1. BRAZILIAN REAL Analysis, Forecasts, and
Insight
UPDATE Christopher Oruma

2. REAL BACKGROUND

3. HISTORY OF THE BRAZILIAN REAL
 The Brazilian Real has been Brazils currency since 1994.
 It was created from the government plan which was called the
“Plano Real”
 Plano Real means “Real Plan” in Portuguese
 This was an attempt by Brazils government to try and stabilize the
countries economy which has been in hyperinflation for decades.

4. “CRITICIZED”
 This plan faced a lot of skepticism because it was the 7th
intervention by the gov’t and the 5th currency since 1986.
 Cardoso whom was the president and Brazilian minister of
finance was the architect of the plan.
 Cardoso put together a team of economists to help him construct
the plan
 The Stabilizing plan was introduced in 3 stages

5. THE 3 STAGES OF THE STABILIZING
PLAN
 1st Cardoso would need to win the support of Congress and
achieve a balanced budget through FSE, an emergency social
fund.
 2nd would be the introduction of a new index, Unidade Real de
Valor (URV).
 3rd The introduction of a new currency, which would become the
Real.
 Eventually on Feb 23, 1994 congress passed the FSE, and the
URV was pegged to the U.S. American Dollar

6. VERY EFFECTIVE
 Finally July 1 1994 Brazil announced its new currency the Real
and officially put an end to the old currency the Cruzeiro
The URV was very effective, and the rate of inflation remained
stable between March of 1994 through May of 1994.
The Real equaled the U.S. Dollar at the time that it was introduced
into the economy

7. HYPER INFLATION
 Since the 1940’s Brazil has experienced an accelerating rate of
inflation.
 The explanation of this trend is political and sociological factors as
well not just economic factors.
 The most important reasons for problems caused by inflation was
the price that had to be paid for the countries rapid development.
 Overtime inflation seemed to be something normal and something
you cant avoid by the Brazilian society.

8. TRADE OFF
 There seemed to be a trade off relation going on between price
stability and growth
 The policies that were created to lower inflation actually were a
big influence on why there was inflation
 However recently since the 1990’s Brazils inflation rate seemed to
be a concern to everyone however before the 1990’s nobody
thought that it was too much of a concern

9. BRAZILS CENTRAL BANK
 Throughout the years Brazil had little concern about its
government projects and how investment would be financed
 Brazil did not have a Central Bank until 1964
 Unlike most Central Banks Brazil lacked autonomy and decision
making abilities
 Brazils Central Bank was closely tied to its government

10. BANCO DO BRASIL
 Until 1986 the largest state commercial bank Banco do brasil was
free to extend loans greater than its deposits, since any currency
shortages would result in the central bank printing out more
money.
 These things led to large deficits and huge increases in the
money supply
 After many stabilization effects monthly inflation reached 50% in
June 1994 right before the “Real Plan” was launched
 So the purpose of the plan was to introduce a currency that would
fight inflation

11. ANNUAL INFLATION
 The annual inflation for Brazil was 909.7% in 1994.
 By 1997 however Brazils inflation had dropped merely 4.3%
 The new plan had succeeded and in adjusting inflation and in
addition to that fiscal measures were adopted to increase
government revenue.
 Income tax rates were raised and there was a 15% reduction in
funds transferred by the federal government to states and
municipalities.

12. URV
 URV (Unidaded Real de Valor) is the official price index that was
introduced before the Real Plan.
 The government’s strategy was to have prices follow the URV
transforming them into the new currency, the Real.
 To keep the new currency free of inflation monetary and fiscal
adjustments were needed
 However the URV was not as efficient as predicted. The use of
the URV in the private sector to determine price changes was not
as efficient.

