Losing 29% of its value against the dollar in 2020 (the fourth year in a row, falling) and being among the worst global performances, the real will still show weakness in 2021. Analysts point out internal reasons for this, such as fiscal risks – mainly because of the huge stimuli given to mitigate the effects of the crisis caused by the pandemic of COVID-19 – and the low return of the currency for investors.

The general view is that, in 2021, the Brazilian economy will not fully recover from the fall in 2020, interest rates will not rise as much (to the point of offsetting the entry of more investors into the country), and the government accounts will remain susceptible to bad weather without the approval of new structural reforms.

“The real should return to around 5 (per dollar), 5.05,” said Bernardo Zerbini, one of those responsible for the macro-management strategy at AZ Quest. “The image of Brazil is still affected, not only by the fiscal issue but also by environmental policies. This is a (relevant) factor for foreign (investor),” he added.

On Wednesday, December 30, the last trading day of 2020, the real is heading for a 29% devaluation against the dollar. It is the second-worst performance in a list of 33 currencies, only better than the Argentine peso.

By Bank of America estimates, the real is expected to rise 1.4% against the dollar in 2021, while Asia’s main emerging currencies – which have been hit less in 2020 than their peers – will rise by an average of 3%.

The Russian ruble will gain almost 9% (after losing 16% this year), the South African rand will be practically stable (after falling 5% in 2020) and the Mexican peso will fall almost 10%, after falling 5% this year.

The prospect that the Brazilian currency will continue without much strength in 2021 occurs even considering that it would be cheap, according to the “fair value” exchange rate models, that take into account macroeconomic data such as terms of exchange, interest differential, growth differential economic, commodity prices, among others.

The Institute of International Finance (IIF) estimates that the negative misalignment of the real is the largest among the major emerging currencies. The IIF sees a “fair value” of 4.50 per dollar and, according to current quotations, the real is 13% below this level.

Deutsche Bank also sees the Brazilian currency as the cheapest in a set that includes currencies from rich and emerging countries. And, according to the most recent data from Fundação Getulio Vargas (FGV), the average misalignment of the real exchange rate in Brazil is around 34%, one of the largest in history.

The basic interest rate of the Brazilian economy (the so-called Selic) is at 2% and, according to analysts, it will end 2021 at 3.13%, by the median of the forecasts shown by the Central Bank’s weekly survey Focus.

This level would still leave Brazil with a lower interest rate than Mexico (4.25%), Russia (4.00%), and South Africa (3.50%) – in numbers projected by Bank of America –, three of the main competitors of Brazil in attracting foreign capital.

Brazil came to be the “paradise” of the carry trade (operations that profit from interest rate differentials between currencies), but not only lost this position but reversed its status, as the Selic fell, over the last two years, from 7% to 2%.

Another element that can limit gains to the real is a pause in the commodities rally – which, since the April lows, have skyrocketed 63% – and a smaller growth of the economy in 2021, according to UBS Brazil, which would have fiscal consequences.

According to Fabio Ramos, an economist at UBS Brasil, the models bring a fair value of around BRL 4.50 for each dollar, but the bank’s projection is BRL 4.95 at the end of 2021.

“We forecast a 0.7% drop in GDP in the first quarter (over the last three months of 2021). If this contraction is stronger, it may cause tension in the political scenario and increase pressure for the return of emergency aid,” he said, recalling that the financial aid giving by the government to unemployed and informal workers to mitigate the effects of COVID-19 ended in December.

But there are those who see the real even more appreciated in 2021. Santander maintained its projection that the US currency will close 2021 at BRL 4.60 and 2022 at BRL 4.15, estimates below market consensus.

“We take into account the scenario of the recovery of the global economy, the return of multilateralism with Joe Biden (elected president of the US), that Brexit will pass and that the trade war will not only not escalate, but will lose some decibels,” Ana Paula Vescovi, Santander’s chief-economist in Brasil, in a recent interview with Reuters, for whom this combination of factors would help the return of foreign flow to Brazil.

This scenario, combined with a reduction in fiscal risks through a commitment to the process of fiscal consolidation and respect for the constitutional spending ceiling, may reduce the premiums of Brazilian assets in general, leading the real to strengthen in a “more pronounced” way, evaluated Vescovi.

Translated by LABS