FACTBOX-Risks and benefits for Brazil of a weaker real
RIO DE JANEIRO, Aug 26 (Reuters) - Brazil's real currency has weakened in recent months as investors shed emerging markets assets because of slower growth in other developing economies and the prospect of a stronger recovery in the United States. The currency, which in July 2011 reached 1.54 reais per dollar, in late August traded as low as 2.45, or about 37 percent off that peak. Here is a list of risks and benefits that a weaker real poses for Brazil's economy, Latin America's largest.
INFLATION As the real weakens, the cost of imports, most of them priced in dollars, rises. Economist Alexandre Schwartsman, a former central bank board member, estimates that each 10 percent drop in the real's value contributes as much as half a percentage point to the inflation rate.
MONETARY POLICY After taking office in 2011, President Dilma Rousseff pushed Brazil's central bank to lower interest rates in stimulate a slowing economy. The bank complied, slashing the benchmark rate, historically in double digits, to a record low of 7.25 percent. As inflation began to creep upward this year, however, Central Bank President Alexandre Tombini realized he had to change course. After a fourth consecutive rate increase expected this week, the bank may have to continue tightening more and longer than it would have with a stronger real.
ENERGY COSTS Even with massive new oil discoveries in recent years, Brazil still relies on imported fuels, priced in dollars, to meet demand for gasoline, kerosene and other refined fuels. Through July, the value of imported gasoline this year rose to $1.86 billion, up 9 percent from the same period in 2012, according to Brazil's trade ministry. The value of imported diesel soared by 23 percent, to $5.1 billion. Though government price controls seek to keep fuel costs from adding to inflation at the pump, artificially low prices can only be maintained so long before they undermine energy policy and further strain the finances of state-run energy company Petroleo Brasileiro SA, or Petrobras, which imports the fuels at a loss.
CORPORATE DEBT As dollars get more expensive, some companies may have a harder time refinancing or even repaying some of the foreign exchange-denominated debt they hold. Brazilian companies are better cushioned against a weaker currency than they were the last time the real tumbled in a significant way - the slump that between the end of 2008 and early 2009 that caused a handful of big corporations to look for buyers when they went through a cash crunch - but a sustained increase in the dollar's value could complicate refinancing. Still, Moody's Investors Service, the ratings agency, said it expects most of the Brazilian companies it covers to honor their debts over the next 12 months.
TRADE AND COMMODITIES Most Brazilian exporters suffered during the real's climb, especially factories that lost competitiveness in global markets against cheaper-priced goods from China and other low-cost manufacturers. Brazil posted its fourth monthly trade deficit this year in July, adding to an accumulated trade deficit of $4.99 billion for the year, a sharp reversal from the $9.9 billion surplus posted by July of last year. Now, big exporters like aircraft manufacturer Embraer SA, whose costs get comparatively lower even as sales of aircraft in dollars buy more reais at home, will get some relief. Big commodity producers, like Vale SA, the world's largest exporter of iron ore, should also benefit. If global demand for commodity exports weakens significantly, though, relief could be short-lived.
(Additional reporting by Reese Ewing and Walter Brandimarte; Editing by Kieran Murray and Andrew Hay)