As the real climbed for the first time in five days, Goldman Sachs Group Inc. recommended that Brazil go further in relaxing support for the currency and let it decline more than 10 percent to support exporters.
“Brazil spent the last five years with an overvalued real, which has weighed on its competitiveness,” Alberto Ramos, the chief Latin America economist at Goldman Sachs in New York, said in a telephone interview. “To ignite the ongoing adjustments and support the struggling exporting sector, the country needs a moderately cheap currency at around 3.50.”
The real rose 1 percent to 3.0562 per U.S. dollar in Sao Paulo after tumbling 2.3 percent Monday, the biggest drop among 31 major currencies tracked by Bloomberg. Brazil began this week rolling over fewer swaps supporting the currency after sales halted in March. It extended the maturity of $393.7 million worth of contracts Tuesday.
The currency gained as Brazil’s lower house was scheduled to debate proposed changes to unemployment benefits and social security. Ramos wrote in a research report that the economy needs a significant structural and permanent fiscal adjustment and less intervention in the foreign-exchange market. Exports declined to $15.2 billion in April from $17 billion in the prior month.
“If measures are approved and they keep their content and substance, markets will likely have a positive reaction since they are important for the very necessary fiscal adjustment,” Ramos said in the phone interview.
The currency pared gains after the newspaper O Estado de S. Paulo reported that the Workers’ Party delayed a decision on fiscal measures.
Swap rates, a gauge of expectations for Brazil’s borrowing costs, declined 0.04 percentage point to 13.51 percent on the contract maturing in January 2017.
Inflation is a problem in the short term, according to Ramos, who forecasts that the central bank will raise borrowing costs by at least a quarter-percentage point at its meeting in June. Policy makers voted unanimously April 29 to lift the target lending rate to 13.25 percent, the highest since 2009.