Brazil Central Bank to Keep Intervening in Exchange Market to Prop Up Dollar

Dollar fall in Brazil Henrique Meirelles, the president of Brazil's Central Bank (BC), said Tuesday, May 26, that there are signs that the economy is recovering although he offered no specifics. Brazil's economy expanded 5.1% in 2008,  but government forecasts have been downgraded to 1% for 2009, and private estimates are even more pessimistic.

"We are already seeing signs that point to an economic recovery by 2010," Meirelles said at an investment seminar. "Brazil's government took timely measures to combat the crisis. Brazil's economy is solid because of this effort."

Meirelles noted that such policies have included building foreign reserves, which currently stand at US$ 205 billion, increasing credit availability and cutting taxes to stimulate consumer demand.

The BC president did specifically address the strong real which has motivated reactions from Brazilian exporters, who feel they are losing competitiveness and hard to retain foreign markets.

Meirelles said the central bank's focus will continue to be monetary policy. He said the central bank has no direct or immediate responsibilities when it comes to foreign exchange policy.

"We are not going to try to set foreign exchange policy by means of monetary policy," he said. "The foreign exchange rate responds to a number of factors. The foreign exchange market is responsible for dealing with those factors. The role of monetary policy is to stabilize the domestic economy and maintain inflation under control."

Brazilian inflation in 2008 was 5.9% but that rate is likely to fall below 5% in 2009, according to most economists.

Meirelles said the only direct role for the central bank in the foreign exchange market was to make timely interventions "with a view to avoiding abrupt market shifts" and he added that "the government's job is to counter waves of both euphoria and pessimism."

In recent weeks, the central bank has intervened in the foreign exchange market through nearly daily snap auctions to buy US dollars. The auctions come at a time when the Brazilian real has been steadily gaining against the US dollar.

The central bank has been under pressure to cut interest rates as a way of making Brazilian fixed-income investments less attractive to foreign investors. Brazil's base rate is currently 10.25%, attracting heavy foreign investment inflows that have helped strengthen the real against the dollar.

Since early March, the Brazilian real has risen from 2.44 to the US dollar to the current 2.04.

In related news the Central Bank also announced a current account surplus of 146 million US dollars for the month of April, the best performance in almost 19 months.

However Altamir Lopes, head of the Central bank's Economic Research Department, said that the surplus in the current account "is not a trend" and may not repeat itself in following months. Speaking with reporters in Brazilian capital Brasí­lia he forecasted Brazil will probably post a US$ 2.3 billion deficit in May as the real strengthens.

Foreign direct investment in Brazil for April totaled 3.41 billion USD and could reach 2.6 billion USD in May, added Lopes.

According to the Central bank, exports contributed 3.71 billion USD to the current account balance last month, compared with a 1.74 billion in April 2008. International companies reduced profit and dividend remittances by 57.3% from January to April 2009 to 5.27 billion USD.

"These figures show interest in the country by foreign investors," Lopes told reporters in Brasilia. "They're looking at Brazil with a long-term perspective."

Latin American Slowdown

The main impact for Latin America of the global financial crisis and economic slowdown has been the contraction of trade, so far in the range of 9 to 11%, revealed Alicia Bárcena, Executive Secretary of the UN Economic Commission for Latin America and the Caribbean, Cepal.

"The strongest impact we are seeing in the region is the fall in trade volumes. I believe that the "shock" of the contraction of global demand for our goods and services is our most relevant issue," said Bárcena in an interview with the Cuban daily Granma.

"Although the situation surprises us when we have a stronger standing, the region is not immune to the crisis and the World Trade Organization considers that our trade volume has dropped 9%, while other international organizations put it at 11%," she added.

In the financial area the effect on Latin American and the Caribbean has also been significant, but less complex, because the region this time has healthier financial systems and a more regulated banking sector," added the economist.

She recalled that when the last big crisis Latin America's foreign debt was equivalent to 24% of GDP, while in 2008 it had dropped to 8%.

Bárcena also pointed out that the global crisis has an additional impact for countries such as Mexico, Central America, the Caribbean, since remittances and tourism have plunged. "And in the case of Mexico worse still because of the A/H1N1 influenza epidemic."

The region is forecasted to contract 0.3% in 2009, according to Bárcena who quoted data from Cepal, which will the first "negative percentage following six years of sustained growth."

"We even believe it could drop a little bit more, precisely because the Mexican economy has a considerable influence in the calculation and they are having serious problems," added Barcena.

However the great challenge for the region is keeping jobs. In six years unemployment in Latin America and the Caribbean fell from 11% in 2003 to 7.6% in 2008, "but could climb an additional point" as a result of this year's performance.

Mercopress

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