# Samba effect
The **samba effect** is the January 1999 collapse and float of the [Brazilian real](https://www.edgepedia.org/brazilian-real), when Brazil abandoned the quasi-fixed exchange-rate regime in place since July 1994, the R$/US$ exchange rate rose roughly 78 percent within 45 days of floating, and Brazil later paired floating with inflation targeting.[1](https://www.imf.org/external/np/loi/1999/030899.htm) • [2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) • [3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en) • [4](https://ies.princeton.edu/pdf/E217.pdf) The name echoes the "tequila effect" coined after Mexico's 1995 crisis.
| Key fact | Detail |
|---|---|
| Event | January 13, 1999: the central bank widened the exchange-rate band; January 15: the real was allowed to float[1](https://www.imf.org/external/np/loi/1999/030899.htm) |
| Exchange-rate path | R$1.21/US$ before the regime change; R$1.52 in January, R$1.91 in February, a low of R$2.15, stabilizing near R$1.65–1.70[1](https://www.imf.org/external/np/loi/1999/030899.htm) • [2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) • [4](https://ies.princeton.edu/pdf/E217.pdf) |
| Devaluation size | 78 percent in the first 45 days of floating; 48 percent over the first year[3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en) |
| Feared vs actual inflation | Observers predicted 30–80 percent inflation; actual 1999 inflation was 8.9 percent, within the 8 percent target's tolerance band[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) |
| Outcome | No banking crisis, no derivative-market collapse, no relevant business failures, no recession; GDP growth rose from 0.22 percent (1998) to 0.79 percent (1999), and 4.46 percent (2000)[3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en) |
| IMF support | A precautionary program backed by twenty countries and up to US$41.5 billion; the first US$9.2 billion tranche was disbursed less than a month before the float[4](https://ies.princeton.edu/pdf/E217.pdf) |
| Policy legacy | Floating plus inflation targeting, with targets of 8 percent (1999), 6 percent (2000), and 4 percent (2001) on the IPCA index[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) |
## Background: the Real Plan and the peg
Brazil's peg dated to the Real Plan, the stabilization program conceived from May 1993, when [Fernando Henrique Cardoso](https://www.edgepedia.org/fernando-henrique-cardoso) became finance minister.[4](https://ies.princeton.edu/pdf/E217.pdf) From the July 1994 monetary reform until January 1999 the central bank pegged the new real to the US dollar, initially at 1:1; after the Mexican crisis, in March 1995 it adopted a crawling band without preannounced depreciations.[5](https://www.cambridge.org/core/journals/journal-of-latin-american-studies/article/abs/brazilian-exchange-rate-crisis-of-january-1999/8A79B03BF3D7A9FDBB334345EBD51BF3) The quasi-fixed rate was the anchor of the anti-inflation fight: inflation fell from 2,477 percent in 1993 to 5.2 percent in 1997.[6](https://www.elgaronline.com/display/book/9781800377363/ch87.xml) (Contemporary journalism put inflation at more than 3,000 percent when the plan was enacted in 1994; the peer-reviewed figure of 2,477 percent for 1993 is used here.)[7](https://archive.nytimes.com/www.nytimes.com/library/world/americas/011699brazil-primer.html)
The crawling band allowed steady, controlled depreciation: the market rate depreciated 13.9 percent in 1995, 7.1 percent in 1996, 7.3 percent in 1997, and 8.3 percent in 1998, reaching 1.2054 to the dollar by December 1998.[5](https://www.cambridge.org/core/journals/journal-of-latin-american-studies/article/abs/brazilian-exchange-rate-crisis-of-january-1999/8A79B03BF3D7A9FDBB334345EBD51BF3) By the end of 1998 price movements were negative, yet the controlled devaluation built into the crawling peg could not be sustained.[8](https://www.dallasfed.org/~/media/documents/research/swe/1999/swe9902c.pdf)
## How the crisis unfolded
The crisis grew out of two post-Real Plan developments: widening fiscal and external imbalances, and the 1997–98 Asian and Russian financial crises.[9](https://www.diw.de/documents/publikationen/73/diw_01.c.38558.de/dp304.pdf) By mid-1998 Brazil ran a primary fiscal deficit, its domestic public debt of 40 percent of GDP was mostly short-term, and the current account deficit approached 5 percent of GDP.[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) A divided coalition government facing impending elections eschewed fiscal austerity and correction of the external misalignment while markets were already unsettled.[9](https://www.diw.de/documents/publikationen/73/diw_01.c.38558.de/dp304.pdf)
**The Russian shock.** [After Russia](https://www.edgepedia.org/after-russia) defaulted on August 17, 1998, capital flows to Brazil came to a halt. Brazil's EMBI spread jumped from 671 basis points on August 6 to 834 on August 18 and 1,524 on August 27, 1998.[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) • [3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en) A US$41.5 billion IMF-coordinated loan, agreed on the assumption of very low rollover rates and filled out with multilateral and bilateral loans, let Brazil end 1998 in uneasy calm.[4](https://ies.princeton.edu/pdf/E217.pdf) • [10](https://www.kansascityfed.org/documents/3542/1999-S99frag.pdf) • [9](https://www.diw.de/documents/publikationen/73/diw_01.c.38558.de/dp304.pdf)
**January 1999.** [Confidence](https://www.edgepedia.org/confidence) weakened again in January despite a December package of compensating fiscal measures, amid concerns over the commitment of some important states to adjusting their finances.[1](https://www.imf.org/external/np/loi/1999/030899.htm) The Minas Gerais debt moratorium in early January broke the calm.[9](https://www.diw.de/documents/publikationen/73/diw_01.c.38558.de/dp304.pdf) On January 13 the new central bank chief, Francisco Lopes, widened the band, an effective devaluation of about 8 percent, even as analysts warned the real was overvalued by as much as 30 percent and that 8 percent would not be enough.[11](https://www.latimes.com/archives/la-xpm-1999-jan-14-mn-63365-story.html) Pressures did not abate, and on January 15 the real was allowed to float.[1](https://www.imf.org/external/np/loi/1999/030899.htm)
## By the numbers
The exchange rate averaged R$1.52/US$ in January and R$1.91/US$ in February 1999, against R$1.21/US$ before the regime change; it plummeted to R$2.15 in February.[1](https://www.imf.org/external/np/loi/1999/030899.htm) • [2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) One account gives the path as R$1.22 to a frightening R$2.16 before stabilization at about R$1.65–R$1.70.[4](https://ies.princeton.edu/pdf/E217.pdf) The R$/US$ rate rose 78 percent in the first 45 days of floating and showed a devaluation of 48 percent over the first year.[3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en)
The feared macroeconomic collapse did not materialize. Observers had predicted inflation of 30–80 percent and 1999 GDP growth of −3 to −6 percent; actual inflation was 8.9 percent, within the tolerance interval, and GDP growth was estimated near 1 percent for 1999.[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) The March 1999 program itself had projected GDP declining 3.5–4 percent for the year and CPI rising over 10 percent in the first half.[1](https://www.imf.org/external/np/loi/1999/030899.htm) The current account deficit fell from $33 billion to $24 billion, financed by record foreign direct investment inflows of $30 billion, a 50 percent increase equal to about 5 percent of GDP.[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) • [3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en) One cost: net public sector debt rose 7 percentage points of GDP, from 42.3 percent in December 1998 to 49.4 percent by end-1999.[3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en)
