May 7 (Bloomberg) — The Brazilian cure is called Engov. The advertising slogan says to take one pill before and another after drinking alcohol to avoid a hangover.
When you consider the celebrating by President Luiz Inacio Lula da Silva and his economic team on the May 1 Labor Day holiday over the awarding of an investment-grade rating for Brazil, let’s hope they took a double dose of Engov.
On April 30, Standard & Poor’s raised its long-term foreign currency sovereign credit rating on Brazil to BBB- from BB+. The extra B means much more than a simple additional consonant in the alphabet used by rating companies. It means that, for the first time, Brazilian sovereign debt is considered investment grade rather than speculative or junk.
Analysts had figured that Brazil would become investment grade sometime in 2008 or 2009, but the announcement by S&P was a surprise. Several analysts expected rating companies to pace the timing of the upgrade against the threat of a U.S.-led global economic slowdown. Others said rating companies probably would be more careful after granting investment-grade status to mortgage- backed securities that later proved unworthy of their ratings.
Regardless of the reasons that led S&P to outrun the market, the Sao Paulo Stock Exchange, or Bovespa, surged 6.3 percent to a record 67,868 points on the day of the announcement. The following business day, the Brazilian currency, the real, climbed 2.6 percent against the dollar to $1.6480, its highest since Brazil floated its currency in early 1999.
Too Late
How long will the excitement last? Probably until an overvalued currency starts making Lula feel like he has had one too many caipirinhas, the Brazilian national drink made from sugar cane. They feel deceptively good — until it’s too late.
The big problem is the investment-grade rating probably will increase the flow of dollars into Brazil. Some large investment and pension funds follow investment policies that only allow them to buy non-speculative global assets. Now, these funds can buy Brazilian securities without breaching their investment rules and, at least in theory, without facing the risk of sudden default.
In coming months and years, demand for Brazilian securities is forecast to grow, lowering the costs that the government and corporations face when they access international markets to raise capital.
The favorable economic outlook can only push the Brazilian currency higher. The real has already climbed 22 percent against the U.S. dollar in the past 12 months, the largest increase among the 16 major currencies tracked by Bloomberg.
Balance of Payments
Even before S&P’s announcement, Lula and Finance Minister Guido Mantega were concerned with Brazil’s rising currency and the rapid deterioration of the country’s balance of payments.
On March 12, Brazil introduced a 1.5 percent tax on foreign fixed-income investments, yet the real kept climbing and the trade balance computer e hardware kept on deteriorating. The country’s 12-month trade surplus dropped to $32 billion in April, from $47 billion a year ago, and its current-account balance turned negative for the first time since 2002.
The key question now is whether Brazil will impose capital controls to prevent additional strengthening of the real. The May 4 edition of O Estado de Sao Paulo newspaper said the Brazilian government is already studying measures to contain the gusher of dollars.
This isn’t good news. There is a big difference between Brazil’s current economic policy and the introduction of capital controls.
Building Reserves
So far, the Brazilian Central Bank has taken advantage of the weaker U.S. dollar worldwide to buy foreign currency and accumulate reserves. moto e accessori This has allowed Brazil to amass $195 billion in reserves and turn into a net foreign creditor for the first time in its history, while keeping public debt under control. It was just this strategy that enabled Brazil to earn investment-grade credit status.
Introducing capital controls would mean discouraging the flow of dollars into the country rather than transforming these dollars into reserves. It would be a different and much riskier policy with at least three major negative consequences.
First, it could prevent the Brazilian Central Bank from using a stronger currency as a tool to help keep inflation under control. The usual tool for holding down inflation is higher interest rates, which would act as a drag on growth.
Second, capital controls might limit the accumulation of additional reserves, which have helped offset Brazil’s rising internal public debt. If volo ultraleggeri federal discretionary spending keeps growing at the nominal pace of 16 percent a year and interest rates are increased to blunt inflation, the lack of additional reserves might interrupt the reduction of Brazil’s net public- sector debt.
In a Trap
Third, capital controls might discourage foreign investments that are needed to finance the country’s current-account deficit and to revamp Brazil’s deficient infrastructure.
Brazil’s investment-grade credit status is well deserved and cause for celebration. Yet it can’t be used as an alibi to overlook the need viaggi vacanze for maintaining a sound economic policy and implementing the changes needed to boost investments and sustain economic growth. If Lula falls into the capital-control trap, the hangover will be long and unpleasant, with or without Engov.
(Alexandre Marinis, political economist and founding partner of Mosaico Economia Politica, is a Bloomberg News columnist. The opinions expressed are his own.)
