RIO DE JANEIRO, BRAZIL – The dollar has dropped sharply in recent days against the Brazilian Real (R$), pushing the American currency from near R$5.50 to around R$5.30. Despite the improvement, the Real is still one of the few emerging country currencies traded at lower prices than before the pandemic, when it fluctuated around R$4.50, reaching R$4.70 in March.
Chile, South Africa, Mexico, and Colombia’s currencies are currently at levels below March 11 last year, when the World Health Organization (WHO) officially classified the global Covid-19 situation as a pandemic.
In addition to Brazil, among the main emerging countries, only Turkey, which underwent a change of its entire economic team, an interest rate shock and attacks against the lira in recent months due to the low level of reserves, still has a more depreciated currency today than before the pandemic. In the Brazilian case, economists do not expect the real to return to its pre-pandemic levels any time soon.
And one of the main reasons is that Brazil spent too much to tackle the crisis, resulting in a much worse fiscal situation than other emerging countries, although on the positive side, it experienced a less severe recession.
For now, analysts believe that the dollar should continue to remain above R$5.00. Even institutions that estimate the price to fall below this threshold are projecting the American currency to remain at a not much lower level, close to R$4.90.
“I don’t envisage the dollar below R$5.00,” said Gustavo Loyola, economist and partner of Tendências, ex-president of the Central Bank (BC), predicting that, in the absence of unexpected external or internal events, such as more political unrest in Brasília or a new fiscal worsening in Brazil due to spending on the pandemic, in the short term the currency should remain around R$5.10 to R$5.20, he said at an event.
Fiscal
“We chose to give a greater fiscal boost in the pandemic than our peers and this ultimately displaces the currency prices,” assesses Sergio Zanini, partner and manager of Galapagos Investment. If on one hand Brazil’s economy had a lower contraction, it suffered other impairments, such as government debt, which in relation to the Gross Domestic Product (GDP) is well above that of other emerging countries.
The manager believes that the real remains cheap in relation to its peers, but should not return to R$4.50 soon, although it may test levels just below R$5.00 by the end of the year, influenced by the Central Bank’s interest rate hike, which improves the attractiveness of local assets, and by commodity prices abroad.
Until recently, the real was one of the worst performing emerging currencies against the dollar in 2021, repeating its position in 2020. Since mid-April, it has performed better than its peers.
Andres Abadia, senior economist for Latin America at the British consulting firm Pantheon Macroeconomics, says that the improvement in the real is due to a combination of external and internal factors, which have placed the currency more in line with its peers, but further depreciated. In relation to the external scenario, conditions are improving, particularly with the rise in commodity prices due to the American, Chinese, and now European recovery. Consequently, Brazil has been posting record exports.
Vaccination
Domestically, the pandemic shows signs of improvement with the advance of vaccination, which helps reduce some of the fiscal concern, Abadia points out. Another factor is that the sanction of the budget maintaining the spending cap brought some relief, he adds. For the economist, the real still tends to gain strength, but the volatility will persist, reflecting eventual political unrest, particularly now with the progress of the Covid’s CPI (investigative committee) in the Senate.
In 6 months, Pantheon sees the dollar dropping to R$5.15. In 12 months, it may fall below R$5.00, but to a level around R$4.90.
The currency and emerging markets analyst at the German Commerzbank, Alexandra Bechtel, is even more cautious and does not project the American currency falling below R$ 5.00 in 2021 or even next year.
Brazil has “specific risks” that tend to maintain the exchange rate under pressure, preventing the real from benefiting as it should from interest rate hikes by the Central Bank, global liquidity and the rise in commodity prices.
Unless the pandemic improves significantly, pressures for more government spending, such as a new extension of the emergency aid, will soon resurface and cause volatility, he argues. The bank expects the dollar to reach R$5.30 in December and R$5.00 at the end of 2022.
Source: Infomoney