Finally, on Tuesday, the dollar rose 1.26% in Brazil, closing at 1.687 sell, the highest one-day rise since June 29. This came on the heels of the government’s decision to raise financial transaction taxes (IOF) on certain investments by foreigners for the second time in less than two weeks.
The idea being to make short-term, hot-money speculation less attractive (even though the main attraction, Brazil’s basic interest rate, remains in place at 10.75%).
A broader objective being to halt the rise of the real, reduce Brazilian imports (specifically, of unbeatably cheap Chinese manufactured goods that are threatening the existence of Brazil manufacturing segment) and make Brazilian exports (preferably, manufactured goods) more competitive.
However, along with the tax measures in Brazil, surprising news came out of China yesterday that is believed to have had something to do with the dollar spike: the announcement that China’s interest rates would rise for the first time since December 2007.
The Chinese are worried about domestic inflation and their decision, besides boosting the dollar everywhere, caused stock markets around the world to drop (in São Paulo the Bovespa was down 2.61%, closing at 69,863).
In spite of the rise, the dollar has still depreciated 0.3% against the real so far this month, and 3.21% since January. In fact, since December 2003, the real has appreciated against the dollar more than any other principal emerging country currency – over 85%.
In the just-released report “Economic Perspectives for the Americas” the International Monetary Fund recommends that Brazil slow down government spending and restrict so-called parafiscal transactions by state-run banks (these are financial operations outside the budget).
The IMF warns that Brazil and other Latin American nations presently undergoing vigorous growth with large inflows of foreign capital should beware of the risks of overheating economies, inflation and deterioration of accounts.
According to BBC Brasil, the IMF said that “normalizing fiscal policy is the first line of defense, with emphasis on reducing government spending.”
In the case of Brazil, the report continues, “less public spending should occur alongside a reduction in off-budget, parafiscal operations by public banks so distortions in normal credit channels can be corrected and monetary policy efficiency restored.”
Critics of government policy in Brazil complain that transfers to the Brazilian Development Bank (BNDES) cause imbalances in government accounts and that the Treasury is increasing public debt levels with the transfers.
Financial analysts are concerned about the monetary and fiscal policies that the next administration will implant (the new government takes office on January 1). Many are calling for a more rigid fiscal approach, consisting of less government spending so as to reduce the pressure on monetary policy and interest rates.
The result would be less foreign capital inflow, less appreciation of the real against the dollar and an improved environment for Brazilian exports – especially high aggregate value manufactured goods.
The Brazilian manufacturing segment is presently being hit with a double whammy: because of the strong real their goods have lost competitivity on international markets while at home their own existence is under threat from cheap Chinese goods.
The IMF says fiscal stimulus removal should occur before changes in monetary policy. Translation: reduce interest rates first.
At the moment (since July 21), the Brazilian benchmark interest rate (Selic) is 10.75% per year, the highest in the world. With interest rates near zero in the advanced economies, it is no surprise that an ocean of cheap dollars is flowing into the country.
The US Fed dumps dollars onto the market in order to loosen up credit, get consumers spending, increase production and create jobs – in the United States. But many of those dollars head to Brazil and the opportunity to make big bucks.
The Brazilian government is trying to stem the flow with taxes on investments by foreigners.
On the foreign trade front, Brazil had a negative result in the third week of this month (October 11 to 17): a trade deficit of US$ 265 million. Exports totaled US$ 3.018 billion, and imports US$ 3.283 billion. On a daily basis, the average deficit per day during the week was US$ 66.3 million.
For the year, up to October 17, Brazil is still running a cumulative trade surplus of US$ 14.189 billion, with exports at US$ 154.120 billion and imports of US$ 139.931 billion. On a daily basis, the average surplus per day is $71.7 million. But that is 36.9% less than the average daily surplus during the same period last year.