13. SUCCEEDED
 Overall the inflation rate fell
 This was mainly due to labor market stability and government
controlled prices
 Now that Brazil is able to raise money in the international financial
market, foreign investment increased and lower import tariffs
allowed for foreign competition under the industrial sector of
Brazils economy
 Now the new Real these changes defined a new era for the
Brazilian economy

14. MONETARY AND FISCAL
POLICY OUTLOOK

15. MONETARY POLICY
INTEREST RATES AND INFLATION

16. CENTRAL BANK OF BRAZIL
 Brazil controls their interest rates to maintain inflation at given
upper and lower bounds.
 Main mission of the BCB is to hit a target range of inflation
 Sacrifices the ability to respond to fiscal spending changes and prevents large
scale currency interventions
 This in turn leads an indirect level of currency control

17. CENTRAL BANK OF BRAZIL

18. SHORT TERM:
INFLATION - INTEREST RATES
 Slowing inflation in Brazil this year will allow the country's central
bank to adopt flexible interest rate policy, Finance Minister Guido
Mantega said Thursday.
 Allows Brasilia to lower interest rates without a fear of
encouraging inflation
 Is Mantega’s forecast valid?

19. 14
SHORT TERM: 12
INTEREST RATES 10
MANAGING INFLATION
8
Lower Bound
Upper Bound
Has inflation management stayed on 6
Realized
track? Poly. (Realized)
4
2
Inflation has slowed in recent
months, but assuming a modest 0
additional inflation of 0.5% for 2012
and 2013 would send prices up
again.

20. SHORT TERM:
INTEREST RATES
 “Brazil's central bank has cut the country's reference Selic rate by
2 percentage points since August to 10.5%.”
 Selic is the name of the Brazilian interest rate
 “According to some market forecasts, the bank is seen cutting the
rate further to as low as 9% before the end of this year. “

21. SHORT TERM ANALYSIS
 If inflation is kept in check, the Brazilian government will have
room to lower interest rates – this could lead to a decrease in
foreign investment and thus depreciation in the currency
 This could promote the Brazilian Balance of Payments: export industries
“cheaper”, and domestic import competing companies face less invasion or
“dumping”
 If inflation is not kept in check, the Brazilian government will be
forced to keep interest rates high attracting more and more
foreign capital and thus putting more pressure on the real to
appreciate.
 This could hurt Brazilian Balance of Payments: encourage even more import
spending which is already high, hurt export industries and make domestic
import competing companies face more invading goods.

22. FISCAL POLICY
INCOME, GOVT SPENDING
PRICE DIFFERENTIAL

23. INCOME EFFECTS OF FISCAL
POLICY
 Brazil has historically faced vast poverty – once considered one of
the most unequal nations on earth
 Political trends over the past twenty years have been including a
broader civic spectrum
 Involves bringing working class, middle class and lower class into the
conversation
 Result: large social welfare programs like Bolsa Familia, Bolsa
Escola, pension programs, and high paying public positions

24. INCOME EFFECTS OF FISCAL
POLICY

26. CONSEQUENCES
 Larger government spending – less saving in the economy, higher
inflation, but larger social welfare and more purchasing power
 Since BCB must stick with target rates, changes in fiscal policy
can disturb monetary policy
 Higher inflation can lead to higher interest rates which can attract
more capital

27. CONSEQUENCES
 Mantega Thursday also noted that local markets responded
positively to a government initiative Wednesday to freeze 55
billion Brazilian reais ($32 billion) in spending from the 2012
budget as part of an effort to meet fiscal savings goals.
 A combination of lower government spending and lower interest
rates can offset inflation and allow Brazil to devalue its currency
by being less attractive to foreign capital

28. BALANCE OF PAYMENTS

29. TRADE AND CAPITAL ACCOUNT
 Since Brazil is largest economy in South America, with a 2.1
trillion dollar economy, its trade account and capital account are
doing extremely well even compared to western countries.

30. WHAT IS CAPITAL ACCOUNT?
 All International Purchases or Sales of Assets
 Major types of capital transfers are debt forgiveness and
migrants' goods and financial assets accompanying them as they
leave or enter the country
 Capital account inflow example: exports of goods or services

31. CAPITAL ACCOUNT
 Brazil has the highest net capital account in South America due to
its large and growing agricultural, mining, manufacturing, and
service sectors.
 In 2010, Brazil's net capital account was about $1.14 billion
(measured in U.S. dollars)

32. BRAZIL'S CAPITAL ACCOUNT GROWTH
 1975- 40 million
 1983- 3 million (fought war against the UK. Bad idea)
 1988- still 3 million
 1990- 35 million
 1995- 352 million
 2005- 663 million
 2010- 1.14 billion (almost double in 5 years)

