Brazil Real to Post ‘Orderly’ Fall as Deficit Rises, Malan Says

 Brazil’s real may depreciate in an “orderly” fashion after a world-beating rally this year as a consumer-led recovery fuels imports, widening the current account deficit, former Finance Minister Pedro Malan said.

The gap for the current account, the broadest measure of a country’s trade in goods and services, will double to a record $34.3 billion next year, according to a Brazilian central bank survey of about 100 economists published this week. The deficit will total $17 billion in 2009, the survey shows.

“If this process continues, especially if it’s linked to the very high rate of growth, we’re going to face increasingly higher current account deficits,” Malan, chairman of the international advisory board of Itau Unibanco Holdings SA, said in an interview in London yesterday. “There’ll be natural forces towards the depreciation of the currency.”

Malan, who as minister in 1999 ended a currency peg that led to a 60 percent depreciation against the dollar, said the real may weaken in an “entirely orderly” fashion. The central bank should continue to sell and buy foreign currency in the spot and derivatives markets to help cushion foreign-exchange moves, he said.

Bank of America Corp. analyst Benoit Anne said yesterday the real is 7 percent undervalued based on a model that analyzes savings rates and the current account, excluding cyclical swings. The real should appreciate to 1.6 per dollar in two to three years, London-based Anne said.

The real has risen 35 percent against the dollar this year to 1.7122 yesterday, the biggest jump among 16 major currencies tracked by Bloomberg. The currency gained 0.3 percent since Finance Minister Guido Mantega imposed a 2 percent levy on all foreign investment in local bonds and stocks to stem the rally and avoid the formation of an asset “bubble.”

‘Major Mistake’

Increasing the tax on foreign investment would be a “major mistake” because the currency rally is being driven by confidence in the country, said Malan, 66.

“The forces for appreciation are such that this tax would have to be increased to the point of having very negative effects on the country and perceptions about its future,” he said.

Brazil’s economy will expand 5 percent next year after an estimated expansion of 0.2 percent in 2009, according to a weekly central bank survey. New vehicle registrations rose 23 percent in October from a year ago after jumping 29 percent in September, the association of car dealerships said Nov. 9.

Bubble

Malan said the economic expansion may lead to complacency and urged the government to cut back on spending.

Malan said he’s not concerned about a “bubble” in Brazilian financial markets because the country has strong fundamentals and “self-correcting mechanisms.” The country’s benchmark Bovespa stock index surged 77 percent in local currency terms this year and 140 percent in U.S. dollars.

“I would be concerned about a bubble in the markets in a country with no fundamentals whatsoever,” Malan said. “I’m not that concerned about Brazil. There are built-in stabilizers and self-correcting mechanisms, checks and balances and weights and counter-weights so the markets will correct. I hope I’m not wrong.”

— With assistance from Firat Kayakiran in London and Tal Barak in New York. Editors: Adriana Arai, Laura Zelenko.