Brazil: The New Brazilian Foreign Exchange Policy

Walter Douglas Stuber and Ricardo Baraldi Macedo

I - Introduction

The Brazilian government announced on January 18, 1999 its new foreign exchange policy, in an attempt to lower internal interest rates, currently maintained at extremely high levels, and thus spend less in defending the Brazilian currency, the "Real".

After years of rigid foreign exchange control, by means of Communiqué No. 6.565, of January 18, 1999 the Central Bank of Brazil ("Central Bank") stated that it will finally let the Real float freely in relation to other strong currencies. However, Communiqué No. 6.565 stresses that the Central Bank may, occasionally, intervene in the market to limit baseless swings in the value of the currency.

Such a decision came soon after the government tried to replace the range of values in which the currency was allowed to fluctuate (denominated "band"), with a far broader one1, aiming at containing the massive capital outflow experienced in recent weeks. Such band was set on January 14, 1999 at between 1.20 and 1.32 Reais to the United States Dollar ("Dollar"), whereas the former band was trading at 1.12/1.22, what triggered a devaluation in relation to the Dollar of approximately 8,26 %.

International investors, however, doubted that Brazil could hold the devaluation within the set limits and, expecting for further changes in the country's foreign exchange policy, continued pressuring for more devaluation. Faced with the fear of spending all its reserves fighting the markets, on January 15, 1999 the Central Bank gave up intervening to support the Real2 at its recently set limit, allowing it to trade freely against the Dollar. As a result of such restructuring, the Brazilian currency closed January with a global devaluation of approximately 40%.

II - The restructuring of exchange regulations

Once the free-floating system was definitely adopted, the government started to adjust its exchange control to the new policy. Below we transcribe the most important rules implemented by the government so far:

i) Circular No. 2857, of January 25, 1999, and Circular No. 2860, of February 01, 1999, of the Central Bank

As a result of such rules, the amount of resources national banks are allowed to borrow from international banks, in order to attend their clients' demands for foreign currency (called "sold position"), was raised in US$ 51.5 billions. According to the new regulations, Brazilian banks can now borrow from abroad, in order to supply foreign exchange markets, the equivalent to 100% of their Adjusted Shareholders Equities. Formerly, interbanking loans for such purposes were limited to pre-fixed values, which were much inferior to the institutions' Adjusted Shareholders Equities. For example, major banks (so called those with Adjusted Shareholders Equity greater than US$ 100 million) could have a maximum sold position of US$ 33.75 million. Now, limits for loans in foreign currency are equivalent to the institutions' Adjusted Shareholders Equities, regardless of their size.

ii) Resolution No. 2588 of January 25, 1999, of the Central Bank

Resolution No. 2588 determined the unification of the commercial and floating foreign exchange rates from February 1st. As of such date, the Central Bank is allowed to use the monetary reserves arising from the floating market - which englobes non-commercial and financial operations, such as tourism - to attend part of the demand of the commercial market - related to export-import operations and financial flows, and vice-versa.

With the above rules mentioned in items i) and ii), the government expects to increase the Dollar supply in the domestic market and thus reduce the pressure for more currency devaluation.

iii) Circular No. 2859 of the Central Bank, of January 27, 1999

By means of Circular No. 2859, the minimum maturity on new foreign loans was shortened to 90 days, instead of one, and the minimum period for rolling over existing foreign loans was lowered from 180 days to 90 days.

The measure is expected to help Brazilian companies which have borrowed money from abroad to renew their debt.

III - Conclusion

Despite the drastic reformulation of the foreign exchange policy, introduced by the above-mentioned rules, the Real shows no signs of stabilizing. On the contrary, foreign capital continues to leave the country and the government appears not to be able to lower domestic interest rates, as previously promised. This is the reason why many economists are predicting more changes in the country's economy.

São Paulo, February 1, 1999

The authors are respectively founding partner and articled clerk of the Brazilian law firm Amaro, Stuber e Advogados Associados. Amaro, Stuber e Advogados Associados is a member of Globalaw - the International Law Group, a network of independent law firms, as well as legal consultant to the Brazilian Association of Multi-Service and Commercial Banks ("ABBC").

1 Such move caused the resignation of Central Bank's president, Mr. Gustavo Franco, a strong opponent to the devaluation of the Real.

2 The new free-floating policy was extremely welcomed by stock markets (shares in São Paulo soared more than 30 percent on January 15, 1999).

The Brazilian Member of Globalaw - The International Law Group

The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.

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