Brazil's President Dilma Rousseff has a chance to start to win back alienated investors... Read More
While the real gained the most in three weeks on Nov. 21 amid optimism the looming cabinet shuffle will help shore up Brazil’s economy, foreigners are betting on more declines after the currency weakened to a nine-year low this month. Overseas holdings of futures contracts wagering against the real have soared 30 percent since Sept. 29 to $31.3 billion as of last week, according to data compiled by the Sao Paulo bourse. That’s just 8.6 percent shy of August’s record high.
A surge in government spending, coupled with Rousseff’s
intervention in Latin America’s biggest economy, has left Brazil with its widest budget deficit in a decade and near-zero growth. Options traders are more bearish on the real than on any of its major peers.
“There’s pressure for further depreciation,” Marcelo Assalin, who oversees $7.5 billion of emerging-market debt at ING Investment Management Co. in Atlanta, said by phone on Nov. 21. “Investors and the market in general are seeking signals of improvement for the Brazilian economy. People don’t want to see more of the same.”
Worst Performer
The real slumped to 2.6287 per dollar on Nov. 14, the weakest level since April 2005, before rebounding to 2.5126 as of 11:28 a.m. in London. The 12 percent drop since mid-year makes it the worst performer after the yen among 16 major currencies tracked by Bloomberg.The real has dropped 40 percent since Rousseff first assumed power in January 2011, with losses exacerbated in recent months by a decline in prices of commodities, Brazil’s main source of export revenue.
A weaker currency is negative for Brazil because it pushes up the cost of imports and stokes inflation, which soared to 6.75 percent in September, exceeding the government’s target. The central bank has issued $104.9 billion of foreign-exchange swaps, equivalent to 28 percent of its reserves, to shore up the currency since August 2013.
Rousseff has a chance to start to win back alienated investors when she selects her next finance minister. In the run-up to her narrow re-election Oct. 26, Rousseff said she would replace Guido Mantega, the public face of government policies that produced Brazil’s first recession in five years.
Economic Growth
Folha de S.Paulo newspaper reported in its online edition Nov. 21 that Joaquim Levy, the head of Bradesco Asset Management Ltd., will replace Mantega. Levy was treasury secretary under Rousseff’s predecessor, Luiz Inacio Lula da Silva, from 2003 to 2006, when Brazilian economic growth reached as high as 5.7 percent amid a rally in commodity prices.The president’s press office declined to comment. The central bank’s press office didn’t reply to a phone call and a message seeking comment. Levy didn’t reply to e-mails seeking comment that were sent over the weekend.
Rousseff’s economic team for her second term will propose adjustments aimed at guaranteeing fiscal sustainability and attracting investments, Folha reported Nov. 23, citing unidentified presidential advisers.
A “market-friendly” replacement for Mantega, who in 2010 coined the term “currency wars” to describe the competitive devaluations happening at the time, may lead to a “relief rally” in the real, Citigroup Inc. analysts led by New York-based Kenneth Lam wrote in a Nov. 20 client note.
Market Bears
Even with a viable economic team, the real will keep declining because “substantive improvements” in economic policy, such as large spending cuts and the removal of subsidies, aren’t politically feasible, according to Eamon Aghdasi, a strategist at Societe Generale SA.“The market is leaning in a heavily bearish direction,” New York-based Aghdasi said by phone on Nov. 20. Rousseff won’t be able to implement the reforms the economy needs because of the “fragile environment of low growth,” he said.
Risk-reversal rates show a more pessimistic outlook for the real over the next three months than for any of the 16 most-traded currencies. Traders pay 3 percentage points more for options allowing them to sell the real than for contracts to buy, data compiled by Bloomberg show. That’s up from 1.8 six months ago. The premium on the yen is 0.3 percentage point.
Currency forecasters have struggled to keep pace with the real’s decline. The median of 16 estimates compiled by Bloomberg has Brazil’s currency little changed at 2.5 per dollar by the end of the first quarter of 2015. On Oct. 3, strategists were predicting a gain to 2.35.
Slimmest Margin
Gross domestic product is set to expand 0.3 percent this year, the weakest pace since the 2009 recession, according to economists surveyed by Bloomberg. That would make the growth record of Rousseff’s first four-year term worse than that of any Brazilian president in more than two decades.Increases in government spending to try to revive growth widened the budget deficit to a record 4.9 percent of gross domestic product in September and prompted Standard & Poor’s to cut Brazil’s credit rating in March to BBB-, the lowest investment grade.
As much as the real has fallen under Rousseff, it remains expensive by some measures because surging inflation has eroded exporters’ competitiveness. When adjusted for inflation, the real is 21 percent more expensive than at the end of 2008, Barclays Plc estimates.
The real “has underperformed because of the poor economic management and lack of competitiveness,” Viktor Szabo, who oversees $13 billion of emerging-market debt at Aberdeen Asset Management Plc in London, said by phone on Nov. 20. “The market is disappointed to have another term” of Rousseff.
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