BRAZIL : THE END OF AN ERA AS OUTFLOWS HIT 10-YEAR HIGH / THE FINANCIAL TIMES

 Brazil: the end of an era as outflows hit 10-year high

Jan 8, 2014 9:36pm

by Samantha Pearson

 

It’s been another record-breaking day for Brazil, but not in a good way.

After data on Tuesday showed car sales fell in 2013 for the first time in a decade, a report from Brazil’s central bank on Wednesday showed the country also recorded the biggest dollar outflow in over 10 years.

Net dollar outflows totalled $12.26bn last year – the largest exit of dollars since 2002 when the election of leftist President Luiz Inácio Lula da Silva caused investors to flee the country.
Last year’s outflow is also the first since the depth of the financial crisis in 2008. In 2012 $16.75bn came into Brazil and over $65bn flooded in during 2011.

It would be easy to blame Brazil’s government for the mass exodus. Deteriorating government finances, state meddling in the corporate sector, and erratic market-unfriendly policies have given investors plenty of reasons to pull their dollars out of Brazil.

However, a closer look at the central bank report suggests the real culprit is the US Federal Reserve. After a shaky start to the year, Brazil actually recorded a whopping $14.66bn in inflows between March and May – not far off its 2012 total. Almost $11bn flooded in during May alone – one of the largest monthly inflows on record. However, everything seems to have changed after May 21 when the Fed first mentioned the idea of “tapering” its stimulus programme.





Flows immediately reversed in June and outflows accelerated as investors pulled money out of emerging markets globally. December was the worst month when almost $9bn left Brazil as global funds prepared themselves for the year end.
 
While the massive inflows in 2011 turned the Brazilian real into one of the world’s most overvalued currencies, the outflows last year have made it one of the worst performers – it weakened 13 per cent against the dollar in 2013, putting further pressure on inflation.


There is little hope for a reversal this year either – analysts expect the real to weaken further as the presidential elections add further uncertainty to the market.


However, there may be some light at the end of the tunnel: Japanese housewives. After leaving for other markets such as Turkey and then Mexico, Japanese retail investors (aka Mrs Watanabe) are finally returning to Brazil, it seems.

This from Bloomberg:

Japan’s banks underwrote 36.7 billion yen ($350 million) of notes in the Brazilian currency in December, the biggest slice of the emerging-market uridashi bond market, according to data compiled by Bloomberg and Nomura Holdings Inc. Investors who buy these notes are switching their allegiance to the real from Mexico’s peso, which accounted for the biggest chunk of sales in the first eight months of 2013. While Mexico’s economy is forecast in Bloomberg surveys to grow 1.2 percentage points faster this year than its South American neighbour’s, Japanese investors are increasingly attracted to Brazil’s rising bond yields.