Itaú BBA - At what level will the BRL stabilize?

Macro Vision

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At what level will the BRL stabilize?

junio 25, 2018

In the long run, the exchange rate depends on the amount of foreign funds available to finance the current account deficit.

For the version with all charts and tables, please open the attached pdf file 

Short-term FX moves may be erratic and hard to predict, as currencies may follow a random walk. However, in the medium and long term, exchange rates tend to be more sensitive to fundamentals. In the long run, the exchange rate depends on the amount of foreign funds available to finance one country’s current account deficit. 

Since 1947, Brazil has been able to finance current account deficits around 2% of GDP, on average. However, this average includes two different regimes: one with plenty of available funding (and current account deficits of 3%-4% of GDP) and another without external funding (and current account surpluses around 1% of GDP).

We analyzed the external and macroeconomic conditions during each regime. The main driver of the availability of external financing was apparently the quality of the country’s macroeconomic policies. 

While the international scenario alone is not the main driver, in times of deterioration abroad, local vulnerabilities tend to become more evident and the availability of funds decreases.

With more adversity in the international scenario and without reforms (especially fiscal reform), Brazil may move toward a regime of little or no availability of external financing. In such a case, the country will need to produce current account surpluses, which would be compatible with a weaker currency (above BRL 4.50 per USD). Alternatively, if reforms are approved and fundamentals improve, we may move toward a regime of abundant availability of external financing and a stronger currency (below 3.50). 


Mário Mesquita
Julia Gottlieb

 

For the version with all charts and tables, please open the attached pdf file

 



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