Brazil has been one of the success stories of the emerging markets, but the real has been taking a beating in the currency markets. The significant decline from 1.63 to 2.26 since the beginning of September has made the real one of the worst performing currencies in the world. Only Iceland which is or all intensive purposes bankrupt and South Africa have done worse over the same period.
The decline in the real has had a negative effect on exports which has been one of the bright spots of the economy. Foodstuffs are a major export business which has been further hurt by the decline in commodity prices. Exports have also been hurt by the fact that currency hedges and dollar funding have worked again many firms bringing them to the brink of bankruptcy.
The central bank which has over $200 billion in foreign currency reserves used its funds to intervene in the market and try and arrest the decline. Since the fundamentals of the economy are sound and inflation is under control, this is a good use of the funds especially if the problem is contagion and short-term liquidity. The government has also reduced taxes on investments into Brazil which may increase the attractiveness of the real in the longer-run.
Here is a perfect case for the IMF to provide liquidity without onerous strings attached to help countries avoid the ravages of contagion. Brazil is not Argentina and should not b painted with the same brush. This situation is all the more reason for a global discussion on how to address currency issues beyond the G7.
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