As the value of the Real has fallen against world currencies, particularly the US$, the cost of flights has gone up. As a consequence the Brazilian air travel market is suffering – this year more than 10% fewer flights are being taken by Brazilians – while the long distance bus companies are experiencing a mini boom: the number of long distance bus journeys this year is expected to increase by over 10% compared to 2012.
From an internal perspective, the fall in the value of the Real may be down to two things:
1. Less than exciting growth prospects combined with rising inflation
In January 2013, the government’s prediction for PIB (broadly equivalent to GDP) growth was 4% for 2013. It was revised down to 2.2% recently. At the same time, inflation is predicted to be around 5% in 2013. This equates to negative real growth i.e. in terms of purchasing power, people in Brazil with Brazilian Reals will be able, on average, to buy fewer goods with their money at the end of the year than they were able to at the beginning of the year.
2. The protests
These have quietened down considerably since July, but they may have (in my view wrongly) rattled the confidence of some leading to the outflow of international money.
The value of a currency is of course the result of an equation, and UK economy is now clearly recovering, which has lead to the British Pound being more attractive to international investors – this outside influence on the value of the Real is something that news reports in Brazil rarely consider.
So what does the future hold?
In terms of the outlook, interest rates may rise further (the key Selic rate rose was increased from 8.5% to 9% yesterday) with a view to curbing inflationary pressures which in turn may see the Real strengthening again.
The lower value of the Real should provide a huge boost to Brazil’s export market, as produce will appear to be cheaper to international buyers. This should see regions where a significant part of economic output is based on agriculture (like Goias) growing more strongly than city regions like Sao Paolo.
While there has been asset inflation since 2011, assets in Brazil, especially real estate, may now represent good value for money for British investors.