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Opinion

Brazil: Avoiding the commodity curse

Is the Brazilian real overvalued? Is there a credit bubble? Is Brazil headed for a correction?

The view on Brazil’s near- and mid-term prospects will, to a large extent, be determined by the answer to the currency question. And there are many valuation theories: going by Brazil’s real effective exchange rate the currency is significantly overvalued compared with its 10-year average.

One banker talking to Euromoney repeatedly used the Big Mac Index to argue that the currency is about 40% overvalued. A Nomura Securities graph is more compelling. It shows the dollar-real inverted exchange rate compared with the CRB Metal Index. The strong correlation is evident and provokes two thoughts. First, if the real’s valuation is linked to the CRB Metal Index – and as the world’s largest iron ore exporter the relationship makes sense – then the real is close to fair value, and therefore concerns about corrections are eased. The second thought feeds into growing doubts about Brazil’s commodity-driven boom: is the country in danger of (another) bout of Dutch disease?

A recent World Bank report Natural Resources in Latin America and the Caribbean: Beyond Booms and Busts? addresses these growing concerns about the region’s increasingly commodity-reliant growth.

The demand is coming from China. The speed of the growth of volumes and concentration of Brazilian exports is stark.

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