33. CAPITAL ACCOUNT- BRAZIL VS
FRANCE, 2001-2012
Brazil France

34. WHY??
 Answer: Brazil is the world's leading “emerging market”
economy. Growing @ 6-8% per year. U.S. is lucky to grow at
3% per year.
 Brazil GDP (Equal to UK): 2.1 Trillion and growing! This high
GDP and growth rate attracts foreign direct investment and
purchasers of Brazilian government debt. (U.S. grew the same
way...foreign nations help finance your growth)

35. VIDEO
 http://www.youtube.com/watch?v=v4FsF8SS34k

36. TRADE ACCOUNT
 Trade Account is Total Exports-Total Imports
 Focuses on traded goods, not services
 Much easier to measure goods though
 Trade deficit (Imports>Exports) can weaken a country's currency over time
 Hume Theory: Deficits and weaker currency will begin to promote the
opposite over time

37. BRAZIL'S BALANCE OF TRADE
 In January 2012, Brazil reported a trade surplus of $1.3 billion
Brazil's primary trading partners are the United States, the
EU, and Argentina

38. BRAZILIAN EXPORTS
 Iron Ore
 Industrial Raw Materials
 Soybeans
 Beef and Pork
 Cotton
 Footwear
 Coffee
 Autos
 Automotive Parts
 Machinery

39. BRAZILIAN IMPORTS
 Machinery
 Electrical and Transport equipment
 Chemical products
 Automotive parts
 Electronics
 (As you can see, mostly advanced finished goods from Europe
and the United States)

40. TRADE ACCOUNT JAN-JUNE 2011
 In the first half of 2011, Brazilian foreign trade registered a trade
flow record U.S. $ 223.6 billion, an increase of 30.1% over the
same period in 2010, when it reached U.S. $ 170.5 billion.
 For 2010, exports grew by 31.6% and imports 28.5%. These
significant increases indicate the strength of the progressive
inclusion of Brazil in international trade.

41. TRADE ACCOUNT- JANUARY 2012
 In the month of January, exports reached U.S. $ 16.141 billion
and daily average of U.S. $ 733.7 million, records for the months
of January, surpassing January 2011 (U.S. $ 15.214 billion and $
724.5 million, respectively).
 Imports totaled U.S. $ 17.433 billion and daily average of $ 792.4
million, a record for January, surpassing January 2011 (U.S. $
14.817 billion and $ 705.6 million, respectively)

42. TRADE ACCOUNT- JANUARY 2012
CONTINUED
 The trade balance in January saw a deficit of U.S. $ 1.292
billion, reversing the result of January 2011, when he presented a
positive balance of U.S. $ 397 million.
 During this period, bilateral trade reached a record figure for the
month of January of $ 33.574 billion
 Summary: Trade is increasing, Brazil is growing, and some
months has a trade deficit (not a bad thing at all)

43. FEBRUARY 2012 (NOW)
 During the second week of February 2012, the trade balance
registered a surplus of U.S. $ 1.155 billion, a result of exports
worth U.S. $ 5.087 billion and imports U.S. $ 3.932 billion.
 This surplus was due to huge exports in commodities
(coffee, soybean, iron ore, beef) and manufacturing (oil equipment
and auto parts)
In the month so far, exports totaled U.S. $ 7.691 billion and
imports U.S. $ 6.340 billion resulting in a trade surplus

44. LOOKING FORWARD

45. USD TO BRAZIL REAL

46. EURO TO BRAZIL REAL
latest (Feb 17) lowest (Feb highest (Sep
2.25501 15) 23)
2.2475 2.56659

47. YEN TO BRAZILIAN REAL
latest (Feb 17) lowest (Sep 2) highest (Sep 23)
0.0216017 0.0211482 0.025084

48. EXPORTS (BILLION $)

49. MONETARY POLICY MOVE
 Jan 18th, 2011: Brazil’s central bank, Banco Central Do
Brasil, announced an interest rate increase of 50 basis
points, raising its overnight lending rate (Selic) from 10.75% to
11.25%.
 This move was made because Brazil wants to curb its inflation
rate.

50. INFLATION
 5.91% in 2010, a significant increase from 4.31% in 2009, and
considerably higher than the government’s target of 4.5%.

