Brazil Scales Back Currency Support as Real Sinks to 12-Year Low
11:55 AM BRT
March 24, 2015
Aldo Mendes, executive director of monetary policy at Banco Central do Brasil. Photographer: Douglas Engle/Bloomberg
(Bloomberg) — Brazil’s central bank scaled back its support for the real, ending sales of new foreign-exchange swaps that had swelled the government’s liabilities.
Officials will stop the auctions at the end of this month, the central bank said in a statement Tuesday. The monetary authority will continue rolling over old contracts, which are equivalent to selling dollars in the futures market, depending on demand and may still hold auctions for dollar loans.
The program, which began in 2013 as part of an effort to limit volatility, wasn’t enough to keep the Brazilian real from plunging 26 percent over the past year to the weakest level since 2003 this month. The swaps became a fiscal liability after growing to about $113 billion, according to Alberto Ramos, the chief Latin America economist for Goldman Sachs Group Inc.
The change is “a very welcome move and a step forward to facilitate the needed macroeconomic adjustment,” Ramos wrote in a note to clients. An over-valued currency “hurt the competitiveness of a number of tradable sectors in the economy and contributed to the significant widening of the current account deficit.”
Brazil’s real has plunged on concern the country could lose its investment-grade credit rating. Analysts predict the economy will shrink this year, even as inflation accelerates to the fastest in a decade. President Dilma Rousseff is struggling to shore up state finances after more than a million Brazilians joined street demonstrations to protest government corruption.
Central bank President Alexandre Tombini told lawmakers Tuesday that the sale of swaps supporting the currency has fulfilled policy makers’ objectives, while adding that extending the maturities of existing hedges is appropriate in the short and medium term. The swaps program has played an important role in promoting financial and economic stability as well as reducing currency volatility, he said.
The real’s slide in the past 12 months made it the second-biggest loser among 24 emerging-market currencies tracked by Bloomberg, surpassed only by the Russian ruble’s 38 percent tumble against the dollar. Twenty-five out of 31 major currencies have lost ground against the greenback in 2015 as the Federal Reserve signaled plans to raise interest rates and more than 20 nations loosened monetary policy.
Brazil’s intervention had already been scaled back over the years. In 2013, the central bank auctioned $1 billion of dollar loans every Friday and offered the equivalent of $500 million of foreign-exchange swaps Monday through Thursday.
Last year, the weekly total for foreign-exchange swaps shrank to $200 million. In 2015, the bank has offered only as much as $100 million a day in swap auctions. The real touched 3.3148 per dollar on March 20 and traded at 3.1395 on Tuesday.
While the swaps don’t change the supply of physical dollars in Brazil, they support the real by meeting demand from investors who want to hedge against the risk of the decline in the Brazilian currency. They also boost onshore dollar loan rates, encouraging commercial banks to bring the U.S. currency into Brazil to profit from the higher rates onshore.
“This is good not only because they’ll stop increasing their position, but because the daily auctions create more noise in the foreign-exchange market,” Roberto Padovani, chief economist at Votorantim Ctvm, said by phone from Sao Paulo. “They announce the auctions and there’s a lot of turbulence.”