Analysts Say Brazilian Real/US Dollar Rate in 2021 Will Hinge on Fiscal Measures

RIO DE JANEIRO, BRAZIL – The Brazilian real recovered strongly in recent weeks, coming from around R$5.60 down to near R$5.00. Some banks, international consultancies and local brokers even see the U.S. currency under R$5 in 2021. But in order to remain at this rate, President Bolsonaro’s government will need to progress with the fiscal adjustment – which analysts perceive as being difficult next year.

Banks like JPMorgan, Citibank, Commerzbank, Morgan Stanley and Bank of America, as well as consulting firms like Capital Economics and brokerage houses like Commcor and NGO, see the dollar remaining over R$5 in the coming months. But, with the potential flow for emerging markets to remain strong, amid unprecedented liquidity in the international financial market, the Brazilian real may appreciate occasionally in 2021. Estimates by institutions such as Citibank and Verde Asset Management suggest that the dollar may now be 20% over its fair price in Brazil.

“Our perception is of a more depreciated exchange level than the current one,” says Leonardo Porto, chief economist of Citi bank in Brazil. In his opinion, political noise should remain loud, as coronavirus cases in the country increase. He projects the dollar at R$5.43 at the end of 2021, a year in which the government should exceed the spending cap by at least R$75 billion.

If vaccination starts in the first quarter of 2021 in Brazil, this will be a factor to celebrate in the markets. If it is left for later, it could jeopardize tax revenue and economic rebound in the country, according to Cleber Alessie Machado Neto, Commcor’s financial derivatives manager. He believes that the start of next year tends to favor risky assets because of the current progress of vaccination against Covid-19 in several countries, plentiful fiscal stimulus and low interest rates in the world. But for Brazil to “ride” this positive foreign wave, the government will need to pass the administrative and tax reforms in the first semester and comply with the spending cap.

Luis Stuhlberger, partner and manager of Verde, estimates that a fairer dollar rate would be around R$4.20, but given the fiscal situation, the currency is operating well over this threshold. If the government breaks the cap in 2021, the dollar could climb even further “10% to 15%”, he said in a recent online event. According to Stuhlberger, given Brazil’s very fragile fiscal situation, to breach the spending cap would be very negative, even if it is temporary.

Economist and partner-director of NGO broker, Sidnei Nehme, believes that the exchange rate could have already broken the R$5.00 floor, due to the pressure of the fragile dollar abroad and because of the very low worldwide interest rates. But he expects political challenges to implement reforms and fiscal adjustment measures until early February, because of the election of the Chamber and Senate presidencies.

Source: O Estado de S. Paulo

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