South America Calling

Brazil's Crisis and Forex

The big story in Brazilian agriculture this year has not been crops but forex.

The 23% slide of the Brazilian real against the greenback in 2015 created positive margins for soybean and corn farmers out of likely losses and has created opportunities to lock in margins for the 2015-16 crop.

As a result, Brazil will likely plant 2% to 5% more soy from September when a decline was widely forecast earlier in the year, not only because of poor margins but a lack of credit.

So what is actually happening?

Just like other raw material exporters, Brazil has suffered with the end of the cycle of high prices for commodities, while, like other emerging markets, its currency has fallen back sharply against the dollar ahead of rate rises.

But Brazil's real has significantly underperformed its emerging market rivals.

The reason for that is a recessionary economy and a lack of governability.

Brazil's economy has been sluggish for five years, hit recession last year and is expected to contract 2% in 2015, according to a central bank market survey. No recovery is seen until 2017 with the same survey putting 2016 growth at 0%.

The government can do little to stimulate as inflation is surging, forcing it to raise interest rates to 14.25% -- the highest level since 2006. Meanwhile, it has no money to spend as it hasn't been hitting its fiscal targets and revenues are falling. As a result, it risks losing its investment grade.

The economic outlook is brutal, only made worse by a political crisis.

The government is being slowly engulfed by a corruption scandal revolving around potentially massive graft at Brazil's massive state-owned oil giant Petrobras.

Members of Rousseff's Workers' Party and allied parties stand accused of syphoning billions from the company.

President Rousseff has not been directly connected, but key allied politicians have been named in investigations. To cut a long story short, the allies feel they are being hung out to dry and are deserting Rousseff in Congress, voting against government spending cuts and threatening governability.

With a dead duck president and a growing fiscal crisis, bets against the real have grown.

The Central Bank has warned investors that Brazilian fundamentals don't justify the real's slide to R$3.50 to $1 and has intervened in the market by offering forex swaps. But while the monetary authority has reserves of $370 billion, it doesn't want to take a stand for fear that it would fail, precipitating a mammoth run on the currency.

A lack of governability and the poor economy led Credit Suisse to forecast last week that the real could slide to R$4 to $1.

Something needs to happen politically or Brazil is destined to slide further into crisis. President Rousseff has to swallow her distaste for political horse-trading and try to hash out a deal, although it may be too late for that. Vice President Michel Temer proposed last week that a new political pact be drawn to end the crisis, with him at the head, of course. The opposition declined the offer as they seem to be gunning for Rousseff to resign and new elections to be held.

In parallel, corruption investigations continue and further revelations could turn the situation upside down.

It's a massive political mess, but one that is benefitting Brazilian grain farmers at the moment.



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