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The commercial rate for the dollar vs. the Brazilian Real just hit the lowest level in almost 3 years. In other words, the Real has been steadily appreciating and the Dollar has been falling. What does this mean? To understand this question, we have to look back at history. The first time I traveled to Brazil in 1998, I found the country to be more expensive than I had expected. The exchange rate then was about R$1.20 for every dollar. The following year, there was a devaluation after the presidential election, and the Real quickly fell to 2.00 to the dollar and kept on falling. In 2002, there was another presidential election and it fell to 4.00 to the dollar. I guess you could say presidential elections in Brazil have not been kind to the Real.  But since then, the Real has taken a turn for the better and has come all the way back and surpassed the 2.60 level. Now you´re only going to receive R$ 2.57 for your dollar (meaning 1 Real is worth about 39 cents). There are several reasons why this is happening, and some believe this trend will likely continue.

Another reason is the expectation for higher interest rates. The SELIC (the basic interest rate, similar to the Fed Funds Rate) was recently raised to 18.75% from 18.25% by the Monetary Policy Committee of the Central Bank (known as the COPOM). When compared to the Fed Funds Rate of 2.5% in the United States or 2% in the European Union, you can see why this rate attracts a big flow of investor´s cash. There´s been a big appetite from foreign investors for all kinds of Brazilian debt and fixed income investments.

There are also more dollars coming in from strong export sales. We´ve seen a boom in commodity prices on demand from China and a global economic recovery. This has resulted in more sales of steel, iron ore, paper, cellulose, beef, soybeans, chickens, etc. Brazil is running a trade surplus now, in contrast to a trade deficit it had in previous years.

The Banco Central (the Central Bank) has been buying dollars to try to slow the Real´s appreciation. The government doesn´t want the Real to rise too much, or else that will start to hurt export sales, and reduce the trade surplus.
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Citigroup just lowered its year-end ´05 target for the Real to 2.80 from 2.95. BBVA reduced its Dec. ' 05 target from 3.10 to 2.90. Of course, analysts cannot predict future exchange rates, because there are too many unknown variables. I read another report that said the Real should really be at 3.15 to the dollar, because of the accumulated inflation differential. Actual inflation is running at about 7% per year, although the government has a target of 5.1% (which is why they´re raising interest rates). But interest rates do not have the same effect on the economy here, as it does in the USA. Mainly becuase the amount of consumer borrowing is much, much less. Consumer interest rates are still incredibly high - 10% per MONTH on credit card debt, and 3.5% per MONTH on car loans. The next time you receive one of those 0% offers from your credit card company, then you´ll know how lucky you are. But for the moment, not many expect the dollar to rise much this year. Many expect it to bottom out at around 2.50 once interest rates stop rising. Volatility, of course, can be expected, but the country has sufficient dollar reserves now to pay their external debts. The country still carries a heavy debt-load and still is not rated "investment grade". All eyes have focused on inflation and interest rates as the two most important indicators for the year.

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So what does all this mean to a tourist or a traveler to Brazil? Prices are higher, but still quite reasonable when compared to USA or European prices. The cost of a man´s haircut is R$10, so last year it was US$3.50 and this year it´s US$3.90. You can still eat out at good restaurants, and it will cost maybe US$7 including drinks, and last year it was maybe US$6. You can go to a Rodízio of Pizza (which means all you can eat for as long as you want), serving delicious Italian-style pizzas for R$15. If you leave the big cities, and go to the interior or to the northeast coast, you'll notice a big reduction in prices.

As for investment choices, the most important rule is diversification. However, there are several options to earn high interest rates, some riskier than others. Each requires that you do basic due diligence, understand what it is, how it works, and consult with professionals who work in these areas. With that said, let´s run through the alternatives:

1. Bank CD´s, or Certificados de Deposito Bancário (CBD). These are offered by banks of course. You will need a CPF number to open an account with a bank or brokerage. These CBD´s pay high interest rates, are liquid, easy to understand, and easy to research on the internet, or with a few telephone calls.

2. Certificados de Recebiveis Immobilarios (CBI) are mortgages backed by real estate, that are bought and sold on the secondary market. These are long-term investments, suitable mainly for patient, long-term investors.   You can earn higher yields than bank CD´s and the other good news is that they are free of income tax.

3. There also exists something in the field of agro-business called Cédulas de Produto Rural (CPR), which are basically receivables secured by crops. They are considered safe, and offer high yield. They are issued by farmers and agricultural producers to finance their crop. Your money is guaranteed by, and paid back at the harvest. The Banco do Brasil is the principal distributor of CPR´s.
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4. Another type of receivable investment is known as Fundos de Investimento em Direitos Creditórios, (or FIDC´s). If you know what factoring is, then you´ll know what this is. The risk is high, because if someone doesn´t pay, you´ll lose not just the interest, but also your investment. You can expect therefore, a very high return, but before you jump into something like this, you need to do some serious due diligence and check the credit rating from one of the agencies like Fitch or Moodys. 5. Another bet involving risk, are hedge funds. The idea behind a hedge fund is to profit from volatility in the market place and to seek out the best opportunity in the market for profit, whether it be in stocks, bonds, foreign exchange, or interest rates. There is a futures market in São Paulo known as BM&F. Some hedge funds have been very successful over the long-term and can add diversification to a portfolio. 6. Of course, if you´re really confident in your own abilities and know what you´re doing, you can open your own account at the Bolsa de Mercadorias & Futuros (BM&F) and do your own trading. You can open an account with 5000 dollars, but you´ll need a CPF number.

8. You could also invest in individual stocks or the stock index. At the moment, prices are high, and the trend is up. Personally, I don´t find this attractive right now after a big advance. In emerging markets, high volatility is to be expected, and prices can drop for no apparent reason that only becomes obvious in hindsight. But for the moment, it´s up and away!

9. Finally, you should consider real estate. Well-located real estate, of good quality generally rise over time.  With inflation running at 7% per year, you´re not likely to lose money. But problem real estate, or poorly located or ill-conceived projects can lose value. Or if you over-pay, you may lose. So never buy any real estate that you´ve never seen. There are no restrictions on foreigners owning property near the coast like there are in México.

I´m not recommending any of these investments. Nor am I selling anything. I mention them because I found it interesting, and it may be interesting too for some readers as a starting point.

The State of Rio de Janeiro just recently launched na investment network, called the Rede Nacional de Informação sobre Investimentos (RENAI). The web-site can be found at: http://www.governo.rj.gov.br/noticias.asp?N=25114

The following are Richard's previous articles for the magazine:

Your Beach Business Under the Sun - Body Painting In Bahia
Study Abroad In Brazil - For Free?

To contact Richard Click Here
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