Morgan Stanley’s report calling Brazil’s real one of the “fragile five” currencies amid an emerging market selloff is groundless, Finance Minister Guido Mantega said.
Near record-high international reserves, a solid fiscal situation, a floating exchange rate and a sound financial system will allow Brazil to weather volatility as the U.S. reduces monetary stimulus, Mantega said yesterday in an interview from his office in Brasilia.
Morgan Stanley coined the phrase “fragile five” last year to describe Brazil, India, Indonesia, Turkey and South Africa, recommending investors bet against their currencies because of wide current account deficits and fast inflation. HSBC Group last week forecast Latin America’s biggest economy will have its credit rating downgraded in 2014 because of increased public spending and weak growth.
“There are no grounds for Morgan Stanley and HSBC to say Brazil is fragile,” said Mantega, the 64-year-old economist who at the end of March would become the country’s longest serving finance minister. “Brazil is well positioned. Contrary to what some say, Brazil has good qualities that leave us with more resources to face volatilities in the market.”
Morgan Stanley and HSBC press offices in Brazil didn’t respond to telephone calls made after business hours yesterday seeking comment.
The government will disclose in February revised fiscal targets that will ensure net debt as a percentage of gross domestic product shrinks, Mantega said. He also said fiscal policy will help the central bank in its fight against above-target inflation.
Standard & Poor’s in June placed Brazil’s rating on negative outlook, citing a deteriorating debt profile and evidence of slow economic growth. The nation is rated two levels above junk at BBB by S&P.
“We are working arduously to have a good fiscal, inflationary and economic performance and with that avoid” a downgrade, said Mantega, who studied economics and sociology at the University of Sao Paulo.
The real has weakened 4.8 percent to 2.4215 per U.S. dollar since Morgan Stanley published its report on Aug. 1. The currency will weaken to 2.65 per dollar in the third quarter, Morgan Stanley said in a Jan. 23 report. Since September, the real has been the worst performer among the 16 most traded currencies tracked by Bloomberg.
A weaker currency has fueled accelerating inflation, partially offsetting seven consecutive increases in the benchmark interest rate. Surging prices have hurt business and consumer confidence as the economy contracted in the third quarter for the first time since 2009.
Inflation in 2013 accelerated to 5.91 percent from 5.84 percent in 2012, the fourth straight year it exceeded the official 4.5 percent target. Policy makers raised borrowing costs more than any major central bank in the world tracked by Bloomberg last year, boosting the key rate by 275 basis points, or 2.75 percentage points, in six straight meetings before increasing again by a half-point to 10.5 percent on Jan. 15.
The government is “determined” to meet the official inflation target, President Dilma Rousseff said in her speech at the World Economic Forum in Davos, Switzerland. “We won’t let our guard down,” she said last week.
Brazil’s economic growth will slow this year, climbing 2.1 percent after increasing 2.3 percent in 2013, according to analysts polled by Bloomberg. Consumer confidence measured by the Getulio Vargas Foundation this month dropped to the lowest level since 2009 and industrial confidence as reported by the National Industry Confederation is weaker than when policy makers started raising borrowing costs in April.
Brazil’s economy may grow more than 2.5 percent this year if global conditions improve, Mantega said. He estimates the South American nation expanded 2 percent to 2.5 percent last year.
Central government spending rose 14 percent in the first 11 months of 2013 from the previous year while revenue grew 12 percent, according to Finance Ministry data. Five-year credit default swaps, which protect bondholders against non-payment, have increased six basis points to 199 basis points this year, which is almost double the 101 basis point for Mexico.
Brazil’s current account deficit widened to 3.66 percent of gross domestic product in December from a surplus of 1.39 percent when then President Luiz Inacio Da Silva appointed Mantega finance minister in March 2006.
Mantega said it is hasty to say emerging markets have lost vigor, saying they will continue to grow more than other economies. He expects China to expand more than 7 percent in coming years.
“There could be more volatility in countries that don’t have our buffers like international reserves,” Mantega said. “There are no capital outflows from Brazil.”