Brazilian Finance Minister Guido Mantega was not in this position during the Brazilian financial crisis in 1999, it was Pedro Malan, but looking back helps illustrate how Brazil has become successful today. In 1999, the Central Bank of Brazil decided to float the Brazilian currency, or the Real BRBY, against the US dollar. By floating the Real in the global market, Brazil hoped to solve some of its economic structural issues and boost profit rates for its exports. An attempt to devalue its currency was seen in 1999, and can still be seen today.
The Brazilian Real backed down against the US dollar after its 12 year high when the government announced a new tax designed to curb the Real’s increase in appreciation. The Real has appreciated 49% against the US dollar since the end of 2008. In the last two years alone, the Real gained more than 20% against the US dollar. A new tax was established to prevent increasing currency inflation. Finance Minister Guido Mantega said the 1% tax on short dollar positions was part of Brazil’s measures to target speculators betting against the dollar. Controlling the flow and increase in FDI is a challenge for Brazil, and with its new global success, inflation poses a greater issue for the Central Bank of Brazil.
Recent development and investment in Brazil’s economy has surged and this can be attributed in part to the 2014 FIFA World Cup and 2016 Olympics in Rio de Janeiro. Brazil needs to allow as much FDI as possible to fund these large scale projects, but money signs around Brazil inflate prices and bring in more FDI. The Real’s inflation is a result of an increase in investment capital though this will in turn, make Brazil less competitive in the global market and hurt industries in Brazil such as manufacturing (as companies look abroad for cheaper alternatives). Guido Mantega indicated that the Brazilian government might take further steps to curb the Real’s gain to help protect domestic producers. Among the major Latin American currencies, the Real is the second-best performer against the dollar (in 2011) next to the Colombian peso.
In light of continued ‘currency wars’ Brazil, China, the US, and others are facing, the issue of what FDI does for an emerging economy is important to observe. In 2011 so far, Brazil has taken in USD $32.5 billion in FDI. Interest rates for foreign investors remain the highest among the world’s major economies. The Central Bank has already increased its interest rates five times this year.
It could be argued that FDI and investor interest in a country are somewhat a self-fulfilling prophecy. As more FDI flows in, Brazil in turn, has an increase in available funds. With these funds, Brazil invests in infrastructure, oil and mining projects (domestic and overseas), and in the coming years, worldwide sporting events. With increasing international presence, investors look to Brazil and more FDI is generated. And so the cycle continues. A country must have something valuable at first in order to attract FDI. Recent oil discoveries off the coast of Rio de Janeiro and various mining ventures abroad with companies such as Vale are two such money makers. However, as with China, this global interest isn’t an overnight trend. Since the late 90s, Brazil has been ’emerging’. Brazil is and continues to be, a country that is receptive and open to foreign investment, Central Bank director Alexandre Tombini said in a Reuters report.
Part of the reason (but certainly not the reason) for the Real currency’s rise is due to global perceptions. As an ’emerging market’ favorite, Brazil is enjoying a lot of attention these days. Oil discoveries, World Cup and Olympic Games preparation, and effects of the ‘currency wars’ on Brazil have investors watching closely. And fortunately for Brazil, it is not suffering from the same economy as it was in 1999. It is hoped that Mantega and Rousseff’s efforts will stabilize the inflation rate. Perception influences decisions, and China knows this better than most. The Beijing Olympics in 2008 were a symptom of a larger trend in FDI interests and global trends. Preparation for the Olympics included infrastructure improvements and domestic development, as well as an increased international spotlight. Currency issues in Brazil may reflect the stress that Brazil is feeling from this increased spotlight and FDI ventures.
With the US and European debt crisis still unsolved, Brazil’s market appears even more attractive to investors. The 2014 World Cup and 2016 Olympic Games preparations are helping to increase global awareness and investors are eager to secure a piece of Brazil’s wealth while they still can. The port of Santos, for example, is one of the largest in the world, and space on this Port site is at a premium. Money has flooded the Brazilian economy this year, with USD $10.87 billion in foreign money just during July, according to the Central Bank of Brazil in a Reuters report. With reminders of the Brazilian financial crisis in 1999, Guido Mantega and Brazilian financial officials are warning that “we’re always ready to take measures that will stop excessive gains in the Brazilian currency”. Guido Mantega and Dilma Rousseff’s decision to curb the inflation rate of the Real currency comes at a time when Brazil is just starting to understand the combination of success and burden brought by FDI and the international community’s hunger for emerging markets.