Brazilian Real: History, Analysis, and Forcasts.

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Brazilian Real: History, Analysis, and Forcasts.

  1. 1. BRAZILIAN REAL Analysis, Forecasts, and InsightUPDATE Christopher Oruma
  2. 2. REAL BACKGROUND
  3. 3. HISTORY OF THE BRAZILIAN REAL The Brazilian Real has been Brazils currency since 1994. It was created from the government plan which was called the “Plano Real” Plano Real means “Real Plan” in Portuguese This was an attempt by Brazils government to try and stabilize the countries economy which has been in hyperinflation for decades.
  4. 4. “CRITICIZED” This plan faced a lot of skepticism because it was the 7th intervention by the gov’t and the 5th currency since 1986. Cardoso whom was the president and Brazilian minister of finance was the architect of the plan. Cardoso put together a team of economists to help him construct the plan The Stabilizing plan was introduced in 3 stages
  5. 5. THE 3 STAGES OF THE STABILIZINGPLAN 1st Cardoso would need to win the support of Congress and achieve a balanced budget through FSE, an emergency social fund. 2nd would be the introduction of a new index, Unidade Real de Valor (URV). 3rd The introduction of a new currency, which would become the Real. Eventually on Feb 23, 1994 congress passed the FSE, and the URV was pegged to the U.S. American Dollar
  6. 6. VERY EFFECTIVE Finally July 1 1994 Brazil announced its new currency the Real and officially put an end to the old currency the CruzeiroThe URV was very effective, and the rate of inflation remained stable between March of 1994 through May of 1994.The Real equaled the U.S. Dollar at the time that it was introduced into the economy
  7. 7. HYPER INFLATION Since the 1940’s Brazil has experienced an accelerating rate of inflation. The explanation of this trend is political and sociological factors as well not just economic factors. The most important reasons for problems caused by inflation was the price that had to be paid for the countries rapid development. Overtime inflation seemed to be something normal and something you cant avoid by the Brazilian society.
  8. 8. TRADE OFF There seemed to be a trade off relation going on between price stability and growth The policies that were created to lower inflation actually were a big influence on why there was inflation However recently since the 1990’s Brazils inflation rate seemed to be a concern to everyone however before the 1990’s nobody thought that it was too much of a concern
  9. 9. BRAZILS CENTRAL BANK Throughout the years Brazil had little concern about its government projects and how investment would be financed Brazil did not have a Central Bank until 1964 Unlike most Central Banks Brazil lacked autonomy and decision making abilities Brazils Central Bank was closely tied to its government
  10. 10. BANCO DO BRASIL Until 1986 the largest state commercial bank Banco do brasil was free to extend loans greater than its deposits, since any currency shortages would result in the central bank printing out more money. These things led to large deficits and huge increases in the money supply After many stabilization effects monthly inflation reached 50% in June 1994 right before the “Real Plan” was launched So the purpose of the plan was to introduce a currency that would fight inflation
  11. 11. ANNUAL INFLATION The annual inflation for Brazil was 909.7% in 1994. By 1997 however Brazils inflation had dropped merely 4.3% The new plan had succeeded and in adjusting inflation and in addition to that fiscal measures were adopted to increase government revenue. Income tax rates were raised and there was a 15% reduction in funds transferred by the federal government to states and municipalities.
  12. 12. URV URV (Unidaded Real de Valor) is the official price index that was introduced before the Real Plan. The government’s strategy was to have prices follow the URV transforming them into the new currency, the Real. To keep the new currency free of inflation monetary and fiscal adjustments were needed However the URV was not as efficient as predicted. The use of the URV in the private sector to determine price changes was not as efficient.
