Desvalorizacao

What Is Desvalorizacao?

Desvalorização, in the context of economia internacional, refers to the deliberate downward adjustment of a country's official exchange rate relative to other currencies, typically by a government or central bank operating under a fixed or semi-fixed câmbio regime. This policy action makes a nation's exports cheaper and imports more expensive, aiming to improve its trade balance. Unlike depreciação, which occurs due to market forces in a floating exchange rate system, desvalorização is a conscious and official decision.

History and Origin

The concept of desvalorização is intrinsically linked to the history of managed exchange rate systems, particularly prominent before the widespread adoption of floating rates in the latter half of the 20th century. Under the Bretton Woods system, established in 1944, countries maintained fixed exchange rates to the U.S. dollar, which itself was pegged to gold. When a country faced persistent balance of payments issues, a formal desvalorização of its currency, often after consultation with international bodies like the International Monetary Fund (IMF), was a mechanism to restore external equilibrium.

A notable historical instance of desvalorização occurred in Brazil in January 1999. After a period of maintaining a crawling peg system for its moeda, the Real, to the U.S. dollar, increasing economic pressures and capital outflows forced the Brazilian central bank to abandon the peg and allow the Real to float, resulting in a significant desvalorização. The Brazilian Real dropped by approximately 8% in a single day after the central bank removed its mini-band trading system, signaling a major shift in monetary strategy.

Key Takeaw⁴ays

• Desvalorização is an official, deliberate reduction in a currency's value under a fixed or semi-fixed exchange rate.
• It aims to make exports more competitive and imports less attractive.
• This policy can improve a nation's balança comercial and stimulate domestic production.
• Potential drawbacks include increased inflação and reduced purchasing power for citizens.
• It is distinct from currency depreciation, which is driven by market forces.

Formula and Calculation

The calculation of desvalorização typically involves comparing the new exchange rate to the old one. If a currency moves from, for example, 1 unit of foreign currency per X units of domestic currency to 1 unit of foreign currency per Y units of domestic currency (where Y > X), the percentage desvalorização can be calculated as:

Where:

• Nova Taxa de Câmbio is the amount of domestic currency needed to buy one unit of foreign currency after the desvalorização.
• Antiga Taxa de Câmbio is the amount of domestic currency needed to buy one unit of foreign currency before the desvalorização.

This formula expresses the change in the domestic currency's value relative to the foreign currency.

Interpreting the Desvalorização

Interpreting desvalorização involves understanding its potential economic impacts. A desvalorização typically signals that a country's currency was overvalued, making its goods expensive internationally and contributing to a déficit comercial. By making exports cheaper and imports pricier, desvalorização aims to correct trade imbalances.

While it can boost export-oriented industries and potentially increase the produto interno bruto by shifting demand towards domestic goods, it also has downsides. Consumers face higher prices for imported goods, which can lead to a higher custo de vida and inflationary pressures within the economy. The success of a desvalorização often depends on the elasticity of demand for a country's exports and imports.

Hypothetical Example

Consider a hypothetical country, "Economia Verde," which maintains a fixed exchange rate for its currency, the "Verdinho" (VD), against the U.S. Dollar (USD).
Initially, the exchange rate is 1 USD = 5 VD.

Economia Verde is facing a persistent trade deficit, as its exports are too expensive in the global market. To stimulate its economy and boost exports, the Central Bank of Economia Verde decides to implement a desvalorização.

The new official exchange rate is set at 1 USD = 7 VD.

Using the formula:

This means the Verdinho has been devalued by 40% against the U.S. Dollar. Now, a product that cost 5 Verdinhos (or 1 USD) before the desvalorização will cost only about 0.71 USD (5/7) for international buyers, making it more competitive. Conversely, a product that cost 1 USD will now cost 7 Verdinhos instead of 5, making imports more expensive for citizens of Economia Verde.

Practical Applications

Desvalorização is a tool primarily used in política monetária when countries operate under managed exchange rate regimes. Central banks and governments might resort to desvalorização to address chronic trade imbalances or to make their economy more competitive internationally.

For instance, in December 2023, Argentina's new government implemented a sharp desvalorização of its peso by over 50% against the U.S. dollar, as part of a "shock therapy" approach to tackle the country's severe economic crisis, including rampant inflation and a large fiscal deficit. This drastic measure aimed to stabilize the economy and pav³e the way for a more sustainable fiscal path. Another application is to replenish dwindling reservas cambiais by encouraging exportações and discouraging importações, thereby increasing the inflow of foreign currency.

Limitations and Criticisms

While desvalorização can offer short-term economic benefits, it is not without limitations and criticisms. One major concern is the potential for increased inflation, as imported goods become more expensive, raising the overall custo de vida and potentially leading to a wage-price spiral. This can erode the purchasing power of the domestic moeda and destabilize the economy.

Furthermore, a desvalorização can damage international confidence in a country's economic management, potentially discouraging foreign investment and increasing the cost of borrowing from international markets. The IMF, for example, has warned that currency devaluations alone are often insufficient to fix a country's underlying economic problems, especially if structural issues contributing to trade imbalances are not addressed. An IMF working paper also suggests that the trade-boosting effects ²of currency weakening can be modest in the short term, with most of the impact coming from reduced imports rather than increased exports.

Desvalorização vs. Inflação

Desvalorização and inflação are related but distinct economic phenomena. Desvalorização specifically refers to an official action by a government or Banco Central to reduce the value of its currency against other currencies within a fixed or managed exchange rate system. It directly impacts the exchange rate in the mercado de câmbio.

Inflation, on the other hand, is a general increase in the prices of goods and services within an economy over a period, leading to a fall in the purchasing power of money. While desvalorização can contribute to inflation (by making imports more expensive), inflation can also occur independently due to various domestic factors, such as excessive money supply growth or supply-side shocks. The key difference lies in the nature of the change: desvalorização is a policy decision affecting the external value of a currency, whereas inflation is a broader economic outcome affecting the internal purchasing power.

FAQs

Why do governments choose desvalorização?

Governments typically opt for desvalorização to make their country's exports more competitive in the global market and to reduce a persistent trade deficit. It can also be used to discourage importações and stimulate domestic production.

What are the immediate effects of a desvalorização?

Immediately after a desvalorização, imported goods become more expensive, and exported goods become cheaper for foreign buyers. This can lead to an increase in domestic prices (inflation) and a potential improvement in the trade balance.

Does desvalorização always lead to economic recovery?

Not necessarily. While desvalorização can help correct external imbalances, its success depends on various factors, including the elasticity of exportações and importations, and the government's ability to control inflationary pressures. Without accompanying structural reforms, its benefits can be limited or short-lived.

How does desvalorização affect a country's debt?

If a country has significant foreign-currency denominated debt, a desvalorização makes that debt more expensive to repay in local currency terms, potentially increasing the burden on the government and private entities.

Is desvalorização common today?

With many countries now operating under floating exchange rate regimes, formal desvalorização (a policy adjustment) is less common than in the era of fixed exchange rates. Instead, countries with floating currencies experience depreciação due to market forces, which serves a similar function of adjusting the currency's value.