Defending the Brazilian Real

1
Defending the Brazilian Real

• Global Gurus
• Danielle Blair    blair.117_at_osu.edu
• Lois Hadley    loishadley906_at_hotmail.com
• Amy Huling    huling.4_at_osu.edu
• Teresa Morales    morales.56_at_osu.edu
• Laura Smigelski    smigelski.6_at_osu.edu
• Audrey Uetrecht    uetrecht.4_at_osu.edu
• Oleg Vishnepolsky vishnepolsky.2_at_osu.edu
• Denotes international student

2
Origin of the Brazilian Real

• Brazil is the biggest economy in South America
• Real replaced cruzeiro as new form of currency in
  1994
• Originated by Fernando Henrique Cardoso, who
  became president of Brazil in 1995
• Goal of real was to reduce the inflation that was
  already over 1000 which was negatively impacting
  the economy
• Real followed a tight monetary policy being
  pegged to the value of the U.S. dollar
• Success! Inflation reduced to 10 in 1996 and
  down to 2 by late 1998
• Economic activity increasing with FDI increasing
  to 16 billion in 1996 and up to 22 billion in
  1998

3
Problems in the Brazilian Economy

• High Inflation over 1000 (1994)
• Government funding
• Only 2/3 of tax revenue given to federal
  government
• Decreased FDI
• Asian Financial Crisis Effects (1997)
• Investors pulling out of emerging economy markets
• Interest rates raised to 43 slowing the economy
• Increased cost of servicing debt
• Russian default on debt obligations (1998)
• People once again pull out of emerging economies
• Lost 1/3 of Foreign Exchange Reserves (mid 1998)
• Brazilian government spending over 1 billion per
  day to defend the real

4
The Problems Continue

• Government Budget Cuts
• Had not followed through in the past, so
  announcement seen with skepticism
• Presidential Election Uncertainty
• Cardoso reelected on October 4, 1998
• IMF Loans
• 41.5 billion in loans with restrictions to
  support austerity package
• Regulations were not satisfied
• January 1999 Cardoso Decides to Float the Real
• No longer pegged to the US dollar
• Improved economy helping it to grow 4 in 2000,
  inflation at 6

5
Recent Troubles

• Economy grew less than 2 in 2001 and 2002
• Real lost 40 of value in 2002
• Another IMF loan
• 30 billion dollars to help economy
• October 2002, Luiz Inacio Lula da Silva was
  elected president
• Predicted growth in 2003 to be less than 1
• In 1998 Brazil was the 8th largest economy
• Predicted to be down to 15th at the end of 2003
• 8.9 rate of inflation for 2003

6
Relation to Chapter 10

• Pegged Exchange Rate
• Imposed monetary discipline
• Pegged real to US dollar to lower inflation
• Government Intervention
• Used to maintain value of currency
• IMF (International Monetary Fund)
• Help to maintain order in international monetary
  system
• Imposed stipulations on loans given out