  13. 13. SUCCEEDED Overall the inflation rate fell This was mainly due to labor market stability and government controlled prices Now that Brazil is able to raise money in the international financial market, foreign investment increased and lower import tariffs allowed for foreign competition under the industrial sector of Brazils economy Now the new Real these changes defined a new era for the Brazilian economy
  14. 14. MONETARY AND FISCALPOLICY OUTLOOK
  15. 15. MONETARY POLICYINTEREST RATES AND INFLATION
  16. 16. CENTRAL BANK OF BRAZIL Brazil controls their interest rates to maintain inflation at given upper and lower bounds. Main mission of the BCB is to hit a target range of inflation  Sacrifices the ability to respond to fiscal spending changes and prevents large scale currency interventions This in turn leads an indirect level of currency control
  17. 17. CENTRAL BANK OF BRAZIL
  18. 18. SHORT TERM:INFLATION - INTEREST RATES Slowing inflation in Brazil this year will allow the countrys central bank to adopt flexible interest rate policy, Finance Minister Guido Mantega said Thursday. Allows Brasilia to lower interest rates without a fear of encouraging inflation Is Mantega’s forecast valid?
  19. 19. 14SHORT TERM: 12INTEREST RATES 10MANAGING INFLATION 8 Lower Bound Upper BoundHas inflation management stayed on 6 Realizedtrack? Poly. (Realized) 4 2Inflation has slowed in recentmonths, but assuming a modest 0additional inflation of 0.5% for 2012and 2013 would send prices upagain.
  20. 20. SHORT TERM:INTEREST RATES “Brazils central bank has cut the countrys reference Selic rate by 2 percentage points since August to 10.5%.”  Selic is the name of the Brazilian interest rate “According to some market forecasts, the bank is seen cutting the rate further to as low as 9% before the end of this year. “
  21. 21. SHORT TERM ANALYSIS If inflation is kept in check, the Brazilian government will have room to lower interest rates – this could lead to a decrease in foreign investment and thus depreciation in the currency  This could promote the Brazilian Balance of Payments: export industries “cheaper”, and domestic import competing companies face less invasion or “dumping” If inflation is not kept in check, the Brazilian government will be forced to keep interest rates high attracting more and more foreign capital and thus putting more pressure on the real to appreciate.  This could hurt Brazilian Balance of Payments: encourage even more import spending which is already high, hurt export industries and make domestic import competing companies face more invading goods.
  22. 22. FISCAL POLICYINCOME, GOVT SPENDINGPRICE DIFFERENTIAL
  23. 23. INCOME EFFECTS OF FISCALPOLICY Brazil has historically faced vast poverty – once considered one of the most unequal nations on earth Political trends over the past twenty years have been including a broader civic spectrum  Involves bringing working class, middle class and lower class into the conversation Result: large social welfare programs like Bolsa Familia, Bolsa Escola, pension programs, and high paying public positions
  24. 24. INCOME EFFECTS OF FISCALPOLICY
  25. 25. CONSEQUENCES Larger government spending – less saving in the economy, higher inflation, but larger social welfare and more purchasing power Since BCB must stick with target rates, changes in fiscal policy can disturb monetary policy Higher inflation can lead to higher interest rates which can attract more capital
  26. 26. CONSEQUENCES Mantega Thursday also noted that local markets responded positively to a government initiative Wednesday to freeze 55 billion Brazilian reais ($32 billion) in spending from the 2012 budget as part of an effort to meet fiscal savings goals. A combination of lower government spending and lower interest rates can offset inflation and allow Brazil to devalue its currency by being less attractive to foreign capital
  27. 27. BALANCE OF PAYMENTS
  28. 28. TRADE AND CAPITAL ACCOUNT Since Brazil is largest economy in South America, with a 2.1 trillion dollar economy, its trade account and capital account are doing extremely well even compared to western countries.
