Wednesday, February 26, 2020

The Downfall of the Brazilian Real

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This past week has be rough for the Brazilian real, it has sunk to the lowest it has been in almost 5 years and was valued at 2.45 real to the US dollar.

This slow dive has been rearing its head since reports of investors leaving Brazil towards greener and more stable pastures. Many investors in BRICs economies have been pulling out in favour of the US regardless of new monetary policies. It has been speculated that the recent increase in US interest rates is the main culprit.

Migration of the investors has dealt a heavy blow to the already suffering Brazilian economy.

In order to have a unified stance against financial woes, the  central bank will begin daily interventions to prevent the currency from falling any further. Every day during the week, with the exception of Fridays, the bank has pledged to give $500 million daily in currency swap contracts. On Fridays this amount will increase to $1 billion. They have stated that they will contribute near $60 billion dollars before the year comes to a close.

In addition to the previous support the central bank has given to the sinking currency, by the end of this year the total will amount to $100 billion dollars.

This funding is necessary in order to stabilize the market in addition to proving to the investors that they have no reason to lose confidence in the country.

GDP

In addition to the nation’s currency woes, slowing GDP growth is a growing cause for concern. According to officials, in two years GDP growth has reduced from 7.5% to a barely recognizable 0.9% last year.

The GDP growth is expected to grow to only 1.96% this year according to a study by the World Bank Group.

This dramatically slowed down growth has been prominent for the last two years and does not seem to be showing signs of improvement in the near future.

Inflation

In addition to both these issues, the central bank is voicing concerns about growing inflation. The Finance Minister, Guido Mantega, stated that battling inflation took precedence over the economy’s growth at this point in time.

This can only mean that with these temporary breaks on economic growth, in addition to the other financial problems that the nation is facing, investors will not be flocking to invest in Brazil any time soon.

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