Tuesday, March 13th 2012 - 07:03 UTC

Goldman Sachs says Brazil’ Real needs to decline 20% to remain competitive

Jim O'Neill, chairman of Goldman Sachs Asset Management, lent his support to Brazilian policy makers' efforts to weaken the Real, saying it needs to decline 20% to keep Latin America's biggest economy competitive.

Jim O’Neill is credited with creating the BRIC acronym

“Brazil's biggest cyclical challenge is to get rid of the strength of the Real,” O'Neill, 54, said in an interview in London on Monday. O'Neill, who created the BRIC acronym in 2001 to describe the emerging markets of Brazil, Russia, India and China, said the currency needs to lose a fifth of its value to be “sustainable.”

The real strengthened 8.7% in the first two months of the year against the US dollar. Since the start of this month, when Brazil boosted efforts to contain the rally, it was the worst performer in the world, falling 5.2%, including Monday’s 1.1% drop.

A stronger currency hurts exporters by making goods more expensive in dollar terms. Brazil on Monday introduced its latest measure to stem capital flows into the country, extending a 6% tax on foreign loans and bonds issued abroad to include lending with a duration of as much as five years. The tax, which originally applied to foreign borrowing of up to two years, had already been extended on March 1 to include a duration of three years or less.

President Dilma Rousseff last week pledged to take all necessary measures to shield the economy from a “monetary tsunami” caused by what she said were efforts by Europe and the US to “artificially devalue” their currencies.

The currency's strength erodes the competitiveness of Brazil's manufacturers and spurs demand for cheaper imports. Car imports surged 30% last year, accounting for 23.6% of vehicles licensed compared with 18.8% in 2010. Industrial production fell 3.4% in January from a year ago, the most since September 2009.

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1 Ozgood (#) Mar 13th, 2012 - 12:48 pm Report abuse
We seem to be in an era of competitive devaluation. I cannot see why “debauching” their currency would help. What it will do is to feed an inflationary pulse into the system, Exports will become competitve for a while but there will be more upward pressure on domestic prices.

Brazil has had its share of hyperinflation.

Yuppie traders will take one way bets on the direction of the currency and make a killing by shorting it.

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