  29. 29. WHAT IS CAPITAL ACCOUNT? All International Purchases or Sales of Assets Major types of capital transfers are debt forgiveness and migrants goods and financial assets accompanying them as they leave or enter the country Capital account inflow example: exports of goods or services
  30. 30. CAPITAL ACCOUNT Brazil has the highest net capital account in South America due to its large and growing agricultural, mining, manufacturing, and service sectors. In 2010, Brazils net capital account was about $1.14 billion (measured in U.S. dollars)
  31. 31. BRAZILS CAPITAL ACCOUNT GROWTH  1975- 40 million  1983- 3 million (fought war against the UK. Bad idea)  1988- still 3 million  1990- 35 million  1995- 352 million  2005- 663 million  2010- 1.14 billion (almost double in 5 years)
  32. 32. CAPITAL ACCOUNT- BRAZIL VSFRANCE, 2001-2012 Brazil France
  33. 33. WHY??  Answer: Brazil is the worlds leading “emerging market” economy. Growing @ 6-8% per year. U.S. is lucky to grow at 3% per year.  Brazil GDP (Equal to UK): 2.1 Trillion and growing! This high GDP and growth rate attracts foreign direct investment and purchasers of Brazilian government debt. (U.S. grew the same way...foreign nations help finance your growth)
  34. 34. VIDEO  http://www.youtube.com/watch?v=v4FsF8SS34k
  35. 35. TRADE ACCOUNT  Trade Account is Total Exports-Total Imports  Focuses on traded goods, not services  Much easier to measure goods though  Trade deficit (Imports>Exports) can weaken a countrys currency over time  Hume Theory: Deficits and weaker currency will begin to promote the opposite over time
  36. 36. BRAZILS BALANCE OF TRADE In January 2012, Brazil reported a trade surplus of $1.3 billion Brazils primary trading partners are the United States, the EU, and Argentina
  37. 37. BRAZILIAN EXPORTS Iron Ore Industrial Raw Materials Soybeans Beef and Pork Cotton Footwear Coffee Autos Automotive Parts Machinery
  38. 38. BRAZILIAN IMPORTS Machinery Electrical and Transport equipment Chemical products Automotive parts Electronics (As you can see, mostly advanced finished goods from Europe and the United States)
  39. 39. TRADE ACCOUNT JAN-JUNE 2011 In the first half of 2011, Brazilian foreign trade registered a trade flow record U.S. $ 223.6 billion, an increase of 30.1% over the same period in 2010, when it reached U.S. $ 170.5 billion. For 2010, exports grew by 31.6% and imports 28.5%. These significant increases indicate the strength of the progressive inclusion of Brazil in international trade.
  40. 40. TRADE ACCOUNT- JANUARY 2012 In the month of January, exports reached U.S. $ 16.141 billion and daily average of U.S. $ 733.7 million, records for the months of January, surpassing January 2011 (U.S. $ 15.214 billion and $ 724.5 million, respectively). Imports totaled U.S. $ 17.433 billion and daily average of $ 792.4 million, a record for January, surpassing January 2011 (U.S. $ 14.817 billion and $ 705.6 million, respectively)
  41. 41. TRADE ACCOUNT- JANUARY 2012CONTINUED The trade balance in January saw a deficit of U.S. $ 1.292 billion, reversing the result of January 2011, when he presented a positive balance of U.S. $ 397 million. During this period, bilateral trade reached a record figure for the month of January of $ 33.574 billion Summary: Trade is increasing, Brazil is growing, and some months has a trade deficit (not a bad thing at all)
  42. 42. FEBRUARY 2012 (NOW) During the second week of February 2012, the trade balance registered a surplus of U.S. $ 1.155 billion, a result of exports worth U.S. $ 5.087 billion and imports U.S. $ 3.932 billion. This surplus was due to huge exports in commodities (coffee, soybean, iron ore, beef) and manufacturing (oil equipment and auto parts) In the month so far, exports totaled U.S. $ 7.691 billion and imports U.S. $ 6.340 billion resulting in a trade surplus
  43. 43. LOOKING FORWARD
  44. 44. USD TO BRAZIL REAL
  45. 45. EURO TO BRAZIL REAL latest (Feb 17) lowest (Feb highest (Sep 2.25501 15) 23) 2.2475 2.56659
  46. 46. YEN TO BRAZILIAN REALlatest (Feb 17) lowest (Sep 2) highest (Sep 23)0.0216017 0.0211482 0.025084
  47. 47. EXPORTS (BILLION $)
  48. 48. MONETARY POLICY MOVE Jan 18th, 2011: Brazil’s central bank, Banco Central Do Brasil, announced an interest rate increase of 50 basis points, raising its overnight lending rate (Selic) from 10.75% to 11.25%. This move was made because Brazil wants to curb its inflation rate.
  49. 49. INFLATION 5.91% in 2010, a significant increase from 4.31% in 2009, and considerably higher than the government’s target of 4.5%.
