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Division
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Investment and Export
PO Box 7970
Madison, WI 53707-7970
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Vol.
8 #1, September 2008
Brazilian Real Now a Strong Currency
Another sign of Brazil’s booming economy and the changes taking
place in South America’s largest country is the news that the
Brazilian Real is set to become a “strong” currency.
With the Brazilian Central Bank's permission for payments to be made to
Brazil from abroad in the Brazilian real (plural: reais)
-, the first step has been taken for the currency to enter the list of
strong global currencies.
This development is going to permit Brazilian exporters to close their
sales contracts in reais, making it possible to escape fluctuation of
the dollar. In spite of the various attempts of the Brazilian
Central Bank to keep the real low, it has grown stronger against the
dollar. In May 2007, the real became worth more than 50 U.S.
cents for the first time in recent years.
With the recent banking crisis in the U.S. the Brazilian currency
experience a sharp devaluation compared to the dollar, reaching the
exchange rate of U$ 1.00 to R$ 1.85 on the week of September 15, up
from U$ 1.00 to R$ 1.60 in early September. Analysts predict that
there should be an adjustment, but that it is unlikely that the
Brazilian currency will return to the constant valuation it was
experiencing in the last three years.
Inflation in Brazil is expected to be around 6.0 percent by the end of
2008. That is 1.4 points higher than projected by the Central Bank, and
markedly above the central value of 4.5 percent for the target set by
the National Monetary Council.
The Central Bank has a reputation for using high interest rates to keep
inflation within its target range. High interest rates have made
it a target for international hot money flows, and policymakers must
take steps to demonetize these flows to prevent them from overvaluing
their currency. The administration of President Luiz Inacio Lula
da Silva has established credibility as friendly to business and one
that welcomes foreign investment.
Brazil is now a net international creditor for the first time in its
history, and its debt was recently elevated to investment grade status
– moves that have only enhanced the country’s
attractiveness to the international investment community.
Many countries are vying for a piece of Brazil’s prosperity. The
United States, the top exporter to Brazil, has increased shipments by
almost 10 percent annually, but that growth is being surpassed by
others. Germany, Japan, and France (also large exporters) are
also losing market share. In contrast, China’s exports to
Brazil have grown by 37 percent annually since 2000, vaulting it into
second place. India is lower in the rankings, but its share has
more than doubled in 7 years, thanks to 27 percent annual growth.
Even for near neighbors, there are no guarantees. Chile and
Bolivia are winning more market share, but Argentina’s share has
fallen considerably.
The Brazilian market is characterized by rising income, increasing
exports, a steady appetite for imports, and an expanding middle
class. For a number of years Brazil has been expanding ethanol
production from sugar cane and is establishing itself as a source for
renewable fuels technology. A recent oil discovery off the
Brazilian coast promises to make the country a major petroleum
supplier as well.
Brazil's long-term future looks bright. But
competition for a space in this market is intense. Even so,
Brazil’s infrastructure deficit and growing industrial base
present key near-term export opportunities that the USA is well
positioned to participate in.
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