beyondbrics

Dilma Rousseff, Brazil’s president-elect, has made her first comments on the “currency war” since winning Sunday’s election. This is the war in which Brazil’s outgoing finance minister told us the world was engaged and Rousseff, broadly speaking, stuck to the policy line he set out.

In separate television interviews, she said that “manipulating” exchange rates cannot resolve anything, that she would not do anything that “created confusion”, and that international organisations such as the G20 should be strong enough to “force certain countries” to value their currencies realistically.

We can only gather from those words that she does not view as problematic the kind of capital controls introduced – and recently tightened – by the government of her mentor, President Luiz Inácio Lula da Silva.

Continuity is the watchword, but her comments leave plenty of questions unanswered. When she makes her international debut at the G20 meeting in Seoul next week, alongside Lula, she will no doubt deal with some of them.

(Rousseff has been clearer on fiscal policy: she pledged tighter controls on public spending, which could help to reduce interest rates and thus upward pressure on the real.)

The markets don’t seem overly troubled: the Brazilian currency, the real, has barely budged against the dollar since the election results (see chart).

Analysts, however, have been speculating about changes to currency policy.

Brown Brothers Harriman said in a note on Tuesday that, judging by Brazilian press reports, another change to Brazil’s transaction tax on bond investments is being considered. The change would adjust the tax rate for the length of stay.

The analysts wrote:

Other possible measures include long-term financing and tax breaks for exporters that are being squeezed by the strong real. Anti-dumping measures against China are also being considered. Note that these measures are being considered by the current administration, so clearly Lula does not want to go out as a lame duck.

In a report released on Monday, currency strategists from HSBC said that in the face of strong capital inflows “we maintain that the risk is for more and stiffer intervention measures”.

But they also said they wouldn’t make a big difference: “FX inflows into Brazil are too strong and diversified to be contained with capital controls; blame low global [interest] rates for that.”

Related reading:
Brazil’s new drill, FT Editorial