By John Lyons and
Sept. 24, 201 5
SÃO PAULO, Brazil—Brazil’s battered currency on Thursday touched a new low, unemployment surged and the central bank forecast a far deeper recession—a litany of woes suggesting a major crisis ahead for this once high-flying economy with a long history of booms and busts.
The real, already the worst performer of any major global currency so far this year, hit a new intraday low of 4.24 reais per dollar, prompting Alexandre Tombini, the head of the central bank, to make a surprise announcement that Brazil could dip into its $371 billion in reserves to stem the currency’s bleeding.
Despite the slight rebound to 4.04 per dollar prompted by the remarks, the real has lost around 35% of its value this year, edging out Kazakhstan’s tenge as the biggest loser so far this year.
The currency’s collapse is a telling marker of the economic reversals touched off by the end of the global commodities boom. Resource-rich Brazil was sure to slow, but what might have been an economic speed-bump is rapidly becoming a full-blown economic crisis, as years of economic policy missteps compound the downturn. Brazil’s central bank lowered its 2015 forecast for a second time Thursday and now predicts the economy will shrink 2.7% this year—the worst contraction in 25 years.
Almost all of the gauges on Brazil’s economic dashboard are heading toward the red. Unemployment rose to 7.6% in August, the eighth consecutive monthly increase. and double the rate from a year ago.The inflation rate is rising toward 10%, cutting into the budgets of the country’s poor. And Brazil’s budget shortfall stands at about 8% of annual economic output—a big reason why Standard & Poor’s cut Brazil’s hard-won investment grade credit rating to junk.
“I am disillusioned and upset with what’s happening,” said Edmar Bacha, one of a group of economists who helped design and implement the real in the 1990s to combat four-digit inflation and stabilize Brazil’s economy. “All the work that we all did to create the real, to create stability, was destroyed” by the government.
Brazil’s economic troubles are worsened by a political crisis threatening to bring down President Dilma Rousseff. The former leftist militant’s approval ratings have dropped to single digits amid a $2-billion kickback scandal at state oil firm Petróleo Brasileiro SA, or Petrobras, much of which occurred while she was its chairwoman. Opposition lawmakers, backed by hundreds of thousands of protesters who often take to the streets, are calling for her impeachment.
Ms. Rousseff’s political weakness hurts her ability to introduce measures designed to turn Brazil around. She named conservative economist Joaquim Levy as finance minister last year to shore up Brazil’s finances. But most of his measures have been watered down or blocked in Congress.
Complicating matters, Brazil is also on the front lines of the global economies likely to be affected if the U.S. Federal Reserve tightens monetary policy this year, as Chairwoman Janet Yellen suggested Thursday it would. With U.S. rates near zero, Brazil became a key destination in past years for investors seeking bigger yields. Rising U.S. rates will create even more incentive for investors to pull money out of countries like Brazil.
Already, Brazil’s central bank has raised interest rates by 2 percentage points to 14.25% to stem inflation and stabilize the currency. Those moves come with side effects: The interest-rate increases are likely to slow down the economy even further, while pinching consumers and companies with debt payments tied to the benchmark rate.
“I am so frustrated because all of this could have been avoided,” said Márcio Utsch, chief executive of Alpargatas SA, the maker the popular Brazilian “Havaianas” flip-flops, who compares the crisis with being “attacked by a turtle—we could have gotten away” but did nothing.
Economists say further currency declines risk making it more expensive for Brazilian companies to pay off dollar-denominated loans it took during the good times.
One of Brazil’s biggest airlines, Gol Linhas Aereas Inteligentes SA, has seen its share price plummet by about 75% this year
. The company is holding around $1.5 billion in dollar-denominated long-term debt, and only a small portion of its dollar exposure is hedged against currency fluctuation
, the most recent company reports show.
Gol declined to comment.
Petrobras, meanwhile, is the world’s most indebted major oil firm, with long-term bonds drifting down toward distressed debt levels of less than 75 cents on the dollar. And though much of its revenue is in dollars, the currency move can affect it in other ways. As Petrobras tries to sell assets to shore up its finances, the declining real could mean the company will get less in exchange.
Companies that need to import machinery and other goods are also taking a hit, executives said. “The lack of clear investment policies and liberation of lines of credit means businesses postpone their investments,” said Eduardo Ibrahim, director of the Brazilian division of the Japanese technology firm Makino.
Brazil’s economy has run hot and cold over the last decades. Many economists predicted the country would avoid the boom-bust cycle this time around and lock into a steadier growth path.
But the past few weeks have poured cold water on that dream, and Brazilians from all walks of life are bracing for yet another economic crisis, the depths of which are still unknown.
—Luciana Magalhaes and Jeffrey T. Lewis contributed to this article.