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Brazil to spend $55 billion to defend sagging real

25 august 2013, 15:03
0
©AFP
©AFP
Markets and analysts cheered Friday after Brazil's central bank pledged $55 billion until year's end to prop up the sagging real while Latin America's biggest economy is showing weak growth, AFP reports.

The Brazilian currency, which has been at its lowest level against the dollar in four years, closed at 2.35 to the greenback Friday, up 3.2 percent from Thursday's close.

Wednesday, the real sank to 2.45 to the dollar, its lowest level since December 2008 amid the international financial crisis.

Friday's rise followed the announcement by the bank overnight that it would conduct daily sales of currency swaps and derivative contracts to boost the domestic currency and regain the confidence of markets.

Analysts hailed the bank's robust move.

"The intervention was a positive signal for all emerging markets," said Luis Costa, a strategist at Citigroup.

"It signaled to investors that central banks of emerging economies are reacting more aggressively and are ready to step up their intervention to stabilize markets."

Brazil, along with Russia, India and Turkey, is one of the main victims of a retreat by investors from major emerging economies in recent days.

Keen to capitalize on a stronger dollar amid anticipation of tighter US monetary policy, investors are massively pulling out of emerging markets seen as showing structural weakness.

The central bank said it would offer $500 million a day in currency swap contracts from Monday through Thursday and $1 billion on Fridays, without ruling out further interventions if necessary.

Since May, it has already injected $45 billion to prop up the real, which means it will have put in a total of $100 billion by the end of the year.

The $100 billion represents nearly a quarter of the country's foreign reserves.

"I think the central bank's posture is necessary given the markets' current volatility," said Wellington Ramos, an analyst with Austin Rating in Sao Paulo.

"There is a need to regain the confidence of investors," he added.

"It was a good decision to the extent it clarifies and makes official for the markets a daily intervention to meet the demand (for dollars)," said Silvio Campos Neto, an analyst with Consultora Tendencias.

"That is what we saw coming, but today it is in a transparent, predictable and daily manner, he added.

"The main goal is to signal to the market that the bank will continue to provide what is necessary."

The real's weakness comes as Brazil is showing stagnating growth.

Finance Minister Guido Mantega has said GDP growth would reach only 2.5 percent this year and four percent in 2014.

Last December, Mantega forecast four percent growth this year and in July brought it down to three percent.

Meanwhile, the central bank, concerned about rising inflation, hiked its base rate to 8.5 percent in July, up from its historic low of 7.25 percent early this year.

Brazil's 12-month inflation reached 6.27percent until July, close to the 6.5 percent upper limit of the government target.

In early August, Mantega told the weekly Veja that the government's priority was combating inflation, even if this means lower growth.

The struggling domestic industrial sector opposes high interest rates, which it says will discourage investment.

Brazil has experienced two years of low economic growth and high inflation, which have dented President Dilma Rousseff's popularity.

Rousseff has also been hurt by last June's massive street protests in which morethan a million Brazilians clamored for better public services and an end to endemic political corruption.

Brazil posted 0.9 percent GDP growthlast year, after growing 2.7 percent in 2011 and 7.5 percent in 2010.

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