Brazilian co's Hedge Against Declining Currency
First Argentina, now Brazil, next?
By Jeb Blount
Rio de Janeiro, June 20 (Bloomberg) -- Paulo Roberto Ribeiro Pinto, chief
financial officer of a Brazilian power utility, is in a bind over the currency.
The more the real weakens, the more he has to buy dollars in the futures market
for Light Servicos de Eletricidade SA to secure a price for foreign debt payments
and dollar-indexed power contracts. This in turn drives up demand for dollars,
causing the real to weaken even more.
``About 60 percent of our debt is in dollars and if the currency weakens we have
to be protected; we have to buy dollars,'' said Ribeiro Pinto.
Demand for dollars from companies such as Light has helped drive the real down
21 percent against the dollar this year. Economists and company executives
expect the currency to decline further as the economy slows due to a power
shortage and concerns mount that Argentina may devalue its currency.
The plunging real will likely force the central bank to boost interest rates today for
the fourth time this year to support the currency and stem inflation.
Companies such as Light must also pay more to protect against a decline in the
real.
The cost of swapping for one year an interest rate in reais with a rate of interest
in dollars, a common means of hedging against a weaker real, has soared to
more than 16.25 percent, the highest rate since September 1999. At the
beginning of this year the cost was about 7 percent.
``Those who now have dollar debts and haven't bought hedge are the ones that
are desperate,'' said Pedro Thomazoni, head of proprietary trading on the
treasury desk of Lloyds TSB in Sao Paulo.
Locked in Price
Ribeiro Pinto has already locked in prices in reais for more than $200 million of
debt payments and dollar-denominated power supply contracts this year in the
futures market. Light had about $2.3 billion of dollar debt and no dollar revenue at
the end of March.
Currency-related charges have sent losses soaring at Light and other Brazilian
companies as a weaker real caused the local currency value of debt to soar.
Losses since Brazil let its currency float against the dollar in January 1999 have
wiped out profit earned in the previous three years by Light.
Its shares have lost 41 percent this year in reais and 54 percent in dollars,
compared with a decline of 26 percent in dollar terms for the benchmark index.
``We are in a vicious circle,'' said Rodrigo Wanderley, a senior trader at Safic
Corretora de Mercados, a Sao Paulo brokerage. ``The more the real devalues,
the more companies hedge into next year and the more the real falls.''
Argentine Concerns
The real, which is little changed today at 2.48 to the dollar, has plunged 2.3
percent in the last week on concern that neighboring Argentina may default on its
debt or devalue its currency. The decline in the real has gathered steam as an
energy shortage has forced consumers and companies to cut power usage an
average of 20 percent, further slowing growth and foreign investment.
``It's no surprise the real is weakening, the power shortages just cut the legs out
from under the economy and the outlook for the future,'' said Ribeiro.
Gross domestic product will grow 2.6 percent this year according to a median
estimate of 20 economists polled by Bloomberg news. A month ago the estimate
for growth was 4 percent.
J.P. Morgan Chase & Co. cut its estimate for foreign direct investment in the
country in 2001 by almost a quarter to $16 billion from $21 billion. Last year the
country attracted $33 billion.
With lower expected growth and investment, investors are betting on further
declines in the real.
Futures Contracts
Contracts on the Sao Paulo BM&F futures and commodities exchange, which at
the beginning of 2001 indicated the real would reach 2.10 to the dollar at year
end, now indicate the real will end 2001 at about 2.62 reais to the dollar. |
