MercoPress. South Atlantic News Agency

Brazil targets a dollar floor of 1.80 Reais and questions private banks attitude

Pimentel: to travel overseas the Real is good, but if you are an exporter the rate is dreadful

Having a floor of 1.80 Real to the US dollar is no great thing, but it is a target to sustain said Brazil Development, Industry and Foreign Trade minister Fernando Pimentel referring to the latest announcements to promote Brazilian industry battered by a strong currency and massive inflow of ‘cheap’ imports.

“We can target that exchange rate but it’s not a fixed exchange; that is one of the reasons for the recent measures to prop industry and help with long term accessible loans”, said Pimentel in an interview with the Sao Paulo media.

“When people travel overseas the exchange rate is good, but if you are an exporter the rate is dreadful. For those outside competition standards it is not, and therefore the need to adjust. Nevertheless manufacturing has integrated production lines with outside suppliers, so there is not an exchange rate we can say satisfies everybody. An exchange rate that can be good for those in a dreadful situation could be ruinous for those in a better position”, explained the Brazilian minister.

When asked about the expected results of the latest package of incentives for industry Pimentel said that in the short term the answer is not definitive but “in 90 days we hope to have all neatly regulated and rolling, while the Development Bank BNDES in a couple of weeks should be ready to implement the new (soft) credit lines”.

Pimentel indicated that although Brazil’s BNDES (usually with subsidized interest rates) task are long term loans “unfortunately the private credit system in Brazil has been acting selfishly. At the slightest sign they restrict loans. This is an extended complaint and the BNDES ends having to provide for the insufficient private credit”.

The minister further on admitted he did know whether the Central Bank could ‘stimulate’ or punish with some mechanisms private credit, compulsory or not, but “the increase of interest rate and the spread (between active and passive rates) does not make sense because the Selic (basic rate) if falling; it’s hard to understand what is happening”.

And this is disappointing because “when the economy most needs credit, just when things are not working as they should, the private banking sector retracts, so it is only natural that the government banks have to move in. It’s not enough to lower the basic rate if the spread does not fall also”.

However Pimentel admits that Brazil has to learn to live with a stronger currency than historically it has enjoyed.

“A strong economy and a consistent fiscal policy end attracting foreign capital. Brazil’s interest rates are above the medium world average which leads to a massive inflow of dollars. We have to learn to live with this, which does not mean we are going to allow the currency to appreciate in excess, rather the opposite”.

In the last six months the US dollar has been trading between a minimum of 1.68 Reais to a maximum of 1.89 Reais and currently is at 1.82 Reais.