MercoPress. South Atlantic News Agency

Brazil preparing to act against the strong appreciation of its currency

Jobim and Mantega addressed the same issue from different angles

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.