Mantega Says Investors Are ‘Wrong’ to Think Brazil Quitting Currency Fight

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  • Posted on April 15, 2011

    Brazil’s Finance Minister Guido Mantega said investors misinterpreted his comments last week about currency gains being inevitable and that policy makers will continue to take measures to curb capital inflows.

    “This interpretation that now we are worried about inflation and not the exchange rate is wrong,” Mantega said in an interview yesterday from Washington, where he is attending the Spring meetings of the International Monetary Fund. “We are worried about both.”

    Brazil’s real strengthened beyond 1.60 per U.S. dollar for the first time since August 2008 last week after Mantega said inflation is faster than the government would like and that the economy’s growth rate made currency appreciation “inevitable.” The real has gained 47 percent against the U.S. dollar since the start of 2009, the world’s second-best performance among 169 currencies tracked by Bloomberg after Australia’s dollar.

    President Dilma Rousseff’s administration on March 29 increased to 6 percent a tax on new corporate loans and debt sales abroad by banks. A few days later, she applied the higher tax to renewed, renegotiated, or transferred loans of up to two years in length. Companies previously paid a 5.38 percent tax on loans up to 90 days and zero tax when the operation exceeded three months.

    The government also doubled the so-called IOF tax levied on consumer credit to 3 percent a year. In October, Mantega tripled to 6 percent a tax on foreign investors’ fixed-income purchases.

    “The measure we took both limits the appreciation of the real and, at the same time, fights inflation because it reduces the availability of credit,” said the 62-year old Mantega, who was asked by Rousseff to stay in the post he’s held since 2006. “What is more contradictory is increasing interest rates, but that is just one of the methods of fighting inflation.”

    ‘Dutch Disease’

    Brazil would be “flooded” with capital, with a currency at a level that could cause “Dutch disease,” if the country hadn’t acted to curb currency flows, Mantega said. The damage being done to Brazilian manufacturers by a strong currency would be even worse if it weren’t offset by strong domestic demand, he said.

    “Dutch Disease” was first applied to a surge in income from new natural-gas fields in the Netherlands during the 1960s, which caused the currency to appreciate, making exports less competitive and reducing manufacturing companies’ profitability.

    Brazil isn’t considering further budget cuts this year after Rousseff announced she would slash spending by 50.7 billion reais from this year’s budget to help fight inflation. The spending cuts are enough to ensure the government hits its fiscal targets this year, Mantega said.

    Rousseff’s administration vowed to deliver a primary surplus, including regional governments and state companies, of 117.9 billion reais this year, up from 101.7 billion reais in 2010.


    The government is using a policy mix of interest rate increases, measures to slow the growth of consumer credit and budget cuts to try to curb inflation running close to the 6.5 percent upper limit of the government’s target range.

    While inflation may exceed that mark in the third quarter, on higher food prices, the pace of consumer price increases is likely to decelerate over the next 12 months, Mantega said.

    “What matters is that, in December, inflation is below its target,” Mantega said. “We’ve achieved that several years running.”

    Consumer prices rose 6.3 percent in March from a year earlier, the fastest pace in more than two years. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

    Fuel Prices

    State-controlled oil company Petroleo Brasileiro SA (PETR4) will not raise gasoline prices in the “short-term” even as crude oil prices surge, Mantega said.

    “Clearly, if these high oil prices persist, we’ll have to review this,” said Mantega, who sits on the board of Petrobras, as the Rio de Janeiro-based company is known. “At the moment there are no plans to raise prices.”

    Credit growth in Brazil’s economy accelerated in February. Total outstanding credit rose 1.3 percent in February from January to 1.74 trillion reais, double the pace of borrowing in January. Credit rose 21 percent from a year earlier. The central bank forecasts credit growth of 13 percent this year.

    Mantega, who last year accused rich nations of provoking a “global currency war” by keeping interest rates at near-zero levels, said the IMF needs to wean itself off a reliance of the U.S. dollar. He also urged a “more extensive use” of the IMF’s Special Drawing Rights, the basket of currencies that its members use to settle accounts with each other.

    “The current system, heavily reliant on a single reserve currency, does not reflect the reality of an increasingly multi- polar world,” Mantega said in the text of his speech to the IMF steering committee, which is meeting April 16. His office today provided the text of the speech to Bloomberg News.

    To contact the reporters on this story: Matthew Bristow in Washington at;

    To contact the editor responsible for this story: Joshua Goodman at


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