Brazil’s finance minister Guido Mantega has stepped up his attack on rich country economic policies that he says have opened the flood-gates to harmful capital flows to the developing world.
Writing exclusively in today’s Emerging Markets, Mantega says the economic competitiveness of emerging nations must not fall victim to ultra-loose monetary policies being pursued by the US, Europe and Japan in response to the global crisis.
And he reiterated his pledge that Brazil will take tough action to combat the ill effects of such policies.
Brazil will not “sit idle in the face of the currency war,” he writes, adding: “We have, and we are ready to use a whole arsenal to prevent or neutralize the excessive appreciation of our currency,” referring to the flurry of capital controls imposed this year to repel foreign capital.
His comments come in the wake of comments last night by a top IMF official who singled out China as a principal culprit in causing destabilizing capital flows.
Responding to a question from Emerging Markets, Nicholas Eyzaguirre, the IMF’s Western Hemisphere director, said China’s closed capital account and man-aged currency were responsible for export-damaging currency appreciation and global distortions.
“There is a correlation [between] the fact that China pegs its currency and pressures on the exchange rate of Brazil or Peru,” Eyzaguirre said.
On March 12, Chinese central bank officials hinted the pace of renminbi appreciation was set to moderate after the country recorded a $31.5bn trade deficit in February, on the back of vanishing import demand in developed countries.
But Mantega omits China from his critique and instead focuses his ire on expansionary monetary policies in the developed world. “A large part of the liquidity injected into the European, American and Japanese banks is destined for the financial market of solid, safe countries such as Brazil,” he writes.
Michael Pettis, finance professor at Peking University, said competitive exchange rate devaluations – the principal weapon in trade protectionism –threatened to sow the seeds of global instability for years to come given the US and eurozone’s commitment to keep interest rates at historic lows. “Do not expect an end to currency wars, trade wars, and the like,” he told Emerging Markets yesterday.
Foreign inflows, attracted by Brazil’s high interest rate environment and liquid domestic markets, threaten to overwhelm the economy and bolster the need for currency intervention, Mantega says. But he denies Brazil is introducing a managed exchange rate regime.
“We have to repeat that the Brazilian government does not consider that there is an ideal exchange rate or an exchange rate range for floatation. Our exchange rate regime is a floating one and it is good that it remains so,” says Mantega.
The minister adds that Brazil has the IMF’s moral and intellectual support for its currency policy, after the institution’s recent softening of its position on exchange rate intervention and capital controls.
“Brazil’s position is backed by multi-lateral organizations, such as the IMF, which recently acknowledged actions of emerging market countries to protect their economies from wild exchange rates wings as legitimate.”
Eyzaguirre last night said there was“nothing wrong” in imposing “a set of cap-ital controls” if “pressures remain and the currency is too appreciated because we are not in a normal situation.”
“We are fine with some degree of cap-ital control if they are temporary,” he said.
The IMF in late January said it was reviewing whether China’s currency should still be considered “substantially undervalued”, given its 8% appreciation against the basked of currencies in real terms in 2011, or 5% against the dollar.