| The Dollar
Does The Samba |
| The Brazilian
Real And U.S. Dollar |
| by Richard Abel |
| 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.
The first
reason is the current flow of international capital. The Bovespa (the
stock exchange) has been hitting record highs day after day. Much of this
is foreign money moving into the country. Higher and higher stock prices
attract even more speculative capital. But it´s more than that. Direct
investment (meaning investment in fixed assets, like factories and stores)
has also been strong, and this money tends to stay for the long-term.
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.
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. |
|
|
Offshore
Resources Gallery
|
|
|
| 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.
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. |
|
|
Offshore
Resources Gallery
|
| 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.
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.
7. You
can also buy government bonds directly from the Treasury over the internet.
This program is called "Tesouro Direto". It´s possible to start with
as little as R$200. There are several options and terms you can choose
from. For example, you can buy inflation-indexed bonds and bonds indexed
to the SELIC. So if inflation or interest rates rise, you won´t suffer
a loss. Inflation is something you always have to remain vigilant about.
But you can also get good results. Last year long-term bonds, known as
NTN´s returned more than 20%.
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:
To contact Richard
Click
Here |
|
Article
Index ~ Brazil
Index ~ |
