Ministry of Economic system evaluates creating objectives for worldwide reserves
The objective is to reduce exchange rate volatility; Brazil holds US$ 338.7 billion and Guedes has already defended the sale of part of this asset
Minister Paulo Guedes’ team (Economy) is considering proposing a target for the level of international reserves, associated with a margin of tolerance for their fluctuation, with the aim of reducing excessive exchange rate volatility.
The discussion becomes public less than 20 days before the first round of presidential elections. The exchange rate is a variable that influences wholesale and consumer prices and, between 2021 and 2022, it was a factor of pressure on inflation, which reached double digits.
Brazil currently holds US$ 338.7 billion in reserves, formed by assets in foreign currency and that work as a kind of safety cushion for the country against external shocks, such as currency crises or capital flight.
The idea under discussion is to make explicit the level of reserves considered ideal by the government, from which the Central Bank should implement its exchange rate policy.
If reserves are higher than the target, it would be a sign of an excessively devalued real, and the BC would have to sell international assets — expanding the supply of dollars in the domestic market and reducing the exchange rate.
In the opposite direction, with reserves below the target, it would be the password for the BC to rebuild its reserves, a movement that would generate a devaluation of the real against the dollar.
The fluctuation band would give a certain margin for the work of the monetary authority, similarly to what happens in the inflation targeting regime. The BC sets the interest rate, but there is some room to absorb fluctuations. In addition, the inflation target is defined by the CMN (National Monetary Council), with the participation of the Minister of Economy and the Special Secretary of the Treasury and Budget.
The argument of the defenders of the measure is that the BC’s action is already guided today by a “non-public decision” on the level of reserves, and that the change would make this information public. Furthermore, the institution is seen as the manager of this mattress, but not the “owner” of it.
The studies were published by the newspaper O Globo and confirmed by the Sheet. Sought after, Ministry of Economy and Central Bank did not want to manifest.
Experts say that the measure can give the market more predictability on the trajectory of the exchange rate, mitigating its volatility. But there are those who warn of the risk of the mechanism imposing a “straitjacket” on the work of the BC, which had its autonomy formally approved in the Jair Bolsonaro (PL) government.
The institution already has a series of instruments to operate in the foreign exchange market, in case it deems it necessary in the face of critical situations, in which the currency has strong variations.
When you need to pursue a target for the level of reserves, there is a risk that your action will be limited by the bands. Faced with the need to give up reserves to throw dollars in the market, for example, the sale would have to stop when the target floor is reached.
The situation is recognized within the government and, in internal assessments, it could be resolved with another instrument, called a repo transaction. The BC delivers to institutions a public bond in exchange for currency, with a commitment to undo the exchange in two or three months. This transaction would help remove excess reais, reducing pressure on the exchange rate – with the side effect of raising public debt until the level of reserves returns to the target.
The adequate level of foreign exchange reserves has generated discussions among economists and even among public bodies. In 2020, the TCU (Tribunal de Contas da União) issued an alert to the government about the cost of maintaining international reserves, since the remuneration received for them is lower than what Brazil pays to finance itself in the market.
Guedes has already defended the sale of reserves at different times. In November 2020, he said the measure was a government option to reduce public indebtedness.
“The debt has to fall, and the way to do that is to sell assets, privatize, deleverage public banks, reduce the internal deficit and even sell some reserves”, he said. At the time, the idea was not well received by the financial market.
According to reports, Guedes has defended the banded target system for reserves at internal ministry meetings, as part of a general overhaul of the fiscal, exchange rate and monetary policy framework. Another arm would be the creation of a rule that has in the gross debt a reference to allow or not a flexibilization of the spending ceiling, which limits the advance of expenses to inflation.
The two measures (for reserves and for indebtedness) would be forwarded independently. The preliminary analysis is that it would be necessary to submit a bill to formalize the creation of the new goal to be followed by the BC.
Privately, some financial market agents express concern that the sale of reserves will help the government to reduce the government’s gross debt and facilitate the easing of the spending ceiling – an intention that is denied by members of the economic team.
Luiz Fernando Figueiredo, former director of the BC and founding partner of Mauá Capital, sees the creation of a “well-crafted” framework on the volume of reserves that Brazil should have as positive, but he emphasizes that it is necessary to know the drawing in depth.
“I don’t think it’s a bad thing that you create a certain rule that helps economic agents understand the action-reaction function of the BC and the government in relation to the management of the exchange market itself, letting it fluctuate, but helping it not have a lot of volatility”, he says. “The devil is in the details to understand this proposal well”, ponders Figueiredo.
According to him, the topic has already been discussed on a few occasions, one of them when Ilan Goldfajn was the president of the monetary authority, between 2016 and 2019.
Economist Heron do Carmo, a professor at FEA-USP (Faculty of Economics and Administration at the University of São Paulo), defends freer action by the autarchy and believes that, by interfering with the exchange rate, the government can compromise other BC goals, such as inflation.
“It’s bad to put restrictions on this kind of thing. BC can increase reserve volume or reduce it depending on the circumstance without having to have a straitjacket,” she says.
“Whenever a band is placed, it ends up having implications for other variables, for example, foreign exchange reserves are related to monetary policy. So it’s something I would rather let go of,” he adds.