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B Y E R I K BU I S C H I ( W ‘ 11)

BRAZIL:

THE REAL UNDER SIEGE S ince the start of the global downturn,

This of course poses a couple of issues for

Brazilian

have

Brazilian policymakers. This is due to the

had a difficult time managing the

fact that a rapidly appreciating currency

country’s currency. On March 2009, about

makes Brazilian exports less competitive by

five months after the enormous fear-driven

immediately raising the prices of Brazilian

dumping of global stocks that followed the

goods to foreigners. In an economy that

Capital inÁows from abroad into

Lehman debacle and resulted in the major

thrives on exports such as Brazil, this is

Brazilian equities strengthened the

Brazilian equity index, the Ibovespa, losing

an immediate source of concern. A more

Brazilian Real in comparison to the

about 50% of its value between April and

subtle effect is the increasing in borrowing

US dollar

November 2008, investors realized that

costs for Brazilian fi rms borrowing from

maybe financial Armageddon was not right

foreigners. This is a result of the fact that if

round the corner.

Putting away all their

Brazilian fi rms are borrowing in US dollars,

canned food, T-bills and other hedges for

the lender must charge a higher rate in order

an eventual cataclysm, investors started

to account for the expected depreciation

reallocating to risk assets. These included

of the dollar vis-à-vis the real.

the risk-asset du jour: Brazilian stocks. Thus,

words, if the lender is going to lend today

on March 9th 2009, the Brazilian iBovespa

“expensive” US dollars, she must charge a

started an upward march which eventually

higher interest rate in order to achieve the

brought it back to 97% of its pre-meltdown

desired return when the borrower repays

value, or about 70,000 points.

using “cheap” US dollars.

111210 hq.indd 30

bankers

In other

Maybe it was the relatively healthy

Thus, it is of no surprise that Brazilian

Brazilian banking system, maybe it was

policymakers have been trying to stop the

the emergence of the Brazilian middle

inflow of foreign capital into the Brazilian

class or maybe, it was just being the

financial markets.

right country at the right time. Whatever

capital control policy took the shape of a

the reason was for the resilience of the

2% tax levied on all foreign inflows directed

Brazilian economy, one thing is certain:

towards portfolio investments in equity and

capital inflows from abroad into Brazilian

fixed income instruments. It is key to notice

equities strengthened the Brazilian Real in

that the government did not tax foreign

comparison to the US dollar.

direct

Without

30

central

delving

into

any

financial

The first incarnation of

investments,

since

these

remain

crucial for development in Brazil.

theory as to why this is so, one can

With a roaring equity market and

intuitively imagine that as demand for Real-

probably the highest real interest in the

denominated assets (i.e. stocks in this case)

worlds, it is no wonder that the 2% tax did

rises, so must the demand for the Real.

little to stop yield-hungry investors around

I N T E R N AT I O N A L B U S I N E S S R E V I E W

FA L L 2 0 1 0

11/27/2010 3:13:11 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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