Brazil urged to return to its trinity

In what could be interpreted as an admission that Brazil needs to improve its reputation with international investors the deputy governor of the central bank, Luiz Awazu Pereira da Silva, has publicly acknowledged that the use of capital controls to lower the value of the real has caused greater collateral damage to the economy than had been foreseen.

“[Capital controls] worked well in Brazil in terms of controlling financial stability and stabilizing the volatility of the exchange rate, but it should be recognized that there is no free lunch,” said da Silva.

“By the same token we have also had to pay a price in terms of foreign investors’ perception of our policy transparency and predictability of our policies and perhaps, in retrospect, [capital controls] even impacted our own animal spirits at home.”

The admission comes as Brazil’s authorities signal that the administration believes it needs to lower the perceived risk profile of investing in the country. President Dilma Rousseff raised the price of gasoline by 6.6% on March 6, which led Petrobras shares to rise by 12%.

Stocks in other areas, such as utilities, that had been weighed down by recent government intervention, also rose. The government has also been undertaking a series of meetings with business leaders.

Meanwhile Brazil’s Latin American neighbours are being increasingly critical of the administration’s interventionist financial and economic policies. With the economies of Peru, Chile, Colombia and Mexico growing strongly there is frustration that the largest economy in the region isn’t adding to the positive momentum.

Brazil registered GDP growth of under 1% in 2012. Interest rates have been reduced to 7.25%, but with inflation (Ipca) running at 5.8% there is little room for more monetary stimulus. The Brazilian government was also clear in communicating to the markets that it had wanted to see a reduction in the interest rate because of, at least in part, its desire to lower the valuation of the currency.

On this point the governor of the Central Bank of Colombia, José Darío Uribe Escobar, was critical of Brazil’s multiple objectives for interest rate policy. Speaking to delegates of the Institute of International Finance in Panama shortly after da Silva, Uribe said that since 1999 central bank strategy in Colombia had been solely focused on targeting inflation.

For the full article go to Euromoney Magazine

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