Brazil Prepared for Stimulus Unwind: Mantega, Tombini

Brazil Prepared for Stimulus Unwind: Mantega, Tombini

Brazil Economy & Policy Corporate & Sovereign Strategy

Brazil is well-placed to withstand another surge in financial market volatility as the US Federal Reserve weighs unwinding its quantitative easing program, Brazil’s top financial officials have said.

Finance minister Guido Mantega said that Brazil was better off than many other emerging markets thanks to its $370 billion in foreign exchange reserves and a manageable current account deficit.

“Brazil has a situation that is more resilient than other emerging market countries,” Mantega said.

He said that markets had regained their footing following several months of extreme volatility and capital flight from emerging markets, which had also led by August to a 20% decline in the value of the real.

The exchange rate appeared to have settled at around 2.20 reais per US dollar, he said.

Speaking at the same event Wednesday, central bank governor Alexandre Tombini said policy measures taken in recent weeks, including a $60 billion currency swap program, had helped turn the tide in Brazil’s favor.

“The program is working well,” he said.

Tombini said the country was now well positioned to withstand tighter global liquidity conditions. The country’s floating exchange rate regime was the “first line of defense” against unfavorable shocks, he said.

Volatility in the Brazilian real had fallen since the currency swap and repo program was implemented late August, which the currency had appreciated, he said.

Tombini also drew attention to Brazil’s current account deficit — which the Bank expects to be 3.35% in 2013 — and large foreign exchange reserves as evidence the country was safe from the ill-effects of global monetary tightening.

Mantega told LatinFinance earlier this month that investment was the main driver of a pick- up in economic growth in the second quarter.

Mantega urged US policymakers to engineer a gradual withdrawal of its bond buying program in order to minimize financial market turbulence.

“The recovery of the US [economy] is essential for the world, however it is a double-edged sword,” Mantega told an audience in New York.

He said that while the US was right consider unwinding its extraordinary support for its economy and financial system, the market reaction had been “excessive”.

“We must have an organized reduction, otherwise you will have international turbulence, and you will negate the advantage that a growing US economy offers.

“In May, when the outlook to reduce the stimulus first appeared, the markets exaggerated,” he said. “The best path is for a gradual reduction.”

The officials spoke at the Brazil Infrastructure Opportunity seminar in New York Wednesday. LF

See also: "The problem with Brazil", in LatinFinance September/October 2013