Last updated: August 23, 2013 11:17 am

Brazil, Indonesia launch measures to shore up their currencies

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Brazil and Indonesia have moved to stem the declines in their currencies and shore up confidence at the end of a torrid week for emerging markets where local borrowing costs hit a two-year high.

The central bank of Latin America’s largest economy said late on Thursday that it would launch a currency intervention programme worth about $60bn to ensure liquidity and reduce volatility in the nation’s foreign exchange market.

Then on Friday, Indonesia’s chief economic minister Hatta Rajasa told reporters that the government would increase import taxes on luxury cars, introduce tax incentives for companies investing in agriculture and metals industries and aim to reduce oil imports. The move, of which more details on plans were expected later in the day, suggests that Jakarta may have given up on trying to shore up its currency through intervening in the markets.

“The government and Bank Indonesia will take steps particularly in the financial sector and current account, and combined with structural policy, to maintain economic growth at a realistic level,” Mr Hatta said.

Brazil’s huge programme, which will be conducted through currency swap and repurchase agreements, follows a more than 15 per cent depreciation in the real against the dollar this year to its weakest levels in more than four years.

“With the objective of providing currency hedging to economic agents and liquidity to the currency market, the Central Bank of Brazil will start, from this Friday . . . a programme of currency swap auctions and the sale of dollar repurchase agreements,” the central bank said late on Thursday.

Fears about rising borrowing costs and the end of easy money were exacerbated this week by the reaction to US Federal Reserve minutes showing broad support for the start of reducing monthly asset purchases this year.

On Friday, emerging markets were given some breathing space as broadly positive data on Thursday showed steady if not spectacular global growth, taking the sting off countries that are reliant on exports. The Turkish lira, also hit badly this week, stopped its declines following central bank forex auctions.

The move to reassure Brazil’s markets comes as central bank president Alexandre Tombini cancelled a trip to Jackson Hole in the US for the annual international meeting of the world’s top monetary policy officials so that he could monitor the real.

While initially welcomed by the Brazilian government, the real’s rapid depreciation against the dollar has started to make policy makers nervous given the danger that it could add to already resilient inflation.

Luciano Coutinho, president of the Brazilian Development Bank, BNDES, the country’s main long-term lender, said on Thursday the currency’s fair value was probably between R$2.20 and R$2.35 to the dollar – on Thursday it closed at R$2.44.

Among the major emerging markets currencies the real is the second-worst performer against the dollar this year, with only the South African rand losing more value.

“It’s highly probable that we are entering a lasting cycle of a stronger dollar that will tend to create favourable conditions in the medium term for our competitiveness,” Mr Coutinho said.

beyondbrics

Beyond brics

Emerging markets: News and comment from more than 40 emerging economies

Brazil’s central bank said in its statement that it would on Monday to Thursday offer $500m a day in currency swaps to support the real, while on Fridays it would sell $1bn on the spot market through repurchase agreements.

“If judged appropriate, the central bank will take additional measures,” the bank said in the statement. The programme, which will last until December, follows intervention this year by the bank through derivative markets and other means worth about $45bn.

The move on Thursday was welcomed by traders as a market-friendly way of lowering volatility.

It stands in contrast to the currency controls and other methods adopted by the government during its so-called “currency war” – its campaign to stop the real from over-appreciating against the dollar at the height of the US Federal Reserve’s quantitative easing programme in 2011.

“They will increase predictability, which should be the most efficient way to take some of the volatility out of the system,” a trader at Nomura said.

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