How bad can it get for the real? - Commerzbank

FXStreet (Córdoba) - The Brazilian real is one of the EM currencies that have recently been under particular pressure. The large current account deficit has played a key role here,according to Lutz Karpowitz,analyst at Commerzbank. Now there are signs of a marked improvement, but this probably signals financing problems, he continues. "For the real, this nevertheless means that possible US rate hikes could lose their terror".

Key quotes

“This year to date, the Brazilian real has lost one third of its value versus the US dollar. It has thus been the worst performer among EM currencies. It was primarily concerns about possible financing bottlenecks that weighed on the real. After all, the current account deficit in 2014 amounted to no less than $103.6bn”.

“In the course of 2015, this deficit has narrowed considerably. Over the last five months alone (April to August), the deficit declined by more than $17bn on the same period last year. But what may look like an encouraging development at first glance turns out to be a symptom of crisis upon closer inspection. It was not rising exports but falling imports that were responsible for the improvement in the current account balance (Chart 10). Despite massive depreciation, there is no sign of an improvement in export price competitiveness. Instead, exports have also declined sharply”.

“In combination with the still very slow growth in Brazil, this is starting to paint a picture of a balance of payments crisis. Such a crisis is characterised by the fact that imports can no longer be financed and are therefore forcibly reduced. Here the main problem for the affected countries is that some important intermediate products can no longer be imported either. This in turn has an adverse effect on exports and the overall economy. This is precisely what is currently being seen in Brazil. At the end of the day, the improvement in the current account balance is a forced one. Whilst there has been no sudden stop (i.e. a sudden capital outflow that would eventually force a current account surplus), Brazil virtually seems to be moving down its external budget restriction at present”.

“For the currency, this could nevertheless be good news. After all, a significant part of the painful adjustment process of a balance of payments crisis is already behind the country, and the risks of a sudden stop are diminishing”.
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