is nothing behind a weaker real
that should have caught anyone off-guard.
Demand for Brazil's commodity exports, one of the drivers of
the boom, slowed as growth in China and other big customers
cooled. A nascent recovery in the United States clearly meant
that the dollar, suppressed in recent years by loose monetary
policy now ending, would appreciate.
"Any economic model would tell you that this was going to
happen," says Marcio Garcia, an economist at the Catholic
University in Rio de Janeiro and a visiting scholar at the MIT
Sloan School of Management. "The question was when."
That, of course, is what has Brazil scrambling.
In an effort to shore up the real and stem volatility,
Brazil's central bank last Thursday said it would intervene in
foreign exchange markets with daily cash and currency swaps
valued at $60 billion by the end of the year.
"I'm glad they decided to go for this, but one thing I can
tell you: it's too late," said Lawrence Pih, chief executive of
Grupo Pacifico SA, which owns Latin America's largest wheat mill
and is considering price hikes to handle the higher costs.
Many other companies have taken measures to cope, too.
Travel agencies are shrinking already small margins in order
to limit the hike in air fares.
Others, including state-run energy company Petroleo
Brasileiro SA, or Petrobras, have adjusted accounting methods to
smooth currency fluctuations on their balance sheets.
The changes during the second quarter enabled Petrobras,
most of whose debt is denominated in dollars, to avoid 8 billion
reais of currency related charges. The company is also in the
difficult position of having to import many fuels and sell them,
because of government price controls, at a loss.
Companies are also adopting new hedges against further
volatility. According to data provided by Cetip SA Mercados
Organizados, Latin America's largest securities clearinghouse,
Brazilian companies increased their use of so-called
non-deliverable forward contracts, which are settled in dollars,
by 30 percent since the end of last year.
The short-term pain of a weaker real could pose an
opportunity in the long run. With slower growth, rising prices
and stagnant investment, Brazil could finally have to tackle
long-pending tax, labor and other reforms that business leaders
argue are necessary to make the country more competitive.
"The current scenario is unsustainable," says Marcos Mendes,
an economist who advises Brazil's senate. "The way out of this