The Brazilian press still minds its manners. The government can’t handle the cheap dollar and we still don’t see a single newspaper getting to the point. On May 15 the dollar reached below 2 reais for the first time since February 2001. The next day it fell again, this time to 1.95 reais, the lowest value in more than six years. This is a "good problem," said President Luiz Inácio Lula da Silva.
The "good problem" costs jobs and affects the industries most dependent on domestic labor and inputs. The only reasons why the damage is not even more serious are that the world economy remains strong, prices for basic products remain high and some industries have been able to sell more expensive products, compensating in part for the strengthening of the real.
The government has reasons to celebrate and some boastfulness is excusable. But a "good problem" is still a problem and some key officials, notwithstanding their state of grace, are not entirely denying it.
Newspapers have been widely covering the industry response to the strengthening of the real. Its impact is particularly tough on some sectors such as textiles, shoes and furniture, but it’s hitting almost everyone, one way or another.
With the dollar cheap, the so-called ‘Brazil cost’ becomes more sensitive: infrastructure deficiencies, heavy and irrational taxes, costly bureaucracy and expensive credit are all hitting the corporate world without the benefit of shock absorbers. Besides, the smuggling of Chinese goods is causing much more damage now.
The press has been providing readers with a cornucopia of explanations. This is no big mystery, really. The trade surplus, still above US$ 40 billion in twelve months, is the main factor for the dollar accumulation. The country’s good export performance has been dependent to a significant extent on international prosperity.
But the growth of the global economy, the longest lasting in the last 60 years, has been followed by huge liquidity. Markets overflow with excess money. Concerns with risk have decreased and rivers of dollars have been flowing to emerging economies, now able to return good profits on the short term.
With interest rates among the highest in the world, Brazil is a preferred destination for all this dough. This reinforces the depreciation of the US dollar vis-à-vis the real.
Some economies such as Chile have been successful at cushioning the exchange rate pressure by squeezing their public accounts, keeping interest rates low and using their fiscal excesses abroad.
Colombian authorities have resorted to controlling capital but then the dollar fell down disastrously to less than 2,000 pesos. The most prudent among economies are getting ready for tougher times, when commodity prices start backing up.
Exchange Rate Threat
In Brazil, the government is still looking for a path to follow. The only good resulting from all the interventions by Banco Central was to put a temporary break in the exchange rate devaluation run and to reinforce reserves accumulation, which is now above US$ 120 billion.
On May 15 the Minister of Finance, Guido Mantega, promised cuts in labor charges for those sectors most affected by the changes. On May 17, the Minister of Development, Industry and Foreign Trade, Miguel Jorge, announced the death of obsolete enterprises as a consequence of the rise in the real.
But the big problem right now is not obsolescence. Representatives of the footwear industry were quick to refute the minister’s comments. Some of the most affected industries have invested heavily since the 1990s precisely because they have been exposed to violent competition following the opening of trade with Brazil. The minister decided to issue a correction. According to his new statement, only those who want to die will die. Not exactly a great amendment.
And now what? Has the government finally decided how to handle the "good problem"? The response of the Finance minister was featured in the middle of a half-page interview published on Sunday (May 20) in the daily O Estado de S. Paulo:
"The unburdening of payroll is part of the arsenal. It will help the companies suffering the most direct impact of the valued real. But we still do not have a conclusive proposal. What we have is not just a single alternative (…) I want to launch the measure when it is ripe."
The confession was clear: the government doesn’t know how to handle the problem. On top of that, the Finance minister became confused when answering another question and quoted the Schumpeterian theory of creative destruction. Well, there is no parallel between the development theory of Joseph Schumpeter (1883-1950) and the exchange rate threat facing Brazilian industries right now.
But the confession remained hidden in the middle of the text, obfuscated by the minister’s triumphalism. According to him, "the virtuous cycle is implemented" and everything is better than it was during the JK (Juscelino Kubitschek, 1902-1976) administration (1956-1961).
Relative Inefficiency
Folha de S. Paulo featured an interview with Mantega on Sunday, May 20.
"We are not going to get involved in any exchange rate adventure. What we have to do is increase the competitiveness of corporations, specially those who suffer the most with rate increases".
So what?
Exchange rate issues are not new, but the Ministry of Finance still sticks to generalities, as if he had never given serious thought to the matter. People who have been thinking about this would perhaps be a little happier if small questions like the following were remembered during interviews:
1. What is the problem of said ‘most affected’ industries – scarcity of investments?
2. Would their equipment be obsolete? (their executives say otherwise)
3. Should they import their raw-materials like other industry segments are doing?
4. If so, would the ‘inefficient’ industries be the domestic suppliers for these raw-materials – for example, cattle breeders and the leather industry?
5. If the government does not want to mess with exchange rates and is not willing to seriously revisit tax rates, what else could it mess with within a reasonable timeline?
6. After all, does or does not the government recognize an emergency situation for these so-called ‘most affected’ sectors?
7. Does the increase in imports of raw-materials – and even of finished products – really reflect at this time a difference in productivity between domestic companies and foreign, particularly Chinese, companies?
8. Who is ‘relatively inefficient’ – domestic producers or the country itself – and an admittedly onerous administration?
Rolf Kuntz is a Brazilian journalist. This article appeared originally at Observatório da Imprensa – www.observatoriodaimprensa.com.br.
Translated by Tereza Braga. Braga is a freelance Portuguese translator and interpreter based in Dallas. She is a certified member of the American Translators Association. Contact: terezab@sbcglobal.net.
