Exchange Rate, Fiscal Fundamentals and Fiscal Results
The strongly rising inflation casts doubt on whether the SELIC rate of 12.75% for an extended period will be sufficient to bring inflation to the target in 2023. If the exchange rate continues to strengthen, it can help achieve this goal somewhat. In this report, we analyze what has been happening with the exchange rate in Brazil. After a long period (from the start of the pandemic to the end of 2021) during which it was persistently weaker than the currencies of the great majority of emerging and advanced countries, the Real has been appreciating more than these other currencies.
In this movement, what predominates is the gap between the basic interest rates in Brazil and the United States, which is greater than observed for other countries. We also demonstrate the recent contribution of good fiscal results, which do not reflect improvement of the fiscal fundamentals. We stress that the reason for this disparity is temporary, depending only on the also temporary growth of tax revenues due to a change in the relative prices between commodities and all other goods. We also discuss the possibility that the appreciation of currencies (of Brazil and other emerging countries) is being driven by a “rotation” of investments in equities, with a shift of portfolios from advanced countries to emerging ones.
In this case, we show that not only has the increase of the IBOVESPA been more recent, it also has been significantly less than the stock indexes of other Latin American countries. We want to stress the importance of distinguishing between the fiscal fundamentals and results. Since the results do not correspond to the fundamentals, when the abnormal expansion of revenue, associated with the change in the relative prices between commodities and other goods ceases, the tendency will be for the risk premiums to rise. Then the political risk will return to the forefront in the pricing of assets.
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