Brazil remains determined to use a wide range of macro-prudential measures to combat the appreciation of the real.
Brazil’s finance minister Guido Mantega, writing in Euromoney’s sister publication Emerging Markets to coincide with the IDB conference in Montevideo, says that the unprecedented monetary looseness in the developed economies, particularly the US, “has caused a currency tsunami with an impact on foreign exchange rates and the creation of financial bubbles”.
He adds that, despite little support from other Latin American countries over the use of capital controls: “The Brazilian government will not stand idly by in this currency war. We have an arsenal of measures that are capable of stopping or neutralizing the overvaluation of our currency and stemming the excess inflows of foreign capital into the currency.”
Last month, Brazil extended – from two to five years – the period for charging the 6% IOF tax levied on loans taken out by Brazilian firms. The central bank has also expanded its intervention in the FX market through buying dollars, spot auctions and issuing swap contracts.
The re-ignition of the currency wars comes as the American Chamber of Commerce issued a report saying that the cost of industrial production is now lower in the US than in Brazil. During the past five years, the labour cost in dollars has increased by 46% in Brazil and 3% in the US – largely driven by the appreciation of the real. Job creation in Brazil is slowing: 150,600 jobs were created in February compared with 280,700 in the same period in 2011.
“Brazil is suffering a serious case of Dutch disease and it’s also present [to a lesser extent] in other countries in the region,” claims Guillermo Mondino, head of emerging markets research at Citi. “Obviously, as the Dutch disease gets more accentuated, we are going to see more social, political and economic consequences.”