Value Chain; Currency Fluctuations In 2011-2013, Brazil’s economy was flourishing in many dimensions, except for a significant and worsening trade deficit with China in 2011-2012. The root of the problem was that the value of the Brazilian currency (the real) had increased by 10% relative to the Chinese currency (the yuan) over the prior year. The increased value of the real meant that Chinese imports were relatively cheap and Brazilian exports were relatively expensive, in currency fluctuation terms. The excess of imports over exports thus heightened the trade deficit. An analysis of the matter identified the relatively high Brazilian interest rates (at almost 11% throughout this period) that attracted foreign investors.
In contrast to this scenario, the value of the Brazilian currency fell by 37% relative to the yuan and 30% relative to the U.S. dollar in the period January 2012 to January 2015. Some say the real was overvalued and the reduction helped to get the currency exchange back into balance. Others say the reduction in value was due to capital outflows from Brazil and a loss of confidence in the country.
Required Briefly explain how you would expect the currency fluctuation issues facing Brazil to affect the value chains of Brazilian companies.
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