Economia

The tide, the wave, the crest

• Brazilian exports enjoyed a phenomenal run during the last 10 years, even facing a major international crisis in 2009: deducting dollar inflation (PPI), they rose at an astounding pace of 12% per annum, while the preceding 10 years growth averaged modest 5% per annum and was even weaker between 1981 and 1991;

• In this report we investigate the reasons behind this. We argue that the extremely favorable combination of rising global trade and higher commodity prices explain virtually all export growth during the past 10 years;

• As these favorable conditions started to unwind, on the back of declining commodity prices and weaker global trade, Brazilian exports lost steam, as seen in the first two quarters of 2012. Brazil rode the crest of a commodity wave during a rising tide; now things do not look that bright anymore;

• This alone should be motive for a weaker exchange rate, and we have indeed observed a weaker real, but, even so, I believe there are reasons to ask whether all recent weakening reflects worse fundamentals;

• As authorities – concerned about the strong real and shouting “currency wars!” – started to intervene aiming at producing a weaker currency, there was a clear break in the hitherto stable relation between commodity prices and the currency, which produced nearly stable domestic commodity prices between 2006 and 2010 . Commodity prices measured in domestic currency increased visibly since then;

• These are strong indications that the depreciation of the currency has gone beyond what appears to be anchored in its fundamentals. No wonder, thus, inflation was so high last year and rising again during 2H12: this phenomenon only illustrates the inconsistencies between targeting the currency and targeting inflation, as Brazilian authorities are painfully learning as we speak;

• While the going was good difficult choices could be avoided; now, as tide lowers, we will find who was swimming naked.

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Economia