Brazil preparing to act against the strong appreciation of its currency
Brazilian Finance Minister Guido Mantega said foreign-based companies operating in Brazil should consider sending some profits home as the exchange rate is unlikely to remain as favorable as it is now.
“This exchange rate won’t remain so favorable for companies that repatriate profits and dividends to their headquarters” Mantega said Monday at an event in Sao Paulo. “We cannot facilitate the appreciation of the currency”.
Another Brazilian top official Economic Policy Secretary, Nelson Barbosa said that the inflation target index could be gradually reduced beginning 2012, since it impacts on the appreciation of the currency.
The Brazilian currency strengthened 33.6% last year, the most among 25 emerging market currencies tracked by Bloomberg, on the back of economic growth and rising demand for the country’s commodity exports. A stronger currency buys more dollars when companies transfer Reais from Brazil.
GDP may have expanded between 0.5% and 1% in the second quarter, Mantega said. Brazil’s GDP may grow 6.5% to 7% this year and in the following years to 2014 should average 5.8%, he added.
The Brazilian economy in the first quarter expanded 9%, over the same period of 2009 and 2.7%n over the fourth quarter of last year.
Mantega also said that Brazil’s widening current account deficit is a transitory problem caused by the worldwide economic slump. The country may take as long as two years to narrow the current account deficit, Mantega said.
The minister however did not advance whether the government is planning to adopt measures to curb the currency’s gains.
Brazil’s current account deficit in the year through July widened to a record 43.8 billion Reais (25 billion USD), the central bank said last week. The Finance Ministry estimates the deficit will increase to 45.9 billion Reais this year almost double the 24.3 billion Reais deficit in 2009. The gap will further widen to 56 billion Reais in 2011.
During the next month and a half, the government may announce incentives such as tax cuts to induce domestic banks to increase long-term lending, Mantega said.
Brazil may “slowly” reduce its inflation target beginning after 2012, Nelson Barbosa, economic policy secretary at the Finance ministry, said Monday in Sao Paulo. He argued that the inflation target affects the country’s exchange rate.
Brazil currently targets inflation of 4.5%, plus or minus two percentage points.
Mantega also underlined the strength of the Brazilian economy by recalling that it is performing under “normal conditions”, when presidential elections are only a month away. He also emphasized that inflation and government expenditure are under control in spite of the deficit increase in the last few months.
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China artificially maintains their currency super undervalued and their huge trade imbalances are affecting the entire world.
In my opinion with a strong currency, what is reliable, stable enough, backed by a strong producing economy is good for the population of that nation where they use that currency locally. A stronger (reliable/stable) currency means: purchasing power for the people who use that currency. Very important. The more worth/strong your money, the more you can buy with less money. Now people say, “Oh, but that's bad for your exports”. Yes, but you can solve that problem by lowering and sweetening the investments environments by keep the capital gain taxes on a level that's competitive with other nations, reform your tax code (what many nations need and in my opinion a flat tax is the best), or perhaps also the pension system ( what is necessary in some nations) and not to forget, cut government (Keep government small, but not to small, meaning have short, effective but powerful regulations). Those are steps you can take to stay competitive with a strong currency.
With a strong currency, the population has not only a strong purchasing power but also a strong savings rate ( after spending on the basics). In nations with a strong currency, the people are also more involved in politics. Why? To protect their own wealth.
If the goal of Brazil is to expand its economy rapidly and get millions of its people out of poverty, that can only be done by means of maintaining their currency at competitive levels with similar countries with which they compete in world markets, namely China, India, Russia and even Turkey or Mexico and other countries with capacity to manufacture valued goods at competitive costs.
Having a strong currency means that goods manufactured in the country will become more expensive in world markets, and will not be able to compete against the same kind of goods made in China, India and other countries Brazil purports to compete against. So investors, both foreign or national, will have to think twice before opening a manufacturing facility in the country, if they can't hedge on a competitive foreign exchange rate, they will take their precious investments, know-how, technology transfer and good paying jobs to other countries where they can lock in on their exchange rate in order to keep their costs down, such as India or China.
This is important because to maintain Brazil's high growth rates that growth has got to come from outside markets, as if has been in the past few decades and if the economy is to rely only in its internal markets, it will be crippled by the inner market limitations, provoking economic stagnation without the influx of fresh foreign capitals.
To keep people out out poverty, they need to be independent. With a strong currency they have purchasing power (low/stable inflation).
How can you still have a strong/productive manufacturing base and exporting economy? Reform your damn outdated tax code, lower the capital gain taxes (not to low, but try keep it competitive compare to other nations) have regulations, but short and understandable to keep it wide open for foreigners who are wiling to invest in your country. Also make sure the government cut wasteful government spending. All those things plus that is also how you can keep prices low and keep foreigners and locals investing in the home nation. You believe China can keep those silly wages what they pay to their slave workers? No, and they know that, that's why slowly they reform their whole system, rather than keep raising and raising their salaries. When their money is more worth, that little bit what the Chinese are earning will give them more purchasing power than what they have today. they will still stay an export nations with the right fiscal policies + the Chinese can buy their own goods and be less depended on only exporting. Brazil can do the same thing. My country thinks that pushing the value of the yuan up, the manufacturing base will come back..HA..wrong, because they don't like being taxed deep in their ****. So Brazil, this is your chance to learn from the mistakes up north.
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