By Ruban Selvanayagam
September 27, 2010
As the growth of the Brazilian economy continues to grab international attention, particularly in contrast to many other developed countries worst hit by the effects of the global recession, it would come as no surprise that real estate and land interest has also subsequently increased. However, with such growth has arisen a situation where the value of the ‘Real‘ is significantly outpacing those of countries, thereby creating a barrier to entry for foreign investors.
As demonstrated back in July, the Economist magazine’s novel methodology of analysing how far currencies are from their realistic value via the price of a McDonalds ‘Big Mac‘ pointed to a 31 percent overvaluation (although it should be noted that this measurement indicated that several other developed world currencies, including the Euro, are also appreciated).
Central Bank President Henrique Meirelles – widely credited as being the main driver behind the economic reforms that has bought Brazil’s economy to where it is today – recently stated to journalists in London: the monetary authority is always alert to signs of imbalances and bubbles in the economy” and pointed that the appreciation is widely due to a number of very positive factors in stark contrast to what is happening in other parts of the world. Looking at the facts, his comments are ringing true – as US unemployment rates remain high, recent statistics on formal job creation in Brazil demonstrated that the country is in its best position in over 18 years. According to Meirelles, whilst there is still much work to do with regards to essential infrastructural reforms and fiscal policy, Brazil is in its strong position today due to clear targets being set on monetary issues such as inflation control.
Nevertheless, at the start of September, in response to other countries evidentially weakening their currency values – including the USA and Japan – Finance Minister Guido Mantega firmly stated Brazil’s intentions to control the continued appreciation of the Real. The process of doing this, however, is viewed by many economists as a challenge particularly due to rising foreign capital inflows such as those that will result out of capitalisation of Petrobras‘ oil exploration projects.
Pro-active examples of Brazil’s anti-appreciation measures have been the purchasing of US dollars to boost international reserves as well as discussions over reserve-swapping and increasing capital limits for banks in the country to ease the pressure in the futures and other derivative markets. Whether such actions result in an improved equilibrium between world currencies remains to be seen, however it is widely expected that it will also require the economic performance of the leading economies (and Brazil’s trade partners) to also improve. Indeed, as several countries are initiating measures to devalue their currencies in order to boost exports, Brazil may well be forced into a position of following suit in order to remain competitive.
Ruban Selvanayagam is a Brazil real estate and land specialist. For free e-books, state guides, up-to-date statistics, strategies, interviews, articles, weekly broadcasts and more please head to the Brazil Real Estate and Land Investment Guide.“