Rio’s $5.00 Big Macs and the Danger of Dutch Disease

Things are getting expensive in Brazil, especially the price of a Big Mac!  Last time we were in Brazil, Big Mac’s were offered at the equivalent of $US.70 at the same time they were bid at US$2.75 in New York.  We tried to arb the two markets, but the trade quickly became stale!

In their article, Why is a Big Mac in Brazil so expensive, the GlobalPost warns the country risks catching Dutch Disease as the surge in commodity prices and capital inflows generates a spending binge , while a stronger currency risks decimating the manufacturing base,

Seven years ago, a Big Mac in Brazil cost less than $1.50. Try buying McDonald’s signature burger here today, and you need the equivalent of a $5 bill.

The investment bank Goldman Sachs last year ranked it among the world’s “most overvalued” currencies, and it has kept rising since — gaining nearly thirty percent in 18 months…

That flow of money – along with Brazil’s heavy exportation of commodities like iron ore, soybeans and oil – has led some observers to conclude Brazil has come down with an economic malady called “Dutch Disease.”

The term was coined in the 1970s to describe the paradoxical way a North Sea oil boom had decimated the Dutch economy. In theory, the disease works like this: The discovery of oil draws a surge of foreign money into a country’s economy, both to buy the oil and invest in the oil industry. All this demand for the country’s currency drives up the exchange rate. This in turn means anything the country manufactures and tries to sell abroad – let’s say a pair of shoes for example – is suddenly less competitive.

This is a long-term risk and explains the country’s concern over the rapid appreciation of its currency.   Brazil remains one of our favorite markets, however,  and we’ll continue to monitor the direction and level of reserves as an early warning indicator of an elevation of risk.  

This entry was posted in BRICs, Commodities, Currency, Equities, Monetary Policy, Sovereign Risk and tagged , , , . Bookmark the permalink.

3 Responses to Rio’s $5.00 Big Macs and the Danger of Dutch Disease

  1. Andy Szabo says:

    Time for a Big Mac Attack on Real?

  2. Pingback: Beijing’s $2.18 Big Mac and $1,400 Golden Arches? | Global Macro Monitor

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