Goldman Sachs Prescribes Weaker Real to Support Brazil’s Exports

Goldman Sachs Prescribes Weaker Real to Support Brazil’s Exports

By Paula Sambo/Bloomberg

10:37 AM BRT
May 5, 2015

Goldman Sachs Group Inc. is recommending that Brazil’s central bank go further in relaxing support for the real and allow the currency to decline more than 10 percent to support the nation’s exporters.

“Brazil spent the last five years with an overvalued real, which has weighed on its competitiveness,” Alberto Ramos, the chief Latin America economist at Goldman Sachs in New York, said in a phone interview. “To ignite the ongoing adjustments and support the struggling exporting sector, the country needs a moderately cheap currency at around 3.50.”

The real climbed for the first time in five days, rising 0.9 percent to 3.0675 per U.S. dollar at 10:32 a.m. in Sao Paulo. It tumbled 2.3 percent on Monday, the biggest drop among 31 major currencies tracked by Bloomberg. Brazil began this week extending the maturity on fewer swap contracts supporting the currency after sales halted in March.

Exports declined to $15.2 billion in April from $17 billion in the prior month, the government reported Monday. Ramos wrote in a report that the economy needs a significant structural and permanent fiscal adjustment and less intervention in the foreign-exchange market. Brazil’s lower house is scheduled to debate proposed changes to unemployment benefits and social security Tuesday.

“If measures are approved and they keep their content and substance, markets will likely have a positive reaction since they are important for the very necessary fiscal adjustment,” Ramos said in the phone interview.

Swap rates, a gauge of expectations for Brazil’s borrowing costs, declined 0.06 percentage point to 13.49 percent on the contract maturing in January 2017.

Inflation is a problem in the short term, according to Ramos, who forecasts that the central bank will raise borrowing costs by at least a quarter-percentage point at its meeting in June. Policy makers voted unanimously April 29 to lift the target lending rate by a half-percentage point to 13.25 percent, the highest since January 2009.