1. BRAZILIAN REAL Analysis, Forecasts, and InsightUPDATE 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 thePlano Real Plano Real means Real Plan in Portuguese This was an attempt by Brazils government to try and stabilize thecountries economy which has been in hyperinflation for decades. 4. CRITICIZED This plan faced a lot of skepticism because it was the 7thintervention by the govt and the 5th currency since 1986. Cardoso whom was the president and Brazilian minister offinance was the architect of the plan. Cardoso put together a team of economists to help him constructthe plan The Stabilizing plan was introduced in 3 stages 5. THE 3 STAGES OF THE STABILIZINGPLAN 1st Cardoso would need to win the support of Congress andachieve a balanced budget through FSE, an emergency socialfund. 2nd would be the introduction of a new index, Unidade Real deValor (URV). 3rd The introduction of a new currency, which would become theReal. Eventually on Feb 23, 1994 congress passed the FSE, and theURV was pegged to the U.S. American Dollar 6. VERY EFFECTIVE Finally July 1 1994 Brazil announced its new currency the Realand officially put an end to the old currency the CruzeiroThe URV was very effective, and the rate of inflation remainedstable between March of 1994 through May of 1994.The Real equaled the U.S. Dollar at the time that it was introducedinto the economy 7. HYPER INFLATION Since the 1940s Brazil has experienced an accelerating rate ofinflation. The explanation of this trend is political and sociological factors aswell not just economic factors. The most important reasons for problems caused by inflation wasthe price that had to be paid for the countries rapid development. Overtime inflation seemed to be something normal and somethingyou cant avoid by the Brazilian society. 8. TRADE OFF There seemed to be a trade off relation going on between pricestability and growth The policies that were created to lower inflation actually were abig influence on why there was inflation However recently since the 1990s Brazils inflation rate seemed tobe a concern to everyone however before the 1990s nobodythought that it was too much of a concern 9. BRAZILS CENTRAL BANK Throughout the years Brazil had little concern about itsgovernment projects and how investment would be financed Brazil did not have a Central Bank until 1964 Unlike most Central Banks Brazil lacked autonomy and decisionmaking abilities Brazils Central Bank was closely tied to its government 10. BANCO DO BRASIL Until 1986 the largest state commercial bank Banco do brasil wasfree to extend loans greater than its deposits, since any currencyshortages would result in the central bank printing out moremoney. These things led to large deficits and huge increases in themoney supply After many stabilization effects monthly inflation reached 50% inJune 1994 right before the Real Plan was launched So the purpose of the plan was to introduce a currency that wouldfight 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 inaddition to that fiscal measures were adopted to increasegovernment revenue. Income tax rates were raised and there was a 15% reduction infunds transferred by the federal government to states andmunicipalities. 12. URV URV (Unidaded Real de Valor) is the official price index that wasintroduced before the Real Plan. The governments strategy was to have prices follow the URVtransforming them into the new currency, the Real. To keep the new currency free of inflation monetary and fiscaladjustments were needed However the URV was not as efficient as predicted. The use ofthe URV in the private sector to determine price changes was notas efficient. 13. SUCCEEDED Overall the inflation rate fell This was mainly due to labor market stability and governmentcontrolled prices Now that Brazil is able to raise money in the international financialmarket, foreign investment increased and lower import tariffsallowed for foreign competition under the industrial sector ofBrazils economy Now the new Real these changes defined a new era for theBrazilian economy 14. MONETARY AND FISCALPOLICY OUTLOOK 15. MONETARY POLICYINTEREST RATES AND INFLATION 16. CENTRAL BANK OF BRAZIL Brazil controls their interest rates to maintain inflation at givenupper 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 largescale 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 countrys centralbank to adopt flexible interest rate policy, Finance Minister GuidoMantega said Thursday. Allows Brasilia to lower interest rates without a fear ofencouraging inflation Is Mantegas forecast valid? 19. 