Against the Brazilian Real (BRL) The £ (GBP) has risen in value by 41% between August 2011 and August 2013

graph BRL-GBP Aug11-Aug13

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.

July 2013 protests in Brazil may signal a positive future for the economy and real estate

The protests are believed to have started in Goiânia over a bus fare increase of over 10%, from R$2.70 to R$3.00.  This was the straw that broke the camel’s back:  people have, apparently, been complaining in Brazil for a long time over the state of education, transport, crime, healthcare services and corruption in politics but generally within the four walls of their houses.

When a great deal of people have to travel into Goiânia to work, frequently needing to take two buses to get there, public transport can amount to over R$10 per day.  On the basis of say 22 working days in the month, this cost can equate to a third of the income of someone earning the minimum wage which this year increased by about 9% to R$678, about £205 per month.

When the court ordered the fare increased be reversed, it was by then too late to stop the public from voicing their anger – it had broken free, and spread throughout Brazil.  While there has been some violence which has made the headlines, the vast majority of the protests have been peaceful.  There has been very little violence in Goiânia linked to the protests.

People in Brazil resent the amount of money being spent by politicians in the context of the quality of healthcare education and so on, e.g. the governor of Rio de Janeiro was recently in the news for frequently taking his family, and pets, in a state helicopter to his beach house.  The amount of money he is spending on helicopters has doubled since 2007.

There is speculation that the new football stadia will be white elephants after the the World Cup, and the copa das confederações which Brazil just won:  the new stadium in the capital Brasilia was programmed to cost R$740 millions and ended up costing 40% more.  Brasilia has a relatively small football team which according to Wikipedia until recently played in a stadium with a capacity of 5,000; the new stadium has a capacity of 71,000.

The wave of protests may result in better transport services, better healthcare, better education which are all necessary for sustainable economic growth.  More prudent public expenditure should free up money for private investment which may in turn drive economic growth.  More prudent public spending can be combined with better public services.

The protests may be an early signal of forthcoming economic improvement and a reason therefore to invest in Brazil real estate, not to be scared off by the short term noise.