Economy

Economic tension is global, but the Brazilian currency is plummeting faster

Brazilian real devalues and already generates inflationary pressures for domestic market

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  • The dollar has risen more than 15% against the real since January;
  • Besides coronavirus worries, Brazilian official statistics agency reported that Brazil’s GDP grew only 1.1% in 2019.

The strong devaluation of the Brazil‘s real in the last few days is already starting to put pressure on inflation, with companies that depend on imported inputs already mentioning price adjustments. If the dollar remains at current high levels – around BRL 4.65 – for too long, companies whose dollar affects operating costs should pass on price increases to consumers, reports O Estado de S. Paulo.

The global market is experiencing moments of tension due to the impacts of the coronavirus outbreak in several sectors, such as those that depend on consumption and tourism, with airlines registering billion dollar losses on stock markets and major gatherings being canceled.

READ ALSO: Brazil’s economy disappoints and grows at lowest rate in 3 years

Even in this scenario, the Brazilian currency stands out for its strong devaluation in the past few weeks. Since the beginning of 2020, the dollar has risen more than 15% against the real. The Mexican peso and the Colombian peso lost between 5% and 8% of their value in the same period.

15%

was the devaluation of Brazilian real since January. Colombian and Mexican currencies registered milder weakenings, of 5%-8%.

Internal obstacles

The sharp difference from neighboring emerging markets suggests that internal problems, in addition to the coronavirus, have been pressuring the exchange rate. Last week, Brazilian official statistics agency reported that Brazil’s GDP grew only 1.1% in 2019, frustrating expectations that had already been adjusted downwards.

READ ALSO: Growth in Mexico and Argentina will be hit by coronavirus, warns OECD

Marcos Ross, senior economist at XP Investimentos, added to O Estado de S. Paulo that the reforms necessary to guarantee a more robust growth to the country are stalled, with the government tensioning relations with Congress. “Everything is stopped. And this is reflected upon economic performance.”

There was also a sharp spike in Brazil’s country risk as measured by the CDS (Credit Default Swap), a type of contract that works as a thermometer of investor confidence in economies, especially emerging ones. Brazil’s five-year CDS rose 14.4% on Thursday to 129 points, the highest daily increase in almost three years.