Positive side of BRL depreciation: improving the outlook for manufacturing

The positive side of the painful adjustment is the increasingly likely chance of regaining the lost competitiveness on the external front. The manufacturing sector contributed over 15% of GDP and nearly 55% of total merchandise exports until almost 2008, when the sharp appreciation of the BRL (2009 onwards) and the real effective exchange rate led to a collapse in the manufacturing sector's growth and competitiveness. 

"We have been saying for quite some time now that in the absence of reforms in the labour market, the only way to achieve external competitiveness was via the currency depreciation", says Societe Generale.

Heavy BRL depreciation can probably lift production and exports from the manufacturing sector and also help start a mild investment cycle in the medium term. While the real exchange rate index has not depreciated as much as the USD/BRL, with the September decline the REER is expected to move back to early 2005 levels.