According to the Big Mac Index, the Brazilian Real is overvalued nearly 150 % to the US Dollar. This gives Brazil the dubious title “the most overvalued currency in the world”. This means additional risk to an already high risk market for foreign firms looking to get started in Brazil.
Beefed-up burgernomics was the title in this weeks’s The Economist. Celebrating its 25th year, the Newspapers Big Mac Index is a “lighthearted guide to whether currencies are at their ‘correct’ level”. Yet, since its inception, the Index has been the focus of several academic studies. Today, the Big Mac Index has made its way into Economics textbooks and MBA curriculum worldwide.
Growing mature, the Big Mac Index is “beefed up” for an even deeper insight into the true value of currencies. New this year is adjusting for GDP per person. Applying this, gives another dimension to the beloved index.
Following the Index, Norway (+104 %), Switzerland (+98%) and Sweden (+88%) all appear to have highly overvalued currencies to the USD.
But Brazil is truly cooking
But adjusting for GDP per person gives another picture. Using this, Brazil jumps ahead with 149% overvalue to the Dollar. Columbia gets the second place, with a ‘mere’ 108%.
Economists have long been raising the red flag, warning of overheating in the Brazilian economy. Professor Nouriel Roubini has argued repeatedly for the need for new laws and economic policies. Stating he’s “positive, but not but not as euphoric,”. More recently, The Economist labeled Brazil “Too Hot”, and “heading for trouble”.
Both The Economist and Roubini call for stronger policies and deeper reforms. In December 2009, Roubini stated “Brazil’s economy can grow more than 6 percent a year if the government makes structural changes to education and infrastructure”. But, our recent travels and meetings in Brazil show the difficulties in implementing these reforms. According to one of our business contacts, the current administration led by Dilma, “is just an administration in waiting. Waiting for Lula to return after her term is over”. According to this consultant, the reforms necessary just are not getting of the ground under the current regime. In June this year, The Economist echoed this, saying “She must push through unpopular measures to cool the economy and sustain growth in the medium term, and to fulfill her promise to make the state more efficient.”, but this becoming increasingly difficult due to internal party politics and suspicions of corruption among her leading economist.
Risk on the rise
For foreign firms looking to get into the growing Brazilian economy all this means more risk. Given the status as the world’s most overvalued currency to the USD, it is more than likely than the Brazilian Real is heading for a correction. With a Big Mac Index of +149 % to the USD, a 20 – 40% correction of the real is not an unlikely scenario. Companies establishing themselves in Brazil, need to hedge themselves and plan for exciting but turbulent times ahead. But with turbulence and risks come also opportunities; potentially great opportunities in an emerging Brazil.