Brazil’s Currency Falls Another 8.5%
Brazil’s currency lost another 8.5% in value against the dollar on Monday after the central bank said it would continue to let its currency float freely on international markets. The real has now slid 32% since Wednesday.
The government also imposed a sharp hike in interest rates and announced a hurry-up schedule of votes in Congress this week on deficit-cutting measures aimed at shoring up confidence at home and abroad.
Brazil’s ballooning fiscal and trade deficits are widely blamed for the loss of confidence that led to last week’s currency devaluation.
The increase in interest rates by Brazil’s central bank, to 41% from 29%, is bitter medicine that economists nonetheless applauded as essential in limiting inflation and keeping Brazil’s recession this year as short-lived as possible.
But whether Brazil, the world’s ninth-largest economy, halts its currency’s decline or slides deeper into crisis could hinge on whether legislators pass proposals intended to cut its 8% fiscal deficit in half by year’s end.
In Washington for talks with U.S. and International Monetary Fund officials, Finance Minister Pedro Malan denied that Brazil had asked for an accelerated disbursement from the IMF’s $41.5-billion rescue package.
Malan said a second installment of $10 billion, due Feb. 28, would not be forthcoming until an IMF mission visits Brazil to assess the nation’s economic situation.
In addition to budget cuts and new taxes to be voted on this week by Congress, Malan said Brazil will soon announce other unspecified fiscal measures in the face of its oncoming recession and the economy’s adjustment to the devaluation.
Brazil’s currency fell again Monday after the central bank said it would continue to let markets determine the real’s value but would retain the option of intervening in the market “occasionally and in limited form.” The real closed at 1.59 to the dollar, compared with 1.21 a week ago.
The loss of 32% of its value is roughly equal to the degree that economists believed the real was overvalued. If so, the currency has reached its approximate market value.
Stocks on the Sao Paulo exchange continued to react positively, with the Bovespa index climbing 5.43% to close at 7,113 on Monday, on top of Friday’s 33.4% gain, the largest one-day jump since 1991.
Last week’s market surge came when the government abandoned the battle to prop up its currency, an effort that has cost Brazil upward of $50 billion in foreign reserves since July. A stable currency has been the centerpiece of President Fernando Henrique Cardoso’s economic reform plan since 1994.
But Brazil’s fluid political situation and the continued flight of capital underscored the shaky climate. An estimated $150 million fled the country Monday, according to Citibank of Sao Paulo. Last week, an average $800 million in foreign capital left each day.
“You have several key events this week that could either help stabilize the real or let it continue to slide,” said Ed Cabrera, chief Latin America equities strategist at Merrill Lynch. He believes the real’s value will settle at about 1.60 to the dollar.
At a news conference with the heads of Brazil’s two houses of Congress, Cardoso called for quick passage of fiscal reform measures, including higher transaction taxes on all checks and ATM withdrawals, higher taxes on retirees, and higher pension contributions by government employees.
Economists expect Brazil’s economic output to shrink by as much as 5% in 1999. Inflation and unemployment are also expected to rise sharply.
Before the central bank’s action Monday, some were calling for a reduction in interest rates as a means of stimulating a recovery.
But most economists said rates must stay the same or even rise for now because lowering them would spur consumers to buy, putting pressure on prices and possibly reigniting the inflationary cycles that crippled Brazil’s economy in the 1980s.
“Rates must remain high, at least for several months, so we can stimulate domestic savings, lower the balance of payment deficit and not reignite inflation,” said Carlos Eduardo de Freitas, a professor at Getulio Vargas Foundation in Brasilia and a former top central bank official.