Brazil: Currency war ended, but the problems are just beginning
The largest economy in Latin America, Brazil, is facing some new challenges to put aside currency war. The iconic phenomenon gives its relevance to the balance of payments and inflation threatening to growth unchanged.
The currency war was declared by the Minister of Economy of Brazil, Guido Mantega, in 2010 and declared himself “neutralized” with the efforts of his Ministry in February this year. The actual exchange rate of real stabilized at two per one U.S. dollar. However, negative trends persisted.
Recently the balance of payments deficit hit a record high: 3.2% of gross domestic product. The situation is not as dangerous as to call it a crisis, given the country’s large reserves of international currencies. But it is an ominous sign, which is primarily due to the decline in prices on international stock exchanges that have caused damage to the country’s exports.
The devaluation of goods worsened the inflation, which is already a problem for Brazil (6.27% annually), for the country’s economy, still developing, depends heavily on imports. If the actual continues to weaken, the Brazilian Central Bank will be forced to raise interest rates above the current 8.5%, which could choke the growth fragile.
To alleviate inflation, the Central Bank of Brazil would like to count on the support of foreign investors, whose interest in Brazil would help markets return to appreciate the currency again. This is the reason why Mantega reduced to zero the tax on foreign investment in June.
But if Brazil reaches the end of this year caught between inflation and stagnation, the minister Mantega could look wistfully back to the time of the currency war.
- Erick Gálvez