As the currency war intensifies in the developed world, the Brazilian official who coined the phrase says for his country it’s softened.
Brazil succeeded in reducing swings in the real after letting the currency depreciate 19 percent in the two years ending in December to protect local manufacturers from foreign competition, Finance Minister Guido Mantega said in an interview. Now with the real hovering around 2 per dollar, Brazil is abandoning policies to depress the exchange rate even as Japan weakens the yen and the U.S. sticks to policies Mantega has said spurred the start of the currency war.
“We haven’t resolved it, but we neutralized, softened the currency war issue that other countries are facing,” Mantega, 63, said at Bloomberg’s headquarters in New York. “We are in Brazil in a transition to a more solid, competitive and efficient economy.”
Stabilizing the currency at a level that allows industry to “survive” has put Brazil on the path to recovery following two years of slowing economic growth, Mantega said. The Bovespa stock index, the worst performer in the world after Jamaica this year, will rebound as investment increases, he said.
The world’s second-largest emerging-market economy after China will grow 3.5 percent this year after expanding 1 percent in 2012, according to the median forecast in a Bloomberg survey of analysts.
The Bovespa is down 6.6 percent this year, the second-worst performer among 94 indexes tracked by Bloomberg after the JSE Market Index in Jamaica, where the government is restructuring its debt. Brazil’s creditworthiness in the swaps market has eroded at the fastest pace among the biggest developing nations over the past month.
Brazil started introducing capital restrictions in 2010 after Mantega said rich nations had engaged in a currency war to boost their exports at the expense of developing countries. The real strengthened to a 12-year high of 1.5290 per U.S. dollar in July 2011, a rally that Mantega called a “disaster” because of the damage it was doing to local manufacturers.
Before the government stepped in, “it wasn’t possible to grow, or at least it was impossible for the industrial sector to grow,” said Mantega, who began as finance minister under former President Luiz Inacio Lula da Silva in 2006. “With the exchange rate around 2, Brazilian industry can survive.”
Implied volatility on one-month real options, which reflects investors’ expectations for future currency swings, hit a record low 5.3 percent on Nov. 7, down from 15 percent at the end of June, and was at 9.6 percent yesterday, according to data compiled by Bloomberg.
The real appreciated 0.5 percent to 1.9728 per dollar today, extending its rally this year to 4 percent, the biggest among the 16 most-traded currencies tracked by Bloomberg. Options traders last month turned the least bullish on the dollar against the real since 2008. The premium for six-month options, granting the right to buy the dollar against the real relative to those allowing for sales, fell to 2.94 percentage points on Jan. 30, down from 3.61 percentage points on Jan. 1.
Central bank President Alexandre Tombini said Feb. 25 Brazil had learned to operate in a currency war environment. The more stable currency this year will also help slow inflation that has exceeded the central bank’s 4.5 percent target for more than two years, Tombini said at a conference in New York.
In Japan, the yen has slid more than 10 percent against the dollar in the past three months as the central bank signaled it would ramp up monetary stimulus to bolster the economy. In the U.S., Federal Reserve Chairman Ben S. Bernanke pushed back yesterday against charges by Republican Senator Bob Corker of Tennessee that he engaged in a currency war. Both Bernanke and Japanese Prime Minister Shinzo Abe say their countries’ policies are aimed at boosting economic growth.
Mantega, who’s in New York to meet with investors and seek financing for $235 billion in infrastructure projects, said it’s difficult to differentiate between monetary policies aimed at weakening the foreign-exchange rate and those that seek to bolster the domestic economy through credit growth.
“I didn’t invent the currency war, I just pointed out a problem that can be overcome with an accord among countries,” he said.
Brazil will offer rates of return of more than 10 percent for the infrastructure projects ranging from building railroads to operating airports, Mantega said. The investment program presented in New York excluded construction for the 2014 World Cup and 2016 Olympics in Rio de Janeiro.
Mantega said last year’s policies, which included the reduction of the benchmark interest rate to a record low 7.25 percent, currency measures and tax cuts, laid the path for faster growth in 2013. President Dilma Rousseff also forced utility companies to accept lower energy rates in exchange for the renewal of concession rights that were expiring.
Investors dumped Brazilian assets as growth sputtered and inflation quickened to more than 6 percent. The cost to protect Brazilian bonds against nonpayment with credit-default swaps rose 22 basis points, or 0.22 percentage point, in the past month to 130.
An index of Brazil energy companies sank 46 percent in the past year while utility shares dropped 34 percent and banks lost 13 percent. Only consumer and industrial shares rose in the MSCI Brazil index during the period.
Government measures “momentarily caused some disturbances for a few sectors, but caused a very good outlook for others,” Mantega said. “The economy will grow more this year.”