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South America: concern over currency appreciation


Brazil Seeks Recruits for ‘Currency War’ in Lima Meeting of Finance Chiefs*

By Alexander Ragir – Aug 5, 2011

South American finance officials, struggling to stop economic harm from a two-year decline of the U.S. dollar, will seek to agree on a coordinated response when they meet today in Lima.

The meeting comes as Latin America is bracing for another surge in foreign investment inflows, which have quadrupled since 2003, amid concern that recoveries in the U.S. and Europe are faltering and may force the Federal Reserve to begin another round of asset purchases. Policy makers are concerned a 25 percent rally in Latin American currencies since the end of 2008 is making its exports less competitive and hurting manufacturers by spurring a surge in cheaper imports.

Guido MantegaFinance Minister Guido MantegaThis is a moment of “stress” in the world, Brazilian Finance Minister Guido Mantega told reporters in Lima today. “Emerging countries have to prepare themselves for the possible consequences. We have to be united to create mechanisms of protection in response to this situation.”

Finance ministers in Chile, Peru and Colombia, who haven’t gone as far as Mantega in restricting foreign investment, may change if capital controls like Brazil’s taxing of foreigners’ buying of bonds can be applied in a joint way that won’t frighten investors, said Mauricio Cardenas, a former Colombian development minister.

‘Destroying Our Capacity’

“A coordinated effort helps reduce the risk to nations’ reputation among investors while increasing the effectiveness of controls,” said Cardenas, who is the director of the Latin America program at the Brookings Institution in Washington. “Colombia, Peru and Chile have been reluctant to go in the direction of Brazil, but they have been watching and if they see these measures are effective they could follow suit.”

President Juan Manuel SantosPresident Juan Manuel SantosToday’s meeting of finance chiefs from the 12-nation Union of South American Nations, or Unasur, was organized at the urging of Colombian President Juan Manuel Santos. On July 28, Santos also said that Latin America can’t be a “mere spectator” as the value of the region’s record $700 billion in reserves is eroded by the decline of the dollar and the euro.

“The appreciation of the majority of our currencies is destroying our capacity to generate jobs,” said Santos in the statement. “We are being very negatively affected.”

Developing nations aren’t alone in fighting the dollar’s decline. Japan yesterday injected 10 trillion yen ($126 billion) to stem an appreciating exchange rate, a day after Switzerland unexpectedly cut interest rates and pledged to boost the supply of the franc.


Mantega, who has accused the U.S., Japan and Europe of sparking a global “currency war” through the use of near-zero interest rates, will attend the meeting along with finance ministers from Argentina, Colombia and Uruguay. Mexico’s finance ministry, which was also invited, declined to comment when asked whether it was sending any officials.

Investors are flocking to Latin America after the region grew at its fastest pace in 30 years last year.

The World Bank estimates that net private inflows surged to $203.4 billion last year as the region expanded 6 percent amid strong demand from China for Chile’s copper, Brazil’s iron ore and Argentina’s soy. In 2003, inflows totaled $57.5 billion, the Washington-based lender said.

In Brazil, the region’s biggest economy, foreign direct investment hasn’t let up this year, jumping to a record $69 billion in the 12 months through June.


To ease pressure on the real, whose 47 percent rally since the end of 2008 beats all 25 emerging market currencies tracked by Bloomberg, Brazil has tripled a tax on bond purchases by foreigners and raised levies on borrowing abroad. Last week, Mantega slapped a tax on bets against the dollar in the futures market.

The real’s rally is taking its toll on manufacturers, who are losing ground to Chinese imports even as domestic demand remains robust in the wake of the fastest economic growth last year in two decades. Industrial output fell 1.6 percent in June. The Sao Paulo Industrial Federation estimates that the country’s trade gap in manufactured goods will widen to $100 billion this year from $71 billion in 2010.

While Chile and Colombia have stepped up daily purchases of dollars this year, and Peru did the same last year before presidential elections cut demand for the sol, none has acted as aggressively as Brazil to stem inflows.

Active Versus Effective

That’s in part because Brazil’s 5.79 percent real interest rate, the second-highest after Croatia among 55 countries tracked by Bloomberg, is a magnet for investors seeking higher yields.

“Brazil stands out in being more active but not as being more effective” in fighting currency gains, said Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York. “Chile and Mexico have been much less activist and they have fared much better.”

Chile in March slashed spending by $750 million, equal to 0.4 percent of gross domestic product, to take pressure off the peso, which has rallied 16 percent since the central bank began raising interest rates in June 2010. Policy makers in January also announced they’d purchase a record $12 billion this year, equal to 43 percent of currency reserves.

In Colombia, where the peso has gained 14 percent against the dollar since the end of 2009, the central bank is buying at least $20 million a day in the spot market. Peru purchased $9 billion last year, the second-biggest amount ever, and increased reserve requirements to lift the cost of short-term, overseas borrowing.


“Many of the region’s leaders think the advanced economies are behaving in an irresponsible way and the side effects are very negative for South America,” said Cardenas.

Concern that the world economy may relapse into a recession saw global equity markets plunge yesterday, pushing the Standard & Poor’s 500 Index to its worst slump since February 2009, while the yield on a two-year Treasury note plunged to a record low.

Stock markets in Latin America also tumbled yesterday and yields on government bonds surged.

South American nations need a common strategy to defend themselves from what’s happening in global markets, Colombia Finance Minister Juan Carlos Echeverry said.

‘Difficult Moments’

“We in South America together with Mexico have to act as a group and have a common strategy for these difficult moments,” Echeverry said at a meeting of regional officials in Lima today. “We’re in choppy seas.”

Echeverry said he didn’t expect a packet of measures to be decided at today’s meeting. Unasur has focused on regional security and strengthening democracy since its creation at Brazil’s initiative in 2008.

Today’s meeting will be followed in a week by another gathering, in Buenos Aires, of regional finance ministers and central bank presidents to create Unasur’s economic and financial board.

Among the board’s priorities will be to lessen the region’s dependence on the dollar by increasing trade in local currencies, Carlos Cozendey, international affairs secretary at Brazil’s Finance Ministry, said in an interview.

Luis Oscar Herrera, head of research at Chile’s central bank, said the room for joint action to fight inflows is limited because not all the countries are as financially integrated as his own with the rest of the world. While Chilean pension funds can invest about half of assets offshore, their counterparts in Brazil, Peru and Colombia face tighter restrictions.

‘Common Concern’

“Although there may be some points of common concern, the solutions have to be focused on the situation of each country,” he said in an interview this week at the Bloomberg office in Santiago.

Neil Shearing, an emerging-markets economist at Capital Economics in London, said policies implemented in Brazil to curb loan growth are needed to prevent asset bubbles that could form from access to cheap credit from abroad. These so-called macro- prudential measures aren’t meant to slow currency gains, he said.

“Targeted capital controls are sensible to keep the more frothy stuff away,” Shearing said. “But they won’t stop currencies from appreciating in the long term, unless the fiscal side is adjusted accordingly.”


To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at

To contact the editor responsible for this story: Joshua Goodman at


* First published by Bloomberg

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