25 years of the Brazilian Real

Today marks the 25th anniversary of the Brazilian Real. We will talk about how the Brazilian currency helped the country escape inflation, allowed wealth distribution, and gave the country some much-needed economic stability.

• Plus, pro-Bolsonaro demonstrators took to the streets to celebrate Justice Minister Sergio Moro—in demos that were much smaller than last month.

• And President Bolsonaro could fulfill a campaign promise to open up the Brazilian economy. Enjoy the read!

25 years of the Real, the Brazilian currency

The Brazilian Real began circulating on July 1, 1994—the 6th plan in less than ten years to tame inflation. From the early 1980s until that point, Brazil struggled with hyperinflation, which corroded salaries and created many economic distortions.

The successive crises were caused by government overspending, lax regulation of bank loans, and an economy with a high level of indexation. Salaries, taxes, and payments were adjusted according to inflation—which created a snowball effect.

To make the Real work, the Itamar Franco administration reduced the public deficit through severe austerity measures and higher taxes, as well as raising the benchmark interest rate (attracting foreign investors, even if speculative).

The side effect was a loss in the purchasing power of the minimum wage, which hit a 25-year low when the currency changed.

The importance of the Real cannot be overstated. The currency gave Brazil stability, allowed the country to reduce the poverty rate (from 43% in 1993 to 35% in 1995), helped curb inequality, and lowered the country’s exposure to foreign crises.

The Real would suffer a major hiccup in 1999. During its first five years, the Brazilian currency was artificially pegged to the U.S. Dollar. After crises in Asia and Russia, the government could no longer control the exchange rate.

The Real lost 80% against the dollar, Brazil’s debt-to-GDP ratio soared from 28 to 48% in one year, and basic interest rates reached 40%. That’s when Brazil adopted new anchors for its monetary policy: inflation targets, a floating exchange rate, and primary surplus goals. Twenty years later, inflation is under control—but Brazil is heading to its 6th-straight year of primary deficit.

Culture tip: A movie about the adoption of the Real was launched in 2017, drawing mixed reviews. Watch the trailer.

• Go deeper: The worst economic crises in Brazilian history

Protesters show support for Moro, but in smaller numbers

Yesterday, protestors took to the streets in approximately 70 cities across the country to defend Operation Car Wash and Brazil’s embattled Justice Minister, Sergio Moro. In recent weeks, Mr. Moro has been the prime target of a series of leaked instant messaging logs involving himself and Car Wash prosecutors. The Intercept Brasil‘s reporting has shown that the former judge overstepped his bounds on a number of occasions during the operation, colluding with the prosecution, particularly in the case which saw ex-president Luiz Inácio Lula da Silva convicted to jail for corruption and money laundering.

Mr. Moro’s public support has fallen since the beginning of the leaks, but he still has a core segment of backers, as shown by Sunday’s demonstrations. However, even this group is dwindling, as shown by the size of the marches: considerably smaller than those at the end of May.

Sunday was notable for gathering all of the most prominent right-wing movements in Brazil on the streets, after the Free Brazil Movement (MBL) had refused to join May’s protests. It would appear that all is not forgiven, however, as members of the MBL were given a hostile welcome at several demos around the country, being called “traitors” and even leading to a small fist-fight in São Paulo.

Beyond defending Sergio Moro, Sunday’s protests also targeted Brazil’s Supreme Court justices—a recurring motif in recent right-wing demonstrations—as well as Congress, and The Intercept journalist Glenn Greenwald. 

Brazil to open up economy by import tax waivers

In an important move to open up the Brazilian economy—one of the main campaign promises of Jair Bolsonaro—the country’s foreign trade chamber is poised to issue a resolution establishing a zero tax rate for importing capital goods, computing products, and telecom devices, even when there are similar products available produced in Brazil.

The plan is strongly opposed by Brazilian manufacturers, which feel they are being unfairly targeted and have backed an alternative of reducing import tax rates gradually over the course of 15 years, as opposed to scrapping them entirely.

However, Economy Minister Paulo Guedes has said in the past that Brazilian companies need to be “thrown into the lion’s den” so that they may learn to survive, increasing their productivity and competitiveness.

The move would be a temporary measure, and Mercosur countries would then vote on whether to implement the rule definitively as of 2021. Uruguay and Paraguay are in favor, while Argentina is still hesitant.

Sources involved in the discussions suggest the measure will be announced as soon as the pension reform is approved in the House of Representatives.

• Go deeper: What will Brazil gain from the Mercosur-EU trade deal?

Also noteworthy

Truckers. Toll fees on Brazilian highways will increase 4.6% as of today, in a move which has been surprisingly accepted by the country’s truck drivers, who in May last year staged a 10-day strike over diesel prices which very nearly brought the country to a halt. The response is indicative of the good relationship between truckers and the current administration, particularly with Infrastructure Minister Tarcisio de Freitas.

Diplomas. The Federal Prosecution Service is investigating a suspicion of fraud in a wave of university diplomas, obtained in Paraguay by citizens from Brazil’s Northeast, and validated in the Federal University of Rio de Janeiro. The university doesn’t require applicants to prove their residence abroad in these courses, and one prosecutor believes it could be the “tip of the iceberg involving the largest scandal of university diplomas in Brazil.”

Beaches. According to recent reports, Rio de Janeiro’s iconic seafront may not be as beautiful as it is made out to be. Municipal government inspections have shown that of the 240 sand samples analyzed on the city’s beaches, 162 showed unsatisfactory results, leading officials to state that the sand in 18 of Rio’s 24 beaches is somewhat contaminated.

Pension reform. Time is running out for the House of Representatives to approve the pension reform before Congress goes on its mid-year recess, on July 17. The bill still has to be approved in a House special committee, before it may be taken to the floor, where it must be approved in two-rounds of voting with a three-fifths majority. Realistically, the House will only be able to approve the reform in one round before the holiday. In order to do so, however, approval in the special committee must happen this week.

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