The weakening of the real is not a short-term anomaly, but a structural change that reflects the exhaustion of the growth model based mainly on consumption, said Luis Stuhlberger, co-founder and chief investment officer of Credit Suisse Hedging-Griffo, one of the largest asset management firms in Brazil.
“From 2004 to 2012, each time the real weakened it was seen as a cyclical and not a structural change, so everyone expected its value to go up again,” Stuhlberger told Dow Jones. “But now it’s structural. The model is broken.” Stuhlberger is responsible for the largest hedge fund in Brazil with R$15 billion under management.
While the slowdown in China and the recession in Europe create uncertainty, they are not to blame for the outflow of capital from Brazil, said Stuhlberger. “The Greeks, Italians, Chinese and Spanish should not be blamed for our problems. Brazil is a victim of its own mistakes,” while he said that the external problems only “exacerbate” such errors.
Years of low investment implies that the growth model driven by consumption is losing steam, though the government has not done much to change that, he said. Moreover, says Stuhlberger, Brazil has not done anything regarding the so needed social and fiscal reforms.
“Our capacity to consume has been exhausted. We need to be more productive. I think that the government’s solutions are not attacking the big problems,” said Stuhlberger, adding that the Brazilian government should cut taxes more and reduce their own spending.
Brazil’s problems are now becoming apparent in the forex market, with the Real falling to less than $0.50 this week. Recently, the government tried to weaken the currency to protect the local industry, although the Central Bank in recent days has done more to prevent an uncontrolled fall.
In recent history, the Brazilian exchange rate came out abruptly only twice off its standard value, said Stuhlberger: once between October 1997 and January 1999, when the country adopted a fixed exchange range, and then between May 2002 and May 2003, when the markets panicked before the election of President Luiz Inacio Lula da Silva.
The current situation implies that the dollar may fall up to R$2.40 per dollar, he said, but the government will certainly try to prevent this. According to Stuhlberger, government intervention in the forex market does not mean that it abandoned the floating exchange rate. “I do not think the concept of a floating exchange rate has lost its validity,” he said.
He also believes that the depreciation of the Real addresses part of Brazil’s problems as it makes the local industry more competitive in the face of cheaper imports.
But the global crisis is certainly helping to expose Brazil’s structural issues, and this is attracting the attention of international investors, said Stuhlberger. And if there is indeed a rush by investors to leave the country, he believes that the Central Bank will interrupt its cycle of interest rate cuts to keep investments in Brazil.
“Do not be surprised if our CB decides to stop the monetary easing at 8.5%. With the basic interest rate to, say 7.5%, at a time when investors are reassessing their views on the country, the demand would be very different from a situation with interest at 8.5% or 9%,” he said.