Fatal attraction

Editorial comment

In contrast to the popular tune of „Girl from Ipanema“ dance up and down real everything else was just not nice and gentle. Blind enthusiasm of foreign investors took the currency from its winter bed, with her rising 54.5 percent against the U.S. dollar and 23 percent of trade weighted basis, while the government did not say „end“ and impose 2 percent tax on portfolio returns.
While insulting as investors left the stock and real to slide down the step was a good choice by the government. To justify as exchange rate management, however, is the wrong move. Rising real problem is a symptom of a mystery in Brazil – the main reason the capital receipts, whose intensity has been growing for years, with a temporary interruption due to financial crisis.
This fatal attraction (currently Brazil’s public debt is assessed by rating agencies with major investment grade) entails the problems. One of them is the opportunity cost of reserve of $ 222 billion, which actually has no interest and is too expensive insurance against capital outflow. By some calculations Brazil already has paid for his care with that 1-2% of annual production.
They also risk the money to disrupt the economy. Gaining more and more capital into Brazil in the form of portfolio rather than direct foreign investment. While in August, the quarterly average movement of foreign direct investments amounted to $ 1.6 billion was less than half compared with the same movement prior year, earnings from portfolio investments have more than doubled to $ 5.2 billion, Love Samba to be too good to be true – there are the traditional ingredients for a classic asset bubble in emerging markets. Brazil’s future status as a major exporter of oil further stoking tensions.
The government is wise enough to worry before it is too late. Fragile and frenetic global monetary system leaves almost no opportunities for developing countries to form bubbles that would be much worse than the moderate development tax. Absorption of liquidity at home just made so that the taking of credit to „low interest“ currency looks like a good option. Recipe for disaster is the exchange rate be allowed to jump over the threshold. After choking exports (half of which are industrial goods) will sooner or later followed by a painful fall from high, if the capital proceeds stop.
Brazil is a reasonable policy. The tax is fairly modest. It does not apply to foreign direct investments that are less favorable for the development of asset bubbles. More importantly, it relates to honest investors, making them subject to their entry, not when they try to take their money back, and make Malaysia a decade ago. Now the government must win back their confidence, making sure that they understand the way of thinking.
To be successful, Brazil will have to live with a strong real. The tax does not change that fact, but it helps to be a manageable task.