Exchange rate in free fall.
Throughout this year the Real has suffered from persistent deterioration.
The contagion from Argentina, concerns about the growth impact of energy
rationing, worries about the global downturn and increased apprehension
about the domestic political cycle have served to weaken the Real
significantly. In September, the currency depreciation continued to
accelerate with the Real losing an additional 5.7% in nominal terms,
following the 4.7% and 5.2% depreciations in August and July respectively.
In total, the Real has now lost 26.8% of its value relative to the US$
this year. As a result of the unrelenting currency deterioration,
international reserve levels have continued to be drawn down as holders of
local assets seek a safe haven in the US$. The loss in international
reserves, which dropped throughout most of September, prompted the Central
Bank to issue some US$ 13 billion in dollar indexed government bonds and
to reinstate the 10% compulsory bank reserve requirement on term deposits
abolished two years ago. This month’s Consensus Forecast reflects
participants’ concern that what was initially expected to be an
overshooting of the exchange rate may, in fact, be a more permanent
weakening of the Real. International reserve levels are expected to drop
further this year, despite the US$ 4.7 billion boost received from the
International Monetary Fund (IMF) on 28 September under the terms of the
US$ 15.65 billion Stand-by Agreement. Thus, the exchange rate forecast
for this year has again been revised upward. Currency pressures are
expected to subside only marginally next year, given the new international
scenario and the prospects for increased risk posed to economic policy by
the political cycle.
Tighter credit and higher interest rates pose
further challenge to economy. The increase in Central Bank
reserve requirements is expected to restrict credit availability further,
which along with a higher probability that interest rates could be hiked
to avert further currency depreciation, will dampen economic activity for
the remainder of this and next year. Even though the Central Bank decided
to maintain the benchmark interest rate at 19% in its 19 September board
meeting, officials are unlikely to ease this year, particularly if
currency pressures persist and concerns over further inflation pass-through
mount The September consumer prices data indicates that annual
inflation remains above the Central Bank target of 6% for this year.
According to Consensus Forecast data, inflation is likely to exceed the
Banking on trade but global scenario not
promising. Despite the economic slowdown, the government is
maintaining its economic growth forecast for next year, anticipating that
the weaker currency will help spur export growth. However, in September,
exports grew only 0.7% over the same month last year, which was down from
3.8% in August. Import growth is showing strong signs of a slowdown as
well, as firms and consumers alike adjust to the weakening exchange rate.
In September, imports declined by 17.6%, the third monthly decline
following the 5.9% and 0.6% drops in August and July respectively. As a
result of substantially lower imports, the monthly trade balance
registered a surplus of US$ 594 million, the highest monthly surplus since
October 1994. The healthy August and September surpluses served to lower
the annual trade deficit to just US$ 174 million in September, down from
US$ 1.1 billion in August. The government hopes that the increased
likelihood of a notable decline in imports, when combined with a stronger
export expansion, will serve to ease some of the pressure on the current
account emerging from adverse international capital market conditions and
declining FDI inflows. According to government estimates, the current
account will drop to US$ 24 billion, which remains well below figure
anticipated by panellists for this year. Furthermore, some participants
remain sceptical about the ability of the economy to export its way out of
the current slowdown, since global demand is likely to experience a major
downturn and the accession of China to the World Trade Organisation (WTO)
is expected to add increased competition for Brazilian exports.
Growth forecast receives major downward
adjustment. Some panellists believe that the economy is
already in or just entering a recession. This month’s Consensus Forecast
indicates that Brazil is likely to enter recession in the fourth quarter
of this year, after meak growth in the third quarter. The high prospects
for a much weaker second half of this year will drive down annual growth.
Moreover, recession is expected to carry over to the first quarter of next
year but the slowdown is likely to subside in the second quarter and pick
up in the second half to boost the annual expansion.