Posts Tagged The Brazilian Real

This is deep thinking and insightful.

Brazil – Ten thoughts on FX – Macro Brazil

It is difficult to offer a conclusive opinion on what may be in the making. Here’s a list of ten thoughts on FX rules and trends:

1. The Central Bank did announce that studies are under way to reform FX rules. No specific measure was announced. The CB’s agenda may or may not include the three measures noted in today’s editions of “Folha de Sao Paulo” (to reopen BRL-denominated globals; to let foreign investors deposit margins abroad; to let banks obtain funding through debentures).

2. As background: for years, Brazil’s FX regulations have moved towards greater freedom, simpler rules, and improved oversight. This is a natural consequence of the end of chronic dollar scarcity. It is also part of a broader drive towards market-friendliness.

3. The CB will certainly aim at these long-term objectives – i.e., take steps to enhance convertibility. The recent appreciation of the BRL provides extra motivation.

4. The CB appears to be testing ideas to lean against the wind in the appreciation process (anything better than taxes on equity flows). They’re securing a place of their own in a discussion that, recently, became the realm of the Finance Ministry.

Where do we come from?

5. In the past, flows were so restricted that even legitimate transactions often happened in the “paralelo” (the illegal black market). “Evasão de divisas” is a local expression denoting illegal outflows. It is widely used. Curiously, this ”evasion” is part of Brazil’s criminal terminology, just as tax evasion. Long-standing prejudices subsist. Any cross-border flow is often construed as suspicious in the public’s eye – also in Courts.

6. Even after much progress, a system of two official markets lasted until 2005: the “floating rate market”, for banks, and the “commercial rate market”, for banks and others. Upon unification, additional changes (in the right direction) were introduced.

7. FX rules are still a patchwork of quick-fixes created over years of scarcity and risk. Streamlining them is not a one-day task. While the CB has a good hold on the issues, they normally tread cautiously in Congress. This is partly out of fear that changes introduced by lawmakers may damage what amounts to a very complex legal architecture.

8. That’s why reforms come in waves with long intervals in between.

Where do we go?

9. This long long-term discussion got mixed up with certain short-term concerns. The recent IOF tax was, in a way, a crack in the wall. Additional measures of this type cannot be rule them out.

10. Other than that, any help in straightening up the country’s still-confusing FX rule book would be most welcome. The CB would probably take a central role, as usual. Alas, it would require the kind of congressional support that is probably not available now, and much less so as we head to an election year.For this reason, it will be hard for any proposition to move in Congress in 2010.
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Offshore Banking

We receive numerous market reports and internal research from financial insitutions all over the world. One them, out of a bank in Brazil, had this quote, “BRAZIL FLOW: Overall balanced with foreigners being net buyers and locals net sellers. Highlights were foreigners 2W on CYRE3, foreigners selling RDCD3, locals buying VALE5 and selling DURA4.”

More and more Foreign Direct Investment is entering Brazil.