Brazil’s Economic Struggles Amid Rising Dollar

By Jamie McGeever
ORLANDO, Florida (Reuters) – Few countries have been hit harder by the soaring dollar and U.S. bond yields than Brazil. But the country has one advantage: as U.S. President Donald Trump prepares to levy punitive tariffs on many of America’s major trading partners, Brasilia is unlikely to be in his protectionist line of fire.

Brazil has not run a trade surplus with the United States since 2007. However, with its economy and markets at a delicate juncture, Brazil cannot be complacent.

Economic Challenges

Brazil is once again the classic case of an emerging economy under pressure. Financial conditions are the tightest since 2016, according to Goldman Sachs, with real yields above 10%, the highest in over 15 years, and its currency at an all-time low.

The central bank has sought to prop up the real, hiking rates by 100 basis points last month and promising another 200 bps to come. While Brazil’s primary fiscal balance is healthy, the soaring interest burden is a drain on public finances.

The central bank also heavily intervened in the FX market to support the real, spending $28 billion of reserves in December alone, marking the largest drop in 19 years.

Investor Sentiment

Investors are understandably anxious, pulling a net $12.6 billion from debt and equity funds in December, the second-biggest outflow since 1995.

Special Case in Trade

Will Trump’s return to the White House add fuel to the fire? Brazil’s position among large emerging countries is unique. Among America’s top 20 trading partners in 2023, Brazil was the only one that didn’t export more than it imported.

Although Brazil last year posted a hefty trade surplus of $74.6 billion, its bilateral trade balance with the U.S. remained flat. Until last year, Brazil had run a trade deficit with the U.S. every year since 2007. Thus, Trump cannot claim Brazil is “taking advantage” of the U.S.

Potential Conflict

However, tensions could arise in various areas. Trump’s and Brazil’s left-wing leader Luiz Ignacio Lula da Silva have stark ideological differences, with existing friction over social media control.

Moreover, Brazil was a target of indirect salvos from Trump when he criticized the BRICS group of nations for allegedly plotting to abandon the dollar. More critically, Brazil could face collateral damage if Trump disrupts global trade, particularly if it impacts China, its largest trading partner.

Economic Lessons from Trump’s First Term

Brazil’s earlier experience during Trump’s presidency presents both hope and concern. Initially, tariff disputes between the U.S. and China benefitted Brazil, as China reduced reliance on U.S. agricultural goods, increasing imports from Brazil instead.

However, China might respond to Trump by enhancing U.S. agricultural imports in exchange for fewer tariffs, jeopardizing Brazilian exporters.

Lula may also react to Trump’s potential disruptions with populist and protectionist measures, leaving Brazil’s economy vulnerable while the U.S. remains resilient.

(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever Editing by Christina Fincher)