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Montevideo, September 26th 2023 - 22:46 UTC



Brazil’s post-election adjustment “won’t have much influence” on Uruguay

Monday, September 20th 2010 - 04:25 UTC
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Uruguay’s Deputy Economy minister Pedro Buonomo, far from ‘equilibrium’ Uruguay’s Deputy Economy minister Pedro Buonomo, far from ‘equilibrium’

Uruguayan market analysts don’t believe Brazil’s attempts to prevent its currency from continuing to appreciate will have a relevant impact for Uruguay or for its foreign exchange rate.

Brazilian Economy minister Guido Mantega announced Wednesday that in a month’s time (after the October 3 presidential election is decided) the government will implement a plan to contain the sustained growth of the Real against the US dollar. However he did not specify details.

But Uruguayan analysts consulted by the local media anticipated that Brazil does not have that many tools to reverse the current tendency of its currency, and therefore the Uruguayan peso which is closely linked to the Real will continue to appreciate against the greenback.

Last June Uruguayan authorities begun implementing monetary and exchange measures to prop the US dollar in the local money market but three months later the steam has gone and the Uruguayan peso is again steadily gaining ground, which has an impact for exporters with significant costs in pesos.

Last week the US dollars ended just above 20.30 Uruguayan pesos, which is the minimum rate of the “equilibrium” point announced three months ago in an attempt to help protesting exporters.

At the time Deputy Economy minister Pedro Buonomo said that “all necessary measures would be addressed” to have the dollar back at what he described as the equilibrium point, between 21 and 22 pesos. The day following his statement the US dollar jumped 3.56% to 20.77 pesos, but with last Friday’s closing the foreign exchange rate is back at the June starting point.

In Brazil when Mantega announced post-election measures, the US dollar appreciated against the Real, but it’s already back at 1.716 Reales.

“Unless Mantega comes up with something really original and revolutionary, sustaining the exchange rate in Uruguay will demand additional efforts from the country, because the inflow of US dollars is impressive”, analyst Alfonso Capurro is quoted by Montevideo’s main daily El Pais.

He recalled that not so long ago Brazil applied a tax on short term capital inflow, but only helped to contain the appreciation of the Real for a short period. “The only way to contain the currencies in Brazil and Uruguay vis-à-vis the US dollar is to have a fiscal surplus, which enables to purchase the excess of dollars coming into the economy”.

Another economist, Pablo Rosselli from Deloitte’s believes that “any measures taken by Brazilian authorities will only have a transitory effect over the foreign exchange rate”.

Rosselli said central banks in the region have an uphill battle to contain the increasing value of their currencies because of the massive inflow of foreign investments, the export dynamism given the strong commodities’ prices and the low interest rates in the developed world.

Ramon Pampin from PricewaterhouseCoopers said that if Brazil follows the same path as Uruguay, “the foreign exchange rate could rise supporting the US dollar” but it will be short lived and won’t have much impact on the Uruguayan peso.

Rosselli and Capurro estimate that in the second half of the year the US dollar exchange rate could further debilitate as the Uruguayan peso continues with its strong performance.

Categories: Economy, Uruguay.

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