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Brazil’s strong currency benefits consumers but punishes businesses

Capital inflows that contribute to the appreciation of Brazilian real critics say, undermines the competitiveness of manufacturing

Wagner Maciel, an electrician earning about 1,800 Brazilian reals (£687) a month, stops his shopping trolley and peers at the unfamiliar sight of a can of Heinz baked beans.

Like most Brazilians Wagner eats freshly stewed beans several times a week, but this British product, awash with tomato sauce, is alien. Wagner frowns and puts the tin back on the shelf, put off as much by the unfamiliar concept as the £2.30 price tag.

This exercise of consumer choice speaks volumes about the economic changes taking place in Brazil. Nine years of economic expansion under former president Luiz Inacio Lula da Silva and his successor Dilma Rousseff, have redistributed wealth in a notoriously unequal nation.

Millions of Brazilians whose wages barely covered their essential costs ten years ago are queuing to buy flat screen TVs and smart phones or pondering over imported tastes such as Argentine wine, French marmalade or British baked beans.

In Brazil’s high-tariff economy, Wagners’s choice would be unlikely were it not for a near tripling in the value of the Brazilian real since Lula’s election in 2002. The real lost some ground at the height of the 2008 credit crunch, but has surged another 40% against the US dollar since then.

This is reflected on the shelves of this downmarket Mundial supermarket, where a sudden proliferation of choice includes a £186 bottle of Portuguese wine that draws gasps of disbelief from curious customers.

“I don’t know about the exchange rate but I do know that if you get to the end of the month and still have some money left over then you will want to try some new things,” said Elenilton Oliveira, store manager in Bairro da Fatima, a lower middle class neighbourhood of Rio de Janeiro.

Global economic forces have served Brazil well in recent years. As a leading exporter of raw materials such as soya and iron ore, the South American nation has benefited from the Chinese-fuelled commodities boom.

This inflow of dollars helped Lula to raise the minimum wage and pay off foreign debts while running a primary budget deficit. He famously called the 2008 economic tsunami a “ripple” when it broke upon Brazilian shores.

The real’s rapid rise has also created a new class of Brazilian globetrotters and previously impoverished middle classes find themselves with enough cash to take to the skies. “Two years ago I never imagined that I would get the chance to see a foreign country. Last year I went to Argentina and Chile, and I could not believe how cheap it was in Buenos Aires. Next year I am going to New York, and shopping has a lot do with this,” said Claudia Guiar, a 28 year old human resources coordinator.

Packed flights and suitcases show this is happening on a large scale.

“I noticed business starting to tail off about two years ago when a lot of my oldest customers told me they were buying their clothes more cheaply on their foreign trips,” says Roxane Abdalla, owner of Roxane Dreams, selling mainly imported clothes on São Paulo’s fashionable Oscar Freire street.

But Abdalla’s comments pinpoint one of many downsides to having a strong currency. Brazil’s base interest rate of 12.5% is one of the highest in the world, considering annual inflation is running at about 7%. Brazilian officials worry that too much cheap money is heading their way for short term speculation, pushing the real ever higher and increasing the risk of capital flight if market mood swings.

Commodities only account for about 20% of Brazil’s gross domestic product, but are responsible for massive inflows of dollars that make the real more expensive, and, critics say, undermines the competitiveness of manufacturing.

Added to the problem of high taxes, crumbling infrastructure and skill shortages, Brazilian policymakers are waking up to the risk of deindustrialisation of the kind seen in the USA and Europe.

Imported machinery, for example, has increased its share of the market from 15% to 50% since 2006, and imported cars account for 25% of the market, against 10% five years ago.

Even basic industries, such as steel have lost competitiveness, despite the presence of iron ore, ample supplies of cheap hydroelectric energy and an experienced labour pool. The Brazilian shoemaking industry, with 8,000 factories and 360,0000 workers, has reported a 26% fall in exports in the first seven months of the year.

Quantitative easing in the US and China’s suppression of its currency intensify the concerns. “The real is one of the most overvalued currencies in the world and we see this issue as an absolute priority. Industry can cope for a while, but whole sectors can be dismantled in the long run,” said Roberto Giannetti da Fonseca, trade director with the Sao Paulo Federation of Industries (FIESP).

The problems are not restricted to traditional industries. Brazilian IT industries have huge potential for growth, but account for 4% of GDP, compared with 6.4% in India with businesses blaming short-sighted import tariffs and weaknesses in the basic education system.

“The quality of our software services market and its professionals should make Brazil a stronger competitor in overseas markets, but taxes and the strong real hold back exports,” said Marco Stefanini, chief executive and founder of Stefanini IT Solutions, a Brazilian company drawing 40% of its revenues from overseas.

The government has launched projects to improve technical education and to help some sectors by stimulating local provision of goods and services through domestic content stipulations in government-controlled contracts. A wave of new shipyard projects suggest that these policies are working, but long-term international competitiveness is a tough challenge.

“We have a factory in China and I am sorry to say that a combination of high steel prices, labour costs and the overvalued currency means it is impossible to compete with our own subsidiary,” said Alberto Crespo, commercial manager of Aalborg Industries, a Danish boiler-making company.

Aalborg has won contracts worth m to supply 53 boilers for Brazilian tankers but, with a 40% price difference, all of them will be made in China.

Although Brazil is poised to soon overtake Britain and France to become the world’s fifth biggest economy, there could be some relief from the problems of the rising real with the economy expected to slow down from a growth rate of 7.5% last year to a more comfortable 4.5% in 2011.

“The slowdown will take the steam out of inflation, allowing interest rates to fall and the real can depreciate,” said Marco Freire, a portfolio manager with Franklin Templeton Investments, a US based firm.

For the most vulnerable sectors of the economy, challenge of raising productivity to compensate for the strong real is a daunting one, but the recent government measures have given them hope. “This is the first time a Brazilian government has addressed the problems of payroll taxes and education in a practical way, but there is much to be done at international level,” said Stefanini. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds