Brazil's Lopes: No Drastic Change In Forex Policy
Dow Jones Newswires
BRASILIA -- In his first appearance as Brazil's newly-appointed central bank president, Francisco Lopes said Wednesday that the changes in foreign exchange policy announced earlier in the day don't imply a drastic policy shift.
Speaking hours after Gustavo Franco stepped down from the top post at the institution, Lopes said Brazil adjusted the wide band within which the real (BRR) trades against the dollar not because the real was overvalued, but to perfect the country's exchange policy and facilitate rate cuts.
The central bank set the new wide band at BRR1.20-1.32 Wednesday, from BRR1.12-1.22, and discontinued use of a mini-band that had restricted dollar movements previously.
Following the announcement, the real weakened 9% against the dollar from its close Tuesday, leading the central bank to intervene by selling dollars at BRR1.32 to restrict the dollar from moving above the new band ceiling.
Lopes said that the new band will serve as a transition to a floating exchange rate policy. He didn't, however, provide a time frame for a shift to a new policy.
"With the changes in the foreign exchange policy, the central bank is in reality speeding up a process which had been occurring in a gradual manner," Lopes said.
The central bank had already indicated early last year that it planned to make its exchange policy more flexible. At the time, the government instituted a policy of gradually widening the spread between the ends of the mini-band.
Lopes said that the new band announced Wednesday was, in effect, 10 times wider than the previous mini-band mechanism.
He explained that the Central Bank will adjust the ends of the new band every three working days, based on market dollar quotes. The upper end of the band will be raised one percentage point per year, with the lower end holding steady.
He said that the new band aims to slow the pace of depreciation of the real, which weakened about 7.5% in nominal terms last year. He said, however, that the new band would result in a nominal depreciation of between 12% and 15% in 1999.
Commenting on the pressure on the real in early trading Wednesday, Lopes said he expects the dollar quotes to remain near the top of the band for the next three days.
He said that the central bank will intervene in the forex market, as it did Wednesday, whenever dollar quotes pressure either end of the band.
Lopes said that a wider band will also allow for a reduction in interest rates, now at 29% per year.
"We are...effecting this quicker widening of the band because we think an additional objective that needs to be pursued is to try to free up monetary policy a bit more," Lopes said.
"In a wider band and with the new rules, we could potentially create the possibility of lowering interest rates, within a less restrictive monetary policy," he said.
The new central bank head noted, however, that fiscal reforms must be implemented before rates can be reduced.
The government introduced a broad fiscal plan last October in a move to trim BRR28 billion from bloated government budgets. The plan was the cornerstone of a deal with the International Monetary Fund and other lenders for a $41.5 billion credit line.
Congress has convened a special session this month to vote on measures included in the plan.
Lopes said that the changes introduced Wednesday weren't included in the agreement with the IMF.
"We will have to negotiate with the IMF on how to adapt to this new reality," Lopes said. "Personally, I don't know what the IMF tradition is in a situation like this, but I believe the IMF...continues to be confident in Brazil."
He added that the government will continue negotiating with the IMF on the remaining funding available.
Brazil received a first tranche of $9 billion last month. The government has said the funds will be used to boost reserves.
Asked about possible attacks on the real, Lopes said that Brazil's reserves on Wednesday stood at $45 billion.
"(Reserves) will continue to be used if necessary to defend the exchange system," he said, noting that monetary policy is another tool the government is willing to use.
The interim president of the central bank, Francisco Lopes, said that the speeding up of the process of making the real's exchange rate flexible means a gain in the competitiveness of Brazilian export products.
"Over the past two years, we have had a real gain with the foreign exchange in the competitiveness of the Brazilian-made product compared to the U.S.-made product of 12%," said Lopes. "We think that, this year, with the new policy, the competitiveness will improve and could be around 8% to 10%."
Without denying that this competitive gain will rely on Brazil's overall economic performance, Lopes added that in the three-year period ending at end-1999, the real will have been adjusted and hence increased competitiveness of Brazilian products by 21% to 24% in real terms.
"This is a substantial foreign exchange adjustment made over three years and it is much more than we would have been able to achieve through single large adjustments," Lopes said.
He added that the increase in competitiveness of Brazilian products, like the forex adjustments, will be occurring through the market, as it has been in recent years.
"We are not interested in adopting further devaluations of the nominal forex rate which we believe would actually slow down the economy eventually," Lopes said.
After Lopes' presentation of the forex policy alterations, the bank's director for foreign affairs, Demosthenes Madureira Pinho Neto also spoke to the press.
Pinho Neto said that Brazil could return to issuing sovereign debt in the first quarter of 1999.
"If progress is made on fiscal reform (in congress)...and added to today's measures, I expect that Brazil will return to the international fund-raising market within the first quarter of this year, as a result of renewed confidence by the international financial community," Pinho Neto said.
-By Stephen Wisnefski, Mara Lemos, Adriana Arai, William Vanvolsen; (5511)
813-1988; swisnefski
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