Brazil: Real weakens in February amid fiscal concerns and sell-off in emerging markets
February 14, 2014
On 3 February, the Brazilian real (BRL) traded at 2.44 per USD, which was 22.8% weaker than it was on the same day of the previous year. At this point the real returned to levels last seen in August 2013, which in turn had marked the lowest level since March 2009.
The real has come under increasing pressure in recent months amid investor concerns regarding the government's fiscal management. The Brazilian government has vowed to work on improving its fiscal standing, but the primary surplus of 1.9% of GDP in 2013 failed to reach the prescribed target of 2.3%, which had been brought down from 3.1% at the beginning of 2013. President Dilma Rousseff and her economic team have stated their intention to reduce the budget this year, but this will be a challenge given that current spending programs and tax breaks are essential to driving growth in a struggling economy.
Matters have become more complicated in recent weeks, as the government has been forced to spend additional resources on alternative sources of energy to make up for the considerable drop in the production of hydroelectric power brought on by a massive drought. Moreover, the government is now facing the prospect of a credit rating downgrade, which has foreign investors worried and is putting pressure on the real. Devaluation of the BRL is being pushed further by the sell-off in emerging markets that followed the U.S. Federal Reserve's announcement that it would go ahead with the tapering of its monetary stimulus program.
Economists polled by LatinFocus Consensus Forecast expect the peso to trade at 2.47 BRL per USD by the end of the year. For 2015, the panel projects that the Colombian currency will close the year at 2.56 BRL per USD.
Author: Carl Kelly, Economist