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Analysis - Brazil's forex problems will not end with Petrobras

SAO PAULO (Reuters) - Hosting the world’s largest-ever share offering has not been easy.

A general view shows the P-51 oil rig of Brazilian oil giant Petrobras at Angra dos reis in Rio de Janeiro in this August 21, 2008 file photo. REUTERS/Bruno Domingos/Files

Brazil has battled to control the rapid appreciation of its currency as foreigners pour money into a $79 billion (50 billion pounds) offering by state-controlled oil company Petrobras PETR4.SAPBR.N, which is expected to price later on Thursday.

But the country’s booming growth and an ever-weaker dollar is likely to continue to support Brazil’s real, inflicting further damage on the country’s industry.

Despite the authorities’ efforts, the real is now the most overvalued major currency in the world, according to Goldman Sachs. Exporters are suffering as their goods become more expensive abroad and manufacturers are struggling to compete with a flood of cheap imports.

After the last of the Petrobras funds trickle in next week, Brazilian authorities will be hoping the real makes a hasty retreat from its recent highs.

But analysts are not so convinced.

“Some of the pressure will probably disappear but the long-term appreciation trend will remain,” says Marianna Costa, an economist with Link Investimentos in Sao Paulo.

Robust economic growth, fuelled by a growing middle class and higher commodity prices, has boosted the currency 100 percent since 2003, and this trend is likely to continue.

If the Petrobras deal had never happened, the real might currently be trading somewhere around 1.75 per dollar, says Pedro Tuesta, senior Latin America economist at 4Cast in Washington. That would still be close to its strongest level this year of 1.702 and almost 3 percent firmer than the end of June.

The real was trading around 1.720 in the local spot market on Thursday.


The most likely reason for the real to continue to appreciate has nothing to do with Brazil. The concern is not the strong real but the weak dollar, analysts say.

The Federal Reserve indicated this week it may introduce more quantitative easing to stimulate the U.S. economic recovery. This would weaken the dollar, favouring U.S. exporters and boosting growth, but it would also encourage investors to borrow cheap dollars and pour them into higher-yielding assets in countries with high interest rates, such as Brazil.

Scores of countries, most recently Japan and Colombia, have responded by trying to weaken their own currencies to defend their exporters.

“It’s a global problem,” said Raphael Martello, an analyst with Tendencias consultancy in Sao Paulo. “The biggest fear is that you will have various central banks in a race, all trying to weaken their currencies.”

Brazil has already been increasing its dollar purchases in an effort to weaken the real, calling two auctions in the spot market every day since September 8 rather than just one, and buying as much as $1 billion (636 million pounds) a day.

The government could also use the sovereign wealth fund to buy dollars or intervene in the futures market via derivatives called reverse currency swaps, as it has threatened to do.

Another hot topic of debate is how many companies will try to raise funds in the wake of the Petrobras deal, which has already satiated investors’ appetites.

“Many local companies have been putting off their issuance plans,” says Marjorie Hernandez, a currency strategist at HSBC in New York. “Once the Petrobras deal is completed, we see now rising probabilities that other IPO deals could be announced, adding upside risks for the Brazilian real.”

But it will be a few months before these companies venture back to the market, says Reginaldo Galhardo, head of currency trading at Treviso brokerage in Sao Paulo. “There are many companies who abandoned their plans for the rest of this year and even then, it wasn’t such a huge number anyway.”

He sees the real trading between 1.75 and 1.78 in the aftermath of the Petrobras capitalisation.

In the meantime, investors are in for a busy few days as the share offering squeezes its way through the market.

The main reason for the currency volatility is that no one knows what portion of the funds raised will be from foreign investors and how much of this cash is already in Brazil.

Estimates vary widely because this money is coming in via so many different brokerages due to the offering’s sheer size. The most popular bet is about $25 billion (15 billion pounds) of foreign funds.

Data on dollar inflows released earlier this week suggests investors have already converted a lot of these dollars.

In the first half of September, $11.1 billion (7.0 billion pounds) was brought in -- more than three times the amount of cash that poured into Brazil throughout the rest of 2010.

Analysts estimate that up to half of foreign investment in the Petrobras offering is yet to come in. That creates a risk that the central bank could hold three or more auctions on Friday or Monday to soak up the excess dollars, analysts said.

It would be the first time since 2004 that the bank has held more than two auctions to buy dollars on the same day.

Brazil’s Finance Minister Guido Mantega vowed last week that the authorities would soak up every single dollar that came in because of the deal. “We’ll buy it all!” he said. But recent central bank data shows that has not yet happened.

“It’s not that the central bank isn’t trying but there are limits,” said an economist at Sao Paulo’s BGC Liquidez brokerage.

Editing by Todd Benson and Andrew Hay