Thursday, November 5, 2009

Brazil Wants to Stop Excessive Fatal Attraction. Real 50% Overvalued Vs. USD and Yuan

Brazilian Finance Minister Guido Mantega said today that the concerns over the appreciation of the Real aims to avoid "irrational exuberance" in Brazil, referring to the term coined by former Federal Reserve chairman Alan Greenspan. "We want to prevent an excess of fatal attraction towards Brazil,"

EWZ, Brazil ETF, +112% YTD:

BZF, Brazilian Real ETF (+35%):

Tracking of Latin-American ADRs

For Mr. Mantega, the creation of speculative bubbles in emerging markets, as has been warned by the ubiquitous Nouriel Roubini, can be avoided, provided that necessary measures are taken. The minister cited the study of Goldman Sachs which pointed out that the Real is 50% overvalued against the dollar and the yuan. Without this overvaluation, the Brazilian economy would be more competitive than that of China, he reckons. "We want foreign investment to come and IPOs , but do we want to create bubbles in the capital markets," he said.

He cited the progress of the financial volumes of the Stock Exchange of Sao Paulo (Bovespa) in recent years. "I see there the president of the exchange smiling when you look at the data volume," he said.

Mantega also assessed the prospect of growth is sustainable for the economy over the next few years, the level of 5% per year. "We are forming a strong mass market in Brazil," he said. As an example, there is a current shortage LCD TVs in the country.

For Mantega, Brazil is entering a new cycle of investments and is moving on solid foundations, with balanced fiscal position. "We are among the three or four countries that grow today."

Also today, Newspaper O Estado de Sao Paulo says that new measure to contain the appreciation of the real are being contemplated.

The government may relax the time limit allowed for the advance purchase of dollars for the payment of private external debt and public. This is one of the proposals circulating within the government's strategy to liberalize the foreign exchange market and stem the appreciation of the Real against the dollar.

The measure would allow the government itself and the ability to buy foreign currency to pay foreign debts, long-term possibility not allowed by law. The authorization for the purchase of foreign currency does not necessarily mean that the transaction will be effected by the private companies and the Treasury, responsible for managing the public debt. Because the purchasing decisions of foreign currency take into account a number of factors such as higher rates for purchase, cash available and economic scenario.

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