Effects of Brazil Real Fall Against Dollar

By Maria Lopez Conde, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The Brazilian real continued its downward spiral this week, closing at R$2.1734 on Monday, its lowest value since May 2009. As Brazilian industries start anticipating some positive short-term effects of a stronger dollar on the economy, consumers are going to feel the decreased purchasing power.

Brazilian commodity producers, according to Neil Shearing, chief emerging markets economist at the London-based research firm, Capital Economics, will also benefit from the stronger dollar.

“Commodity companies may benefit in the short-term from a weaker currency, since their exports are priced in U.S. dollars and a weaker real increases the local currency value of these exports,” Shearing told The Rio Times. Brazil is one of the world’s largest commodities exporter, producing soybeans, coffee and iron, among others.

In fact, Vale, the country’s mining giant and biggest exporter, announced last week that a weaker real against a robust dollar may compensate for increased production costs and a sluggish growth in China, one of the firm’s main buyers.

“The Brazilian currency will devalue even more,” argued José Carlos Martins, Vale’s executive director, in an interview at the company’s Rio de Janeiro headquarters last week. “The slowdown in China is negative, the devaluation is positive. Not only because our costs in dollars will be reduced, but because the investment will also be smaller.”

The dollar’s strength should also help agricultural production, which are some of Brazil’s key exports. The president of the Brazilian Rural Society, Cesário Ramalho, told the agriculture news outlet, Canal Rural, that an exchange rate above R$2.10 to the dollar is “healthy” for the agriculture sector.

“When it was at R$1.70 [the exchange rate] was extremely cruel, but the brusque variations worry me intensely,” Ramalho explained.

Nevertheless, the real’s tumble has stoked inflationary fears from those who believe foreign products will become even more expensive in Brazil as a result of a weaker real.

“In theory, a weaker currency can push up inflation by increasing the cost of imported goods,” Neil Shearing said. “But in practice, there is not much of a link between movements in the exchange rate and fluctuations in inflation in Brazil,” he explained, adding that this is partly due to the fact that Brazil is a relatively closed economy and imports account for less than fifteen percent of GDP.

However, Shearing warned that the commodities sector might only see short-term positive outcomes. Commodities companies “won’t see a major improvement in competitiveness as a result of a weaker real,” Shearing explained. “Instead the main benefit in the long-run will be for manufacturers, which have struggled over the past five years or so.”

According to O Globo, the effects of a weaker real are already echoing amongst Brazilian tourists looking to travel abroad. The dollar’s rise in recent weeks – 7.04 percent in the month of May alone – has led tourists to refrain from buying U.S. dollars.

In Rio de Janeiro, where dollar sales have dropped about fifty percent since May, some exchange brokerage firms have begun offering special deals to move the greenback. Others have opted to follow the market’s trend and keep the American currency high, selling at nearly R$2.28 at some exchange houses last week.

Pioneer, an exchange brokerage company in São Paulo, told Globo that it has not seen a dip in demand for the American currency, especially for those who are planning to travel abroad. “With a ten-point increase, people lose R$100 for every US$1,000 they buy. For those who are traveling, it is not much,” the firm said.

Foreign tourists visiting Brazil; however, are set to benefit from the favorable exchange rate, which will effectively yield more reais for less dollars. The story is different for Brazilian consumers, already burdened with high inflation and cost of living. They are set to feel the pain once again, as Shearing predicts “the major losers will be consumers who will see their purchasing power in overseas markets eroded.”