Last week, Brazil's central bank President Alexandre Tombini
announced new monetary policy measures which aim to prop up the
domestic currency. Tombini unveiled a $60 billion program
which intends to utilize currency swaps and loans to arrest the
fall of the Brazilian real.
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The Plan and its Response
Tombini said that from Monday to Thursday the central bank would
sell currency swaps worth $500 million. This move aims to provide
insurance to investors against the decline of the real.
Additionally, every Friday the central bank will make available
$1 billion on the spot market via repurchase agreements.
These actions make it clear that the central bank is determined
to arrest the decline of the real. Martin Redrado, former
President of the Central Bank of Argentina welcomed the move,
saying that it illustrated how economies should manage their
currencies in periods of uncertainty. He supported the idea that
utilizing foreign currency reserves was the best way to go.
The real responded almost immediately to these measures. It
gained 3.7%, rising to 2.3488 against the dollar. This is a clear
indication that such measures may be effective, at least in the
near term. Prior to the announcement, the real had declined
dangerously close to a five-year low against the
The immediate reason for the dollar's decline is undoubtedly the
concerns emanating from Fed policy. The Federal Reserve has
indicated several times that it will begin tapering its
long-running stimulus program sooner rather than later. This has
already caused massive capital outflows from emerging economies.
The extent to which such flight of capital will take place will
become more evident once the Fed firms up on a definite timeline
for such measures. Brazil's new policy measures attempt to
address that situation without actually affecting currency
reserves worth $370 billion.
But whether such measures would be effective over the longer term
remain a matter of concern. The immediate gainers will be
domestic investors and companies who hold dollar denominated debt
securities. However, debt of this kind has already increased by
2.9% in July, raising the question as to whether such a move
should have come into effect earlier.
Ultimately, the long-term strength of the currency will be
determined by the direction of both fiscal and monetary policy. A
high rate of taxation, inadequate infrastructure and profligate
government spending are key issues which need to be addressed.
The central bank also needs to introspect about its moves in
earlier months where it continued to reduce interest rates even
in the face of fiscal indiscipline.
If such issues are addressed, Brazil's $2.3 trillion economy
remains a good bet in the long term. We recommend one excellent
addition to your portfolio as well as two other stocks which are
also good options
The eight largest producer of thermoplastic resins in the world,
) has 36 plants across the globe. 29 of these are in Brazil,
while the rest are located in the U.S. and Germany. Braskem holds
a Zacks Rank #2(Buy) and its sales are expected to grow by 26.83%
over the current fiscal. The forward price-to-earnings Ratios
(P/E) for the current financial year (F1) is 2.33.
Itau Unibanco Holding S.A.
Itau Unibanco Holding S.A
) is also a good choice. One of the largest banks in the world,
Itau is the largest Latin American bank. It is one of the leading
brand names in Brazil, valued in excess of $10,765 billion by
Interbrand in 2012. The company has a Zacks Rank #3(Hold)
with expected earnings growth of 18.34%. It has a P/E (F1) of
Petroleo Brasileiro Petrobras SA
Another good option is
Petroleo Brasileiro Petrobras SA
). This is a joint stock company which focusses on the oil and
gas sector. It plans to invest around $236.5 billion in the
20012-16 period as per its current business plan. The company has
a Zacks Rank #3 (Hold), with expected earnings growth of 7.44%
and a P/E (F1) of 6.48.
The coming months will make it clearer as to when the Fed intends
to begin tapering monetary stimulus. It is therefore imperative
that Brazil begins to urgently address fundamental economic
issues with view towards the future.