Mantega Says Brazil Currency May Weaken More on Lower Surplus

By Andre Soliani and Heloiza Canassa

Sept. 9 (Bloomberg) -- Brazil's real, the worst performing Latin American currency in the past two months, will weaken further because of reduced investment flows and a narrowing trade surplus, Finance Minister Guido Mantega said.

The real has weakened 8 percent against the U.S. dollar since July 1, compared with a 7.7 percent drop for the Colombian peso and a 1.2 percent decline for the Mexican peso. Chile's peso has been little changed during the same period.

``The exchange rate will continue in this trajectory,'' Mantega said during an event in Brasilia to celebrate the 200th anniversary of the finance ministry.

Brazil's annual current account deficit widened to $19.5 billion in the 12 months through June. It was the biggest gap in six years as companies stepped up profit remittances and increased imports, the central bank said last month. Turbulence in global financial markets has increased risk aversion and is limiting inflows into Brazil, Mantega said.

``The drop in the trade surplus, the increase in the current account deficit and the scarcity of capital in international markets has decreased the inflows of capital to Brazil,'' Mantega said.

The real declined 1.2 percent to 1.736 per dollar yesterday, after most trading in Brazil had ended, from 1.716 on Sept. 5. The decline took the Brazilian currency to the lowest level against the dollar since April 1. The real peaked at 1.56 to the dollar on Aug. 1.

Weekly Decline

The real last week had its biggest weekly decline in 5 1/2 years as a tumble in commodities and a global economic slump reduced demand for emerging-market securities. The real sank 5.2 percent, the most since January 2003.

Demand has eroded among investors seeking to take advantage of Brazil's 13 percent benchmark lending rate, which compares with the Federal Reserve's 2 percent target.

The yield on Brazil's zero-coupon bonds due in January 2010 rose 5 basis points, or 0.05 percentage point, to 14.88 percent yesterday, according to Banco Votorantim. The yield on the overnight futures contract for January delivery increased 2 basis points to 13.94 percent.

To be sure, the weakening of the real will make Brazilian exports relatively cheaper for foreigners to buy and eventually help bolster the trade surplus, Mantega said.

To contact the reporters on this story: Heloiza Canassa in Sao Paulo at hcanassa@bloomberg.netAndre Soliani in Brasilia at asoliani@bloomberg.net