Good news? Bad news? The Brazilian Currency

Posted on Wednesday, May 16, 2012

As many already know the Brazilian economy has been in a boom period for the last decade. Oil discoveries off the coast of Rio de Janeiro state, economic & social reforms under the Lula Administration, a stable, and increased foreign investment are just a few reasons for the economic boom. As a result, the middle class grown, real estate prices have increased, and unemployment has fallen to record lows. With more people working and wages going up, these factors bring new purchasing power to millions of ordinary Brazilians who in the past never had disposable income. Disposable income equals increased consumer spending and demand for premium goods and services. Basically the extra cash flow means Brazil's economy is strong. As a result, the Brazilian Real has gained dramatically on the weakened US Dollar. Well this is good, right? Well yes and no, here is why.

Brazilians can travel to the US and buy American products at cheaper prices and this promotes the American economy and pushes for less strict border controls for Brazilian and Americans who wish to travel between each country. That's the good part. The bad part is eventually as the Brazilian Real becomes closer to the dollar in value, it products become more expensive, which price themselves out of various markets, losing to competitors like China, Mexico, and India, where the currencies are weaker. Also it becomes more expensive for visitors to Brazil. Por exemplo, on my recent trip to Rio in February, the exchange rate had 1 US dollar equal to 1.71 Brazilian Reais. In August 2010 and February 2011 the rates where 1.75 and 1.66. This may sound like a few pennies, but when traveling on a budget it can make a big difference.The biggest expense for the traveler will be lodging, food, and transportation. If staying in Brazil (specifically Rio) for a week or more, travelers can save hundreds of dollars on their trip just based on fluctuations in the exchange rate.

A bit more of the good. In the three months since my trip the exchange rate of US Dollars to Brazilian Reais has gone from 1.71 to 1.96. It is projected that this trend will eventually see the rate being 2 to 1. Which will probably happen within the next 20 to 30 days by my guess. This may sound bad but actually this is good for the Brazilian Economy. Yes, foreign products will be more expensive for Brazilian citizens but this gives those citizens the incentive to buy Brazilian made products which boasts Brazilian manufacturing, promotes job growth, increases tax revenue, and keeps money in the country. Also a lower exchange rate makes Brazilian products cheaper for export. This will allow Brazilian companies to compete with Chinese, Indian, and Mexican manufacturers in the global market.

Another bad part is that interests rates have also fallen to all-time lows . Good for consumers, but bad for investors. Investors will see smaller returns on the investments and this could be risky considering that Brazil's past history of financial instability. Also if foreign investors decide to be cautious and pull money out of Brazil, it could spell economic disaster. Massive cash flow out of the country means less capital for banks to use in lending/investing which will cause credit to become restricted. This means less or no loans for small businesses, construction projects, etc, etc. Sound familiar? Personally, I think that lower rates will be good for everyday Brazilians . Why? Because during this economy boom period, consumer credit has been given out like free water. People are buying many goods on credit, but if a economic crisis were to befall Brazil, we could see another scenario like what has played out in the US and Europe. I think the reduction in interest rates and more expensive foreign products will hopefully make Brazilians save cautiously instead of SPEND SPEND SPEND and not get caught up in the current 1st World mess. On the other hand, lower interests usually promote more spending but Brazilians love their Apples, Levis, Sonys, etc just as much we do. So, we shall see. Brasilieiros....Do the Right Thing as Spike would say.

UPDATE: I was way off with why my predication of when the exchange rate would react 2 to 1. It  actually reached this mark a few days after I starting writing this. So now go to Brazil and spend, spend, spend 

1 Comment


John Gardiner said...

The decline in the Brazilian currency (the Real) will help boost exports because Brazilian products will be cheaper.  If you want to find Brazilian suppliers and products, the premiere B2B portal for Brazil is B2Brazil.com.  Not only can users find Brazilian companies, but non-Brazilian companies as well.  Member-companies can be promoted globally in English via www.B2Brazil.com, and can be promoted in Brazil in Portuguese via www.B2Brazil.com.br.

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