Brazi diverts USD offshore. Has Brazil’s currency peaked?
Edited by Jonathan Wheatley, Brazil correspondent
Published: June 8 2008 22:44 | Last updated: June 8 2008 22:44
Brazil is expected to announce plans for a potentially massive sovereign wealth fund this week, based on the country’s coming oil wealth. One of the fund’s aims, according to Guido Mantega, finance minister, will be to counter the appreciation of Brazil’s currency, the real, by using the fund to put foreign currency that would otherwise have entered Brazil (pushing up the real) in an offshore account.
While there seems little doubt that Brazil is indeed sitting on enormous oil reserves, the government is engaging in wishful thinking if, as Mr Mantega says, it expects revenues to start flowing within three to five years.
Brazil in $200bn sovereign fund plan
June 09, 2008
The Brazilian government plans to use revenues from newly discovered oil fields to create a sovereign wealth fund containing as much as $200bn-$300bn in the next three to five years, Guido Mantega, finance minister, has told the Financial Times.
Mr Mantega said a bill to create the fund would be sent to Congress as early as this week under a fast-track system that gives legislators a maximum of 45 days to consider the bill and approve or reject it.
The SWF would initially resemble a fiscal stability fund, setting aside 0.5 per cent of gross domestic product, or about R$14bn ($8.6bn, €5.5bn, £4.4bn), as a counter-cyclical contingency reserve. It would invest in locally issued government debt, reducing the debt held by the private sector and in effect lowering the net burden of public debt, currently about 41 per cent of GDP.
“The fund will start small but once the oil begins to come in it will grow quickly, to $200bn or $300bn in three to five years,” Mr Mantega said in an interview on Friday.
He said the fund would initially help to fight inflation, which he said would reach about 5.5 per cent by the year end, or 1 percentage point above the government’s target.
By setting revenues aside, the fund would reduce the inflationary impact of government spending. The fund would increase the government’s target primary budget surplus (before debt repayments) from 3.8 per cent to 4.3 per cent of GDP.
However, economists say in its initial form it is unlikely to have much impact on inflation as the government is already running a primary budget surplus of 4.5 per cent of GDP over the past 12 months and of 6.5 per cent so far this year, largely because of bigger-than-expected tax revenues resulting from faster economic growth and delays in executing government investment plans.
Mr Mantega said once revenues from newly discovered fields began to flow, the fund would take on new roles.
“The fund will have various functions, not just one,” he said. “It will help reduce government spending but it can also help the exchange rate.” Brazil’s currency, the Real, has risen strongly against the US dollar in recent years, driven by large trade surpluses and heavy inflows of speculative and investment capital.
Mr Mantega said the fund would help weaken the Real by buying foreign currency and keeping the funds in an overseas account, where they could be used to provide finance to buyers of Brazilian exports and to finance overseas investment by Brazilian companies.
He compared the fund with Chile’s stabilisation funds, which hold foreign currency overseas, easing pressure on the currency.
Plans for Brazil’s fund have been changed several times over the past year and have caused controversy within the government.
The central bank only recently voiced its support after plans had apparently changed to limit the SWF’s role to that of a fiscal stability fund.
Source: Financial Times (www.ft.com) |