14SHORT TERM: 12INTEREST RATES10MANAGING INFLATION 8 Lower Bound Upper BoundHas inflation management stayed on 6 Realizedtrack? Poly. (Realized) 4 2Inflation has slowed in recentmonths, but assuming a modest0additional inflation of 0.5% for 2012and 2013 would send prices upagain. 20. SHORT TERM:INTEREST RATES Brazils central bank has cut the countrys reference Selic rate by2 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 therate 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 haveroom to lower interest rates this could lead to a decrease inforeign investment and thus depreciation in the currency This could promote the Brazilian Balance of Payments: export industriescheaper, and domestic import competing companies face less invasion ordumping If inflation is not kept in check, the Brazilian government will beforced to keep interest rates high attracting more and moreforeign capital and thus putting more pressure on the real toappreciate. This could hurt Brazilian Balance of Payments: encourage even more importspending which is already high, hurt export industries and make domesticimport competing companies face more invading goods. 22. FISCAL POLICYINCOME, GOVT SPENDINGPRICE DIFFERENTIAL 23. INCOME EFFECTS OF FISCALPOLICY Brazil has historically faced vast poverty once considered one ofthe most unequal nations on earth Political trends over the past twenty years have been including abroader civic spectrum Involves bringing working class, middle class and lower class into theconversation Result: large social welfare programs like Bolsa Familia, BolsaEscola, pension programs, and high paying public positions 24. INCOME EFFECTS OF FISCALPOLICY 25. CONSEQUENCES Larger government spending less saving in the economy, higherinflation, but larger social welfare and more purchasing power Since BCB must stick with target rates, changes in fiscal policycan disturb monetary policy Higher inflation can lead to higher interest rates which can attractmore capital 26. CONSEQUENCES Mantega Thursday also noted that local markets respondedpositively to a government initiative Wednesday to freeze 55billion Brazilian reais ($32 billion) in spending from the 2012budget as part of an effort to meet fiscal savings goals. A combination of lower government spending and lower interestrates can offset inflation and allow Brazil to devalue its currencyby being less attractive to foreign capital 27. BALANCE OF PAYMENTS 28. TRADE AND CAPITAL ACCOUNT Since Brazil is largest economy in South America, with a 2.1trillion dollar economy, its trade account and capital account aredoing extremely well even compared to western countries. 29. WHAT IS CAPITAL ACCOUNT? All International Purchases or Sales of Assets Major types of capital transfers are debt forgiveness andmigrants goods and financial assets accompanying them as theyleave or enter the country Capital account inflow example: exports of goods or services 30. CAPITAL ACCOUNT Brazil has the highest net capital account in South America due toits large and growing agricultural, mining, manufacturing, andservice sectors. In 2010, Brazils net capital account was about $1.14 billion(measured in U.S. dollars) 31. BRAZILS 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) 32. CAPITAL ACCOUNT- BRAZIL VSFRANCE, 2001-2012 BrazilFrance 33. WHY?? Answer: Brazil is the worlds 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) 34. VIDEO http://www.youtube.com/watch?v=v4FsF8SS34k 35. 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 countrys currency over time Hume Theory: Deficits and weaker currency will begin to promote the opposite over time 36. BRAZILS BALANCE OF TRADE In January 2012, Brazil reported a trade surplus of $1.3 billionBrazils primary trading partners are the United States, theEU, and Argentina 37. BRAZILIAN EXPORTS Iron Ore Industrial Raw Materials Soybeans Beef and Pork Cotton Footwear Coffee Autos Automotive Parts Machinery 38. BRAZILIAN IMPORTS Machinery Electrical and Transport equipment Chemical products Automotive parts Electronics (As you can see, mostly advanced finished goods from Europeand the United States) 39. TRADE ACCOUNT JAN-JUNE 2011 In the first half of 2011, Brazilian foreign trade registered a tradeflow record U.S. $ 223.6 billion, an increase of 30.1% over thesame period in 2010, when it reached U.S. $ 170.5 billion. For 2010, exports grew by 31.6% and imports 28.5%. Thesesignificant increases indicate the strength of the progressiveinclusion of Brazil in international trade. 