Brazil’s Mantega mulls new currency measures

Brazil will continue to act to
curb the strength of its currency, with restraining excess
speculation in the futures and derivatives markets among
possible options, the country’s finance minister said on
Tuesday.

 Speaking on the sidelines of a conference in London,
Finance Minister Guido Mantega also said Latin America’s
largest economy was on track for growth of around 4.5 percent
this year — a forecast higher than the 4.0 percent predicted
by the central bank and the 3.94 percent seen by analysts.
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 “The government will continue to take measures to contain
the over-valuation of the exchange rate … We’ve taken
measures on reserve requirements, we can take measures on
derivatives and futures. But these are not measures we will
pre-announce,” Mantega told reporters.

 Brazil’s real weakened for the first time in seven sessions
when the market opened shortly after Mantega made his comments.
In Brazil’s spot market, the real shed 0.7 percent to 1.563 to
the dollar.

 Despite aggressive measures to curb the strength of its
currency, including taxes on fixed-income inflows, the real
BRL=BRBY is trading close to its strongest level against
the dollar in 12 years.

 In recent weeks, foreign investors have raised their bets
that the real will continue rising to record levels.

 Net bets the real will gain, the so-called “real net
longs,” were $23.2 billion on Monday, according to Sao Paulo’s
BM&F exchange and Reuters. Monday’s result is the
second-highest ever and 1.4 percent less than the record $23.5
billion recorded on Friday.

 Last year, Mantega accused governments around the world of
deliberately weakening their currencies to boost their export
competitiveness, warning of an “international currency war.”

 “The problem is that monetary policy in advanced economies
is too relaxed. These countries are not recovering. They have a
problem of growth. That’s why money flows to emerging
countries,” Mantega said.

 But for Alberto Ramos, Latin America economist at Goldman
Sachs in New York, Brazil is “no passive victim.”

 Near-zero rates in developed markets and high rates in
emerging economies are drawing investment to countries like
Brazil. At the same time, though, Brazil has failed or refused
to contemplate measures that could ease flows, such as cutting
government spending, which makes up a whopping 40 percent of
gross domestic product, he said.

 “With the current world system there is no surprise that
capital is being attracted to Brazil,” Ramos said in an
interview. “But they refuse to do the kind of serious fiscal
adjustment that would alleviate the pressure.”

Some measures used to check the real’s gains, such as buying
dollars at daily auctions, actually make it more attractive to
invest in Brazil by reducing price swings, he added.

 “Not only are Brazilian rates high, 12.5 percent, but the
government acts to reduce volatility,” Ramos said. “Think from
an investor’s perspective: return is already high and Brazil
has just made volatility lower.”

 HOT, BUT NOT TOO HOT

 Mantega insisted that no credit and capital market bubbles
were forming despite Brazil’s robust economic expansion.

 “It’s a hot economy but not too hot … Credit is growing
at a rate lower than last year. We have decelerated the
economy,” he said, adding that Brazil’s 2011 growth rate of 4.5
percent was in line with that of other emerging economies.

 “As far as inflation is concerned, the rate is decreasing.
All indicators point to the deceleration of inflation. Next
month, inflation will be lower because commodity (prices) are
lower, fuel and gasoline prices are lower,” he said.

 Like many fast-growing emerging economies, Brazil has moved
to rein in rising consumer prices. The central bank has raised
interest rates four times so far this year by a cumulative 150
basis points, to 12.25 percent.

 But with 12-month inflation just above the government
target, analysts see at least one more rate hike on the way,
keeping the benchmark Selic interest rate among the highest in
the world’s major economies.

 “We have always taken measures to adjust growth to our
potential … If necessary the central bank will keep raising
interest rates, but that’s the decision of the central bank,”
Mantega added.

 He also said the country had achieved more than half of its
primary surplus target this year and that the government’s
reform agenda includes reducing investment taxes.

 “In 2011, the fiscal result will be much better than 2010,”
he said, adding that the government would also undertake
reforms to improve the country’s economic efficiency.

 “We have a tax-reform agenda, to reduce tax on investments
and labor requirements so that payrolls should be taxed less.
We have a state tax system we have to simplify,” Mantega said.