Brazil central bank: We thought 'good times would last forever'
Commodity exports overvalued the real; manufacturing went 'down the drain'.
The Brazilian central bank has admitted the country was taken by surprise by lower commodity prices and had failed to prepare for the end of the commodity cycle.
“A few months after April 2009, due to [the increase in] Chinese imports of commodities, we in the department [of foreign reserves] started buying more reserves – looking back, we thought life would be perfect forever,” said Ariosto Revoredo de Carvalho, head of the department of foreign reserves at the Brazilian central bank, speaking at the Institute of International Finance’s conference on the occasion of the IMF/World Bank annual meeting in Lima on Saturday.
Revoredo said Brazil’s policymakers and its population began to realize that momentum was turning last year, and cited the national football team’s defeat to Germany in the 2014 World Cup as a symbolic event.
“We are reputedly a very optimistic country so you must understand why we thought things were going to go on forever," he said. "That [defeat] was the first sign things were getting bad.
“Looking back, we missed many opportunities and we didn’t prepare for the rainy days – so right now we find ourselves not only with a decline in commodity exports, but also a fiscal problem that needs to be addressed – along with a political problem; and at the same time the state oil company is under investigation for major corruption. Put all this together and it’s a very bad situation.”
Revoredo says the complacency has now been dispelled, with the country predicted to contract by about 3% this year and the consensus of economists is that Brazil’s recession will continue next year.
“You have to do your homework – right now this is being addressed by the government [which is trying] to fix the fiscal situation in order to put the country back on the growing path. This is not an easy task given the political turmoil, but it is doable.”
Revoredo points to the country’s floating exchange rate as the main transmission mechanism to defend the economy from falling commodity revenues.
The real has fallen from 1.55 to the dollar in early 2011 to around 4.0 to the dollar today.
“For the first time sine 2008 or 2009 we will have a [trade] surplus, which has been helped by the floating exchange regime," he says. "We are also addressing monetary policy by trying to keep rates at a level that will bring inflation down and we have been very adamant in insisting on anchoring expectations. On that front – and its not an easy task I have to admit – we have the proper tools.”
Revoredo says the recovery will be helped by the mix of commodities the country exports, as well as by a resurgence in manufacturing, as the currency makes these exports more competitive.
“In the 1950s, the country was dependent on coffee [exports], but today coffee [is] only 3% of the total," he says. "Having a wide variety of exports puts us in a better situation than some other countries that are dependent on just one.
“The overvaluation of the real had made imports very cheap – and when added to the fiscal burden this held industry back. A lot of the things that we had been competitive [in manufacturing] have gone down the drain; not totally – you see some signs of recovery but it is still at the start of this process.”