Smith International Legal Consultants, P.A.

If you follow Brazilian business, one of the primary concerns is the value of the Brazilian real versus the US dollar and the euro. Over the last few years, the movement of the real has driven or hurt the fortunes of many Brazilian businesses, and with the Copa America getting into high gear with the quarterfinal games over the weekend, now is a great time to look at the value of the real and its effect on doing business with Brazil.

How does the value of the Real relate to soccer? Look no further than today's Financial Times, which has two articles looking at the value of the real in light of current soccer player movement between Brazil and Europe. Yesterday, one of Brazil's largest soccer teams offered 40 million euros for Carlos Tevez, a value unthinkably high just a few years ago. Why can Corinthians make this kind of offer? The value of the real has risen significantly against the euro and made player pay packages much more lucrative.

According to the Financial Times, the value of the real is at a 12 year high. There are various causes cited by experts, including the massive inflow of foreign investment into Brazil and the policy of other countries who are keeping their interest rates very low. In fact, the Minister of Agriculture of Brazil recently said the increased strength of the real is the principal concern of the Brazilian government, and the government is doing everything in its power to control the slide.

So what does this mean for those doing business with Brazil? On the contractual side, parties should consider including a clause that adjusts the prices of imports from Brazil based on the value of the currency. For many Brazilian exporters, they are receiving revenues in dollars but paying expenses in reais. As the value of the real increases, the value of expenses increases while the value of profits decreases. Both sides should be prepared for this risk. Non-Brazilian companies also need to recalculate the costs of sending expat employees to Brazil. The value of the real is one of the single greatest factors pushing São Paulo and Rio de Janeiro to the tenth and twelfth spots as most expensive cities in the world. Finally, the value of the real has affected different industries in different ways, which investors should carefully consider. With a strong real, many Brazilian consumers travel abroad to buy consumer goods and luxury items in the US and Europe. This has been a huge boon to retailers, airlines, and the tourism industry. For each industry the impacts can be different, but keeping the role of the value of the real in mind is crucial.

Now, only one question remains, why "valorization"? It's pretty simple and a nice Portuguese lesson for the day: value=valor; valuation=valorization. I'm sure our Brazilian readers got it from the start.

Share this post