São Paulo – Despite the depreciation of the Brazilian real (R$), with each dollar going for R$ 2, after repeated appreciation of the dollar, the government of Brazil should not yet repeal measures announced in recent months to contain the appreciation of the Real and, in thesis, provide greater competitiveness to the country’s industry, including a 6% Tax on Financial Operations levied (IOF) levied on foreign loans mature in under five years, 6.38% tax levied on credit card purchases abroad and greater Tax on Industrialized Products (IPI) levied on imported vehicles.
The evaluation of economists heard by ANBA is that it is still early to know whether the highs of the North American currency are transitory or are here to stay. "It is too early to remove [the measures]. I do not believe the government will do so, as the scenery is one of volatility,” said the macroeconomics professor at the Pontifical Catholic University of São Paulo (PUC-SP), Cristina Helena de Mello. "The economy and the economic policy are strategic; the car may be repaired as it moves along. In this respect, the government’s position should be one of waiting,” added the Finance professor at Getúlio Vargas Foundation (FGV), in São Paulo, Samy Dana.
Last week, the behaviour of foreign exchange rates was strongly influenced by the worsening of the European crisis. At moments like this one, investors tend to seek safer havens and the dollar is among the most sought. Furthermore, the North American government has stunted the depreciation of its currency, according to Mello.
The economics professor at the Economics and Administration College of the University of São Paulo (FEA-USP), Manuel Enriquez Garcia, believes that, once the worst phase of the crisis is over, Brazil should return to attracting a greater flow of foreign funds to the capital and financial markets, pushing exchange rates down. In the same line, Mello says that the tendency for the future is stability.
Garcia pointed out, however, that the European situation could worsen, including a possible exit of Greece from the Euro Zone, which, if true, should further appreciate the North American currency, prior to a possible depreciation.
Appreciation of the dollar is considered positive by Brazilian exporters as it may make domestic products cheaper abroad, and by industry as a whole as, in thesis, it makes imported products cheaper on the domestic market.
Inflation
With this, however, the change in forex rates also tends to pressure inflation, as it makes inputs more expensive and reduces competitiveness of foreign products on the domestic market. Furthermore, it creates problems for companies that are indebted in foreign currency. Federation of Commerce of the State of São Paulo (Fecomercio-SP), for example, defends the end of exchange measures.
"If it [appreciation of the dollar] generates inflation, then the government must act,” said Dana. As Brazil suffered much with hyperinflation in recent years, the pressure on prices is one of the main causes for economist concern, although there is a group that defends that a little inflation is not bad, if the country grows. This opinion is shared by government members.
To economists, there is no doubt that the appreciation of the dollar should boost inflation, but the extent to which that will happen, however, is difficult to gauge. Mello believes that the impact should not be great, as the domestic demand is giving signs of cooling down. In the same line, Dana pointed out that the use of installed capacity is at 85%, on average, which does not show a problem in terms of offer.
Garcia recalled, however, that some inputs greatly used in the production of primary need consumer goods, like the raw materials for pharmaceuticals and fertilizers, are majorly imported, and it is unreal to think that the growth in import cost will not be transferred to consumers. He fears lack of inflationary control.
In this respect, Dana believes that recent figures in the Broad Consumer Price Index (IPCA), 0.64% in April, already shows greater inflation than desired, and the effects of the current appreciation of the dollar will only be felt in future. The government believes that this year inflation will be 4.7%, a projection considered too optimistic by Dana.
The government may, however, make use of other instruments to try to lower the dollar rate, in case of concerning inflation, without modifying exchange rates adopted previously. "Brazil has US$ 372 billion in international reserves, the Central Bank has good firing power to reduce the exchange rates, a measure that would be more efficient than repealing the measures,” said Garcia.
*Translated by Mark Ament
