Brazil’s ‘Magical Moment’ at Risk as Real Gains, Freitas Says

By Camila Fontana

Oct. 19 (Bloomberg) -- Brazil’s real, the best-performing major currency this year, may rally another 6 percent against the dollar before investment flows to the country start to ebb, former central bank director Carlos Eduardo de Freitas said.

“Brazil is now at a magical moment but also has weaknesses and is subject to a sudden outflow of capital,” said Freitas, who headed the central bank’s economic department from 1991 to 1993, in a telephone interview from Brasilia. “That is why the central bank needs to be prepared and keeps increasing international reserves. Economies do not adjust smoothly.”

The real completed a seventh straight week of gains, the best run since 2004, to close Oct. 16 at 1.71 per dollar, helped by the economy’s recovery from a recession, increased demand for the nation’s stocks and a credit rating upgrade by Moody’s Investors Service. The currency may rise to 1.6 per dollar before falling, Freitas said.

The real has rallied 35 percent this year while the Bovespa stock index is up 76 percent.

The currency is gaining even as the central bank buys dollars daily in a bid to stem the advance. Brazilian central bank President Henrique Meirelles said in an interview last week that emerging-market currencies that have been appreciating as economies recover from a global recession may become volatile as markets overprice assets.

Brazil’s international reserves have risen by $25.3 billion this year to $232.1 billion on Oct. 14, according to data compiled by the central bank.

Analysts estimate the real will end the year at 1.75, according to the median of 20 forecasts compiled by Bloomberg.

‘Little’ To Do

The government is unlikely to adopt measures to curb the rally, Rodrigo Azevedo, who served as the central bank’s monetary policy director between 2004 and 2007 and now helps manage $1.8 billion at JGP SA, said in an interview from Sao Paulo on Oct. 16. “There is very little Brazil can do,” he said.

The same day, President Luiz Inacio Lula da Silva denied a report published in O Estado de S. Paulo newspaper that said the government was planning to tax foreign inflows.

“Fortunately our president seems to be against miraculous ideas”, said Freitas, who runs a consulting firm, OF Consultoria Economica.

The real fell 0.5 percent on Oct. 16 and rose 1.8 percent for the week. Its gain this year is the best for the world’s 16 most-traded currencies. The South African rand has climbed 30 percent and the South Korean won is up 8 percent.

Central banks need to “alert investors and markets of the risks of exaggeration in the formation of prices, which can lead to future corrections and create unnecessary volatility,” Meirelles said in the interview in New York.

To contact the reporter on this story: Camila Fontana Correa in Sao Paulo at cfontana@bloomberg.net.