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 What Brazil Gains by Downgrading its G-20 Presence Read more: What Brazil Gains by Downgrading its G-20 Presence | STRATFOR

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Victor Quinn
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PostSubject: What Brazil Gains by Downgrading its G-20 Presence Read more: What Brazil Gains by Downgrading its G-20 Presence | STRATFOR    10/27/2010, 22:24

Brazil has downgraded its presence at the Oct. 22-23 Group of Twenty (G-20) finance ministers’ and central bank chiefs’ meeting in South Korea. Brazilian Finance Minister Guido Mantega and Central Bank President Henrique Meirelles have decided to remain at home, and Secretary of International Affairs of the Ministry of Economy Marcos Galvao will attend the summit in their absence. The Brazilian government explained that Mantega and Meirelles would instead be preparing for a meeting in Brasilia, which is not scheduled to take place until Oct. 27, well after the G-20 meeting, in which Brazil will be discussing ways to tame the appreciation of the Brazilian real.

Not coincidentally, the topic of the Brazilian meeting is also the focus of the G-20 finance summit. The United States is attempting to lead a multilateral effort to encourage states not to engage in economic policies that forcibly weaken one’s currency strength — or allow it to remain weak through inaction — as a way of maintaining competitiveness in export markets and thus putting its competitors at a disadvantage. Instead, Washington wants to form a united front within the group to fight non-appreciation through the encouragement of market-driven exchange rate regimes and the formation of an international mechanism to handle foreign exchange (forex) disputes in a more controlled and balanced manner.

But Brazil, with interest rates reaching as high as 10.75 percent and an economy that has attracted strong investor interest, is severely lacking in options to tame its currency (the real appreciated roughly 30 percent against the U.S. dollar over the past year and is now valued at 1.71 per dollar). Brazil has likely anticipated that the G-20 is unlikely to reach a binding agreement on the forex dilemma. Export-led economies like China are simply unwilling to incur the political cost of cutting its trading surplus with a currency appreciation for the betterment of the global economy.

Brazil is essentially avoiding being put in an uncomfortable position at the meeting and is deriving political benefits in snubbing it. If Brazil had a big presence at the summit, it would logically side with the United States against China in trying to avoid competitive devaluation that has been eating away at its export competitiveness. But doing so would publicly pit Brazil against export-led economies like China, Japan and Germany at a time when Brazil is looking to reassert its independency in foreign policy matters. Brazil will rarely miss an opportunity to take a stand against Washington on behalf of the developing world, especially when it comes to economic matters.

Meanwhile, at home, Brazil is eight days away from a presidential runoff on Oct. 31, with the rising real being a major electoral theme. The opposition, led by Sao Paulo governor Jose Serra, has been climbing in the polls with its attacks on the current administration’s economic policies, claiming that President Luis Inacio Lula Da Silva’s monetary policies (and, thus, those of his preferred successor, Dilma Roussef) have failed to curb the real’s appreciation. Concerned that Roussef may lose the support of Brazilian industry in the runoff, the administration wants to show that the finance minister and central bank governor are at home putting all their effort into dealing with this issue instead of playing politics at the G-20 meeting. Brazil has attempted to avoid real appreciation by taking measures such as increasing the tax on foreign capital from 2 to 6 percent and having the central bank use money from the sovereign wealth fund to buy up dollars in the market.

However, these measures have not been enough to bring the value of the real down, mainly because beyond being an emerging economy that has attracted a large amount of foreign direct investment, Brazil has high interest rates that also attract speculative investment. With no other good options, Brazil is moving increasingly toward an interventionist foreign exchange policy while the agenda to fight such policies at the G-20 is likely to flounder.



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