51.  Brazil has been trying to protect its domestic industry.
 In order to promote domestic products instead of exports, the
real’s value needs to be kept low.
 Increasing Brazil’s key interest rate to 11.25% makes investing in
the country very attractive to foreigners. Jan 18th, 1-year Brazilian
government bond yields 12.52% while the American equivalent
yields a mere 0.25% and the U.K. will yield 0.77%

52.  International investors buying reais to invest will certainly drive the
currency up in value.
 A higher real makes import less expensive and more attractive
 The principally affected group is therefore the domestic
manufacturing sector- the very sector the government aims to
protect.

53. THE DILEMMA
 Brazil therefore faces the dilemma of protecting itself from inflation
or protecting its domestic manufacturing sector.
 If the central bank stops increasing interest rates, the economy
faces the risk of overheating. On the other hand, if monetary
policy is tightened too much, in addition to domestic lending being
curbed, foreign investors will put upward pressure on the real.

54.  A year later; Feb 20th, 2012
 What they did.

55. ACCORDING TO THE O ESTADO DE S. PAULO
WEBSITE VIA AN ARTICLE AT SMARTMONEY
Brazil's government will use public-sector
banks to lower interest rates on lending to
consumers and companies.
Finance ministry officials have asked Banco do
Brasil SA (BBAS3.BR) and Caixa Economica
Federal to lower their interest rates, and that
way encourage private-sector competitors to
follow suit.

56.  Govt officials want credit growth.
 Borrowing in Brazil remains well below levels seen in many other
countries.
 even though the central bank has been reducing interest rate, the
Selic, since August, report said the government is concerned that
bank lending rates haven't fallen as fast.

57.  The government made a similar move during the financial and
economic crisis of 2008 and 2009, when public-sector banks cut
rates, private-sector banks followed, the report said.

58.  The Govt moved from tight monetary policies to expansionary
monetary policies recently.
 This is Probably as a result of the Euro debt crises. They are
trying to ward off the effect of the crisis by pursuing expansionary
monetary policies.

59. QUESTIONS?

60. SOURCES
 USD to Brazil real.
http://forex.tradingcharts.com/charts/index.php?sym=USDbrl&data=b&tz=EST&type=l&cs=1&period=
1d&defdates=1&bmonth=Jan&bday=1&byear=2006&bhour=&bmin=&emonth=Jan&eday=1&eyear=2
004&ehour=&emin=&Img+Type=png&drsi=0&ma1=0&dmacd=0&ma2=0&bol=0&dstoch=0&Submit=S
ubmit
 Euro to Brazil real
 http://www.x-rates.com/d/BRL/EUR/graph120.html
 The dilemma: local manufacturing sector or inflation
 http://seekingalpha.com/article/248096-will-brazil-s-monetary-policy-tightening-help-or-
hurt?source=feed
 Brazil's Government to Use Public-Sector Banks To Lower Lending Rates
 http://www.smartmoney.com/news/on/?story=ON-20120218-000174&cid=1259
 Current Selic rate
 http://www.nasdaq.com/article/too-soon-for-brazil-to-see-record-low-in-base-interest-rate-20120208-
01442
 Brazils export data
 http://www.indexmundi.com/g/g.aspx?c=br&v=85

61. SOURCES
 INFLATION TARGETING Frederic S. Mishkin Graduate School of
Business, Columbia University and National Bureau of Economic
Research E-mail: fsm3@columbia.edu July 2001
 http://www.bloomberg.com/markets/rates-bonds/government-
bonds/brazil/
 http://www.bcb.gov.br/?FISCPOLICY
 http://www.bcb.gov.br/ingles/notecon2-i.asp
 http://translate.googleusercontent.com/translate_c?hl=en&rurl=transl
ate.google.com&sl=pt&tl=en&twu=1&u=http://www.desenvolvimento.
gov.br/sitio/interna/interna.php%3Farea%3D5%26menu%3D571&us
g=ALkJrhgelO1tkcws6myUfkI_d22ynUlgSA
 http://www.indexmundi.com/facts/brazil/net-capital-account

62. SOURCES
 http://online.wsj.com/article/BT-CO-20120216-709486.html#
 A_Tombini_EconomicandFinancialSectorOverview08-15-2011
BCB