Brazil Between Rock of Inflation and Hard Place of Export Decline

Siemens chief Brazilian executive has warned the country faces deindustrialization if it continues to pursue a strong currency to curb inflation. At the same time, its booming economy has revived fears of the hyperinflation that plagued the country for much of the late 20th century. What is a BRIC to do? Keep walking that fine line, appears to be the only sensible answer. Ultimately, business threats to move elsewhere seem hollow given the size and power of Brazil's agricultural and energy industries.Furthermore, its growing relationship with China promises some buffering for the bumpy transition period. Samantha Pearson reports in the Financial Times:

"Brazil faces the risk of “deindustrialisation” unless it imposes more extreme capital controls to rein in the surging local currency, the head of Siemens in the country has warned.

Adilson Antonio Primo, the Siemens chief executive for Brazil, told the Financial Times that the strong real was crushing the group’s export business in the country.

Siemens, the German industrial group that ranks as Brazil’s biggest electronics conglomerate, now only exports some 12 per cent of its products made in the country compared with 20 per cent four years ago.

“We need wider measures, harsher measures. If the currency strengthens beyond 1.50 [per dollar], that would be a real disaster for us,” Mr Primo said.

“We’re not advocating protectionism, but you need to be able to compete on equal terms. This is fundamental; there is a risk of deindustrialisation.”

The real has soared about 50 per cent against the dollar since the start of 2009, making exports less competitive and encouraging a flood of cheap imports, mainly from Asia. It was trading at about 1.584 to the dollar by midday in Brazil.


Surging prices for raw materials have relieved the pressure on Brazil’s commodity exporters, but Siemens and many other industrial groups have been harder hit.

Mr Primo added to calls from industrialists for tougher action as the real nears the key level of 1.50 a dollar, saying the government should introduce a quarantine on foreign investment, a drastic capital control option.

The measure, which was employed by Chile in the 1990s, would force foreigners to leave money at the central bank for a certain period or incur a fine for early withdrawal, theoretically favouring long-term investors over the speculators who have been blamed for driving up the Brazilian real.

Siemens, which has more than 10,000 employees in Brazil and provides the equipment for about half the country’s electricity generation, has also had to compete with a flood of imports, such as cheap electronic transformers from China. Steel producers also suffered in 2010 from a flood of cheap imports, mainly from China, which grabbed 20 per cent of the market from the normal level of 5 per cent.

“Last year was a disaster, almost a complete disaster,” said Benjamin M. Baptista Filho, chief executive officer of ArcelorMittal in Brazil, the country’s biggest steel producer.

Yet, Brazil is likely to stick to softer so-called macro-prudential measures to slow inflows and curb the currency, such as the tax introduced at the end of March to limit foreign borrowing. Quarantine is not even on the radar, according to people close to Alexandre Tombini, Brazil’s central bank president.

As Brazil prepares to host the World Cup in 2014 and the Olympics two years later, the government is reluctant to scare away foreign investors. It has indicated that it may welcome some currency appreciation to help tame inflation, one of its most pressing problems.