Best Forecasters of World's Worst Currency See More Brazil Pain

  • Fiscal measures and political infighting to remain focus
  • Top currency strategists say real to slide another 6% in 2015

Brazil’s real is the worst-performing major currency this year. Ask the top-ranked forecasters and they’ll say it’s set for more losses.

The three most accurate currency analysts see the real trading at an average of 4.1 per dollar by year-end, data compiled by Bloomberg show. To get there, the real would have to slide another 6 percent, adding to its 31 percent drop this year. 

The top three forecasters for the real last quarter see Brazil's currency weakening further by year-end.

The real’s collapse amid concern the country’s finances are deteriorating threatens to undermine government efforts to fight inflation that’s running close to 10 percent while gross domestic product heads for its longest decline since the 1930s. For companies that piled on $270 billion of foreign debt during the boom years of the last decade, the weaker local currency also makes it harder to meet those obligations and puts them at risk of defaults and credit-rating cuts.

“What you have in Brazil is a very serious fiscal problem -- since last year, there’s been a brutal decline in the budget and GDP, and no one in the government is proposing a solution,” said Gustavo Rangel, a New York-based currency strategist at ING Financial Markets LLC and the top-ranked forecaster in the third quarter. “It’s necessary to anchor credibility for investors first. Brazil is doing that all wrong.” 

The collapse -- like that of most emerging-market currencies this year -- has any number of reasons, from the end of the commodities super-cycle to China’s economic slowdown and an overall anemic appetite for risky assets. But Brazil is also contending with a sweeping corruption scandal that has left President Dilma Rousseff fighting for her political survival, lawmaker infighting that’s hindering austerity measures and a credit-rating downgrade to junk.

Rangel estimates the real will weaken to 4.10 by year-end and 4.25 in 2016, before rebounding to 4.15 in 2017. Citigroup Inc. and ABN Amro Bank NV -- the second- and third-best forecasters -- see the Brazilian currency trading at 4.2 and 4, respectively, by the end of 2015. The real rose 0.4 percent Wednesday to 3.8369 per dollar as of 1:20 p.m. in New York.

A sudden worsening of the political or economic scenario could even cause the real temporarily to shoot close to 5 per dollar before stabilizing again at a stronger level, Rangel said.

At least one analyst thinks the worst is already over for Brazil’s real: No. 7-ranked forecaster Clyde Wardle at HSBC Holdings Plc.

“Fundamentally, this deterioration of fiscal accounts and the continuation of increasing debt-to-gross ratios is to a large extent priced in,” he said. Another cut to junk by a second ratings company could contribute to some short-term weakening of the currency, Wardle said from New York. He sees the real falling to 4 by the end of this year and 4.2 next year.

S&P downgraded Brazil’s rating to junk last month, prompting the government to announce a new round of tax and spending measures designed to close the budget gap and avert another cut. Rousseff also eliminated some ministries and gave control of others to the biggest party in Congress to try to shore up lawmaker support.

The measures still don’t go far enough, which will prevent the real from rebounding anytime soon, said Marcelo Kfoury, Citigroup’s chief economist in Brazil.

"The fiscal issue will remain investors’ focus,” he said from Sao Paulo. “The cabinet reshuffle was more of a move to avoid impeachment than to solve the fiscal problem.”

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