Exchange rate volatility and fiscal fragility

BRAZIL ECONOMICS - Report 27 Aug 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Last week Brazil was once again included in the group of countries facing the largest currency depreciations. Unlike Turkey and Argentina, which are highly dependent on capital inflows to finance their current account deficits, Brazil has no balance of payment problems. In the past 12 months, its current account deficit stands near US$ 10 billion, less than half of the non-volatile portion of inflows: the “capital participation” account. Brazil’s fragility comes from the combination of a profound fiscal imbalance and huge uncertainty over whether the next government will undertake a fiscal consolidation sufficient to eliminate the explosive growth of the public debt. Until the election results are in, the currency volatility will remain strong.

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