In a period of enormous international uncertainty, the temptation for governments to boost their economies is inevitable; even if some of these actions may not be that good from an intertemporal point of view.
The Brazilian blue sky from some years ago has darkened recently, in part because some of the previous euphoria fueled by the northern hemisphere’s financial bubbles has passed away, and the domestic economic structure that remains without those distorted glasses has revealed important inefficiencies in many sectors.
The latest monthly report for Brazil’s industrial physical production published by the IBGE, the Brazilian Institute of Geography and Statistics (see chart 1), shows how difficult the situation is for the second sector of our economy; and the reason for that is very well-known: a huge lack of international competitiveness due to a messy fiscal structure, a labor legislation that is more than 50 years old, and a tremendous lack of education for great part of our labor force, among other problems.
And once again, the proposal for the salvation of the industry relies on a “devalued” exchange rate; this time with an ‘official’ confirmation speech by one of the members of the BACEN’s board of directors. So, the official Brazilian (dirty) floating rate seems to be part of the past.
Among a selected group of currencies the BRL is still the one with a higher devaluation against USD in the last 12 months (see chart 2, BACEN’s PTAX quotes).
Within the recent announcements by Europe’s authorities, which lay out the necessary path to strengthen the Eurozone, a weakening of the rally of the main currencies USD, JPY, GBP and CNY was to be expected (not mentioning the CHF that the Swiss Central Bank has so far been able to sustain its ‘pegged’ policy against the EUR), but it is not what has happened since the beginning of this month.
In any case, the first act of this new exchange rate setup was the return of the BRL above 2.00 for USD after the 3% appreciation in the beginning of the week, together with an increase in volatility in the local currency market since that BACEN director’s speech. A more intense intervention from part of the Central Bank is inevitable once it is also to be expected a tatonnement process from part of the market in finding out how certain and secure will the Brazilian government behave with its devalued currency policy. Brazil’s international reserves are enough to sustain a determined exchange rate level. What is less obvious is how efficient such policy will be for the industrial sector that clamors for help for the trade balance and also for the exchange rate market itself.