40. TRADE ACCOUNT- JANUARY 2012 In the month of January, exports reached U.S. $ 16.141 billionand daily average of U.S. $ 733.7 million, records for the monthsof 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 $ 792.4million, a record for January, surpassing January 2011 (U.S. $14.817 billion and $ 705.6 million, respectively) 41. TRADE ACCOUNT- JANUARY 2012CONTINUED The trade balance in January saw a deficit of U.S. $ 1.292billion, reversing the result of January 2011, when he presented apositive balance of U.S. $ 397 million. During this period, bilateral trade reached a record figure for themonth of January of $ 33.574 billion Summary: Trade is increasing, Brazil is growing, and somemonths has a trade deficit (not a bad thing at all) 42. FEBRUARY 2012 (NOW) During the second week of February 2012, the trade balanceregistered a surplus of U.S. $ 1.155 billion, a result of exportsworth 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 equipmentand auto parts)In the month so far, exports totaled U.S. $ 7.691 billion andimports U.S. $ 6.340 billion resulting in a trade surplus 43. LOOKING FORWARD 44. USD TO BRAZIL REAL 45. EURO TO BRAZIL REAL latest (Feb 17) lowest (Feb highest (Sep 2.25501 15) 23) 2.24752.56659 46. YEN TO BRAZILIAN REALlatest (Feb 17) lowest (Sep 2) highest (Sep 23)0.0216017 0.02114820.025084 47. EXPORTS (BILLION $) 48. MONETARY POLICY MOVE Jan 18th, 2011: Brazils central bank, Banco Central DoBrasil, announced an interest rate increase of 50 basispoints, raising its overnight lending rate (Selic) from 10.75% to11.25%. This move was made because Brazil wants to curb its inflationrate. 49. INFLATION 5.91% in 2010, a significant increase from 4.31% in 2009, andconsiderably higher than the governments target of 4.5%. 50. Brazil has been trying to protect its domestic industry. In order to promote domestic products instead of exports, thereals value needs to be kept low. Increasing Brazils key interest rate to 11.25% makes investing inthe country very attractive to foreigners. Jan 18th, 1-year Braziliangovernment bond yields 12.52% while the American equivalentyields a mere 0.25% and the U.K. will yield 0.77% 51. International investors buying reais to invest will certainly drive thecurrency up in value. A higher real makes import less expensive and more attractive The principally affected group is therefore the domesticmanufacturing sector- the very sector the government aims toprotect. 52. THE DILEMMA Brazil therefore faces the dilemma of protecting itself from inflationor protecting its domestic manufacturing sector. If the central bank stops increasing interest rates, the economyfaces the risk of overheating. On the other hand, if monetarypolicy is tightened too much, in addition to domestic lending beingcurbed, foreign investors will put upward pressure on the real. 53. A year later; Feb 20th, 2012 What they did. 54. ACCORDING TO THE O ESTADO DE S. PAULOWEBSITE VIA AN ARTICLE AT SMARTMONEYBrazils 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. 55. Govt officials want credit growth. Borrowing in Brazil remains well below levels seen in many othercountries. even though the central bank has been reducing interest rate, theSelic, since August, report said the government is concerned thatbank lending rates havent fallen as fast. 56. The government made a similar move during the financial andeconomic crisis of 2008 and 2009, when public-sector banks cutrates, private-sector banks followed, the report said. 57. The Govt moved from tight monetary policies to expansionarymonetary policies recently. This is Probably as a result of the Euro debt crises. They aretrying to ward off the effect of the crisis by pursuing expansionarymonetary policies. 58. QUESTIONS? 59. 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=2004&ehour=&emin=&Img+Type=png&drsi=0&ma1=0&dmacd=0&ma2=0&bol=0&dstoch=0&Submit=Submit Euro to Brazil real http://www.x-rates.com/d/BRL/EUR/graph120.htmlThe dilemma: local manufacturing sector or inflation http://seekingalpha.com/article/248096-will-brazil-s-monetary-policy-tightening-help-or-hurt?source=feed Brazils 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 60. SOURCES INFLATION TARGETING Frederic S. Mishkin Graduate School ofBusiness, Columbia University and National Bureau of EconomicResearch 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=translate.google.com&sl=pt&tl=en&twu=1&u=http://www.desenvolvimento.gov.br/sitio/interna/interna.php%3Farea%3D5%26menu%3D571&usg=ALkJrhgelO1tkcws6myUfkI_d22ynUlgSA http://www.indexmundi.com/facts/brazil/net-capital-account 61. SOURCES http://online.wsj.com/article/BT-CO-20120216-709486.html# A_Tombini_EconomicandFinancialSectorOverview08-15-2011BCB