  50. 50.  Brazil has been trying to protect its domestic industry. In order to promote domestic products instead of exports, the real’s value needs to be kept low. Increasing Brazil’s key interest rate to 11.25% makes investing in the country very attractive to foreigners. Jan 18th, 1-year Brazilian government bond yields 12.52% while the American equivalent yields a mere 0.25% and the U.K. will yield 0.77%
  51. 51.  International investors buying reais to invest will certainly drive the currency up in value. A higher real makes import less expensive and more attractive The principally affected group is therefore the domestic manufacturing sector- the very sector the government aims to protect.
  52. 52. THE DILEMMA Brazil therefore faces the dilemma of protecting itself from inflation or protecting its domestic manufacturing sector. If the central bank stops increasing interest rates, the economy faces the risk of overheating. On the other hand, if monetary policy is tightened too much, in addition to domestic lending being curbed, foreign investors will put upward pressure on the real.
  53. 53.  A year later; Feb 20th, 2012 What they did.
  54. 54. ACCORDING TO THE O ESTADO DE S. PAULOWEBSITE VIA AN ARTICLE AT SMARTMONEYBrazils government will use public-sector banks to lower interest rates on lending to consumers and companies.Finance ministry officials have asked Banco do Brasil SA (BBAS3.BR) and Caixa Economica Federal to lower their interest rates, and that way encourage private-sector competitors to follow suit.
  55. 55.  Govt officials want credit growth. Borrowing in Brazil remains well below levels seen in many other countries. even though the central bank has been reducing interest rate, the Selic, since August, report said the government is concerned that bank lending rates havent fallen as fast.
  56. 56.  The government made a similar move during the financial and economic crisis of 2008 and 2009, when public-sector banks cut rates, private-sector banks followed, the report said.
  57. 57.  The Govt moved from tight monetary policies to expansionary monetary policies recently. This is Probably as a result of the Euro debt crises. They are trying to ward off the effect of the crisis by pursuing expansionary monetary policies.
  58. 58. QUESTIONS?
  59. 59. SOURCES USD to Brazil real. http://forex.tradingcharts.com/charts/index.php?sym=USDbrl&data=b&tz=EST&type=l&cs=1&period= 1d&defdates=1&bmonth=Jan&bday=1&byear=2006&bhour=&bmin=&emonth=Jan&eday=1&eyear=2 004&ehour=&emin=&Img+Type=png&drsi=0&ma1=0&dmacd=0&ma2=0&bol=0&dstoch=0&Submit=S ubmit Euro to Brazil real http://www.x-rates.com/d/BRL/EUR/graph120.html The dilemma: local manufacturing sector or inflation http://seekingalpha.com/article/248096-will-brazil-s-monetary-policy-tightening-help-or- hurt?source=feed Brazils Government to Use Public-Sector Banks To Lower Lending Rates http://www.smartmoney.com/news/on/?story=ON-20120218-000174&cid=1259 Current Selic rate http://www.nasdaq.com/article/too-soon-for-brazil-to-see-record-low-in-base-interest-rate-20120208- 01442 Brazils export data http://www.indexmundi.com/g/g.aspx?c=br&v=85
  60. 60. SOURCES INFLATION TARGETING Frederic S. Mishkin Graduate School of Business, Columbia University and National Bureau of Economic Research E-mail: fsm3@columbia.edu July 2001 http://www.bloomberg.com/markets/rates-bonds/government- bonds/brazil/ http://www.bcb.gov.br/?FISCPOLICY http://www.bcb.gov.br/ingles/notecon2-i.asp http://translate.googleusercontent.com/translate_c?hl=en&rurl=transl ate.google.com&sl=pt&tl=en&twu=1&u=http://www.desenvolvimento. gov.br/sitio/interna/interna.php%3Farea%3D5%26menu%3D571&us g=ALkJrhgelO1tkcws6myUfkI_d22ynUlgSA http://www.indexmundi.com/facts/brazil/net-capital-account
  61. 61. SOURCES http://online.wsj.com/article/BT-CO-20120216-709486.html# A_Tombini_EconomicandFinancialSectorOverview08-15-2011 BCB

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