## Aftermath and policy shift
The policy response combined tighter fiscal policy, tighter monetary policy anchored by an inflation target, and external financial support.[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) The exchange rate stabilized and fell below 2 per dollar quickly, and inflation expectations came down, allowing interest rates to be cut from 45 percent to 42 percent and then 39.5 percent during March 1999; by June the panic was over and debt maturities lengthened from six months to about a year.[10](https://www.kansascityfed.org/documents/3542/1999-S99frag.pdf) • [2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) [Inflation](https://www.edgepedia.org/inflation) targets were set at 8 percent for 1999, 6 percent for 2000, and 4 percent for 2001 on the IPCA index with a 2-point band.[2](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf) GDP growth reached 4.46 percent in 2000, and CPI inflation fell to 5.97 percent.[3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en)
## How it compares with Asia, Russia, and Argentina
The January 1999 float was benign by the standards of its sibling crises: no banking crisis, no collapse in derivative markets, no relevant business failures, and no recession.[3](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en) The reason is structural. Much Brazilian government debt was indexed to dollars, so a big currency drop would have sharply increased the government's obligations and heightened the risk of default.[7](https://archive.nytimes.com/www.nytimes.com/library/world/americas/011699brazil-primer.html)
**Contagion.** The January 13 devaluation roiled markets immediately: Argentina's index plunged 10.2 percent, Mexico's lost 4.6 percent, Peru fell 5.5 percent, and Mexico's peso initially dropped 10 percent before recovering two-thirds; commentators warned of a tequila effect in Argentina.[11](https://www.latimes.com/archives/la-xpm-1999-jan-14-mn-63365-story.html) Brazil, the eighth-largest economy, was the locomotive for Latin America, which absorbed one-fifth of US exports, so its difficulties raised fears of currency realignments across the developing world.[12](https://www.nytimes.com/library/world/americas/011499brazil-rdp.html)
## References
1. [Brazil Memorandum of Economic Policies, March 8, 1999 Letter of Intent, IMF](https://www.imf.org/external/np/loi/1999/030899.htm)
2. [Arminio Fraga (2000). Monetary Policy During the Transition to a Floating Exchange Rate: Brazil's Recent Experience. Finance & Development, IMF](https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/fraga.pdf)
3. [Notes on the Brazilian Crisis of 1997-99, Revista de Economia Política](https://www.scielo.br/j/rep/a/whK5vcMtVKQCCktWYwtSbYg/?lang=en)
4. [Princeton International Economics Section essay on the Brazilian exchange-rate regime, 1993–99](https://ies.princeton.edu/pdf/E217.pdf)
5. [The Brazilian Exchange Rate Crisis of January 1999, Journal of Latin American Studies](https://www.cambridge.org/core/journals/journal-of-latin-american-studies/article/abs/brazilian-exchange-rate-crisis-of-january-1999/8A79B03BF3D7A9FDBB334345EBD51BF3)
6. [The Brazilian currency crisis of 1999, Elgar Encyclopedia of Financial Crises](https://www.elgaronline.com/display/book/9781800377363/ch87.xml)
7. [Why Brazil Did What It Did and What Options Are Left, New York Times, January 16, 1999](https://archive.nytimes.com/www.nytimes.com/library/world/americas/011699brazil-primer.html)
8. [Brazil: The First Financial Crisis of 1999, Federal Reserve Bank of Dallas, Southwest Economy](https://www.dallasfed.org/~/media/documents/research/swe/1999/swe9902c.pdf)
9. [An Investigation into the 1999 Collapse of the Brazilian Real, DIW Discussion Paper 304](https://www.diw.de/documents/publikationen/73/diw_01.c.38558.de/dp304.pdf)
10. [New Challenges for Monetary Policy, Jackson Hole Symposium Proceedings 1999 (Fraga), Kansas City Fed](https://www.kansascityfed.org/documents/3542/1999-S99frag.pdf)
11. [Brazilian Devaluation Delivers Global Jolt, Los Angeles Times, January 14, 1999](https://www.latimes.com/archives/la-xpm-1999-jan-14-mn-63365-story.html)
12. [The Overview: Brazil Devalues Its Currency 8%, Roiling Markets, New York Times, January 14, 1999](https://www.nytimes.com/library/world/americas/011499brazil-rdp.html)
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