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September 23, 2015

The Impact of a Record Low Brazilian Real

Original article written by Ruth Costas at BBC Brasil on 09/22/2015
Click here for article in Portuguese
Translated by Pedro Ferreira

Image by Rafael Neddermeyer/ Fotos Publicas


This Tuesday (22), the Brazilian Real was valued at its lowest level (R$4.05 per dollar) since it was established in 1994.
 
Several analysts attribute this to the domestic political crisis and the uncertainties over the government’s capacity to execute a fiscal adjustment-- in addition to changes in US policies and China’s economic slow down.
 
The Real has also been pressured by Standard & Poor’s downgrade of the country's credit and the revision prospects from other credit rating agencies.
 
This climate of uncertainty gained further momentum this Tuesday with the lack of support by Brazilian lawmakers towards President Dilma’s plans of increasing taxes and cutting government spending.
 
Thiago Biscuola, analyst at RC Consultants, believes that even if Dilma’s plans stay the same, it is likely that the Real will remain at a minimum of R$3.50 per dollar for a while.
 
Andre Perfeito, chief-economist at Gradual Investments, agreed: “Our perspective is that this economic and political crisis will not have a short-term solution. So it is likely that the dollar at R$4.00 is here to stay.”
 
This crisis is affecting the lives of many in Brazil, by helping some, and hindering others. Check out four factors being impacted below:
 
1. Inflation
 
The impact of the exchange rate shift is most evident on the prices of imported products and in sectors that depend on inputs produced abroad.
 
"Electronics such as smartphones, for example, tend to become more expensive," said Biscuola.
 
However, the high dollar also has an effect on the prices of "exportables"; especially on food. 
 
Biscuola and Perfeito explained that producers are likely to hike prices domestically, in order to match exporting profits.
 
“Even though the recession is already limiting consumers, it is reasonable to expect an inflation closer to the double digits, as food prices go up,” said Perfeito.
 
2. Tourism
 
Many Brazilians are having to rethink their travel plans because of the current exchange rate.
 
Even though airlines are rolling out numerous deals, travelers face high expenses on hotels, food, and excursions.
 
Biscuola advises those who have already scheduled an international trip to monitor the market closely so they can find dollars at low rates.
 
"This new exchange rate is in a way a part of the adjustment that the economy needed. It did not make much sense for dinner to cost more in São Paulo than in New York, or for Brazilians to bring back things like toothpaste from Miami because they cost less abroad," said Perfeito. 
 
Brazilian expenditures abroad have already fallen about 25% in the first semester of 2015, as many families are now opting to travel inside the country. This is good news for the domestic tourism industry.
 
In addition, the Real devaluation should help the country attract foreign tourists since, for them, Brazil travel is now a bargain. "This makes attending the Olympics even more attractive," said Perfeito.
 
3. Income and Employment
 
Those that work in industries or sectors that rely on imported inputs, may face collective layoffs.
 
Companies with high dollar debts are also vulnerable. The higher costs should mean a reevaluation of projects and spending cuts. 
 
In contrast, some exporters, such as those in agribusiness and those in pulp and paper production, are smiling from ear to ear because they spend with the real and get paid in dollars.
 
This exchange rate also causes Brazilian products to have more competitive prices abroad, and helps domestic businesses to have an advantage over competitors who import. Those sectors should bring new job opportunities amid the crisis. 
 
“However, this change should take a while to have a significant effect in the job market. Brazil had closed its doors and looked inwards when its currency was valued, and those doors won’t open from day to night,” said Biscuola.
 
 
4. Investments
 
With the real falling, and no short-term solution in sight, some are beginning to wonder if it is time to invest in the dollar.
 
Perfeito advises against it due to the current volatility of the exchange market and the political and economic instabilities in Brazil. According to the economist, “the best investment options remain the same.”
 
“No one should risk on making a prediction right now,” agreed Biscuola. “There are so many uncertainties that the dollar may reach R$ 4.30 or R$ 3.50 by the end of the year.”

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