Financial Regulatory Forum

INTERVIEW-Brazil mulls forex rules change for convertibility

By Reuters Staff
February 5, 2010

By Ana Nicolaci da Costa and Isabel Versiani

BRASILIA, Feb 4 (Reuters)- Brazil’s government is mulling changes in the foreign exchange rules as part of a long-term plan to make the real a fully convertible currency, though market demand will be the key driver for those changes, a top finance ministry official told Reuters on Thursday.

A stable and growing economy has boosted demand for the Brazilian currency, which will naturally lead to steps aiming to make it fully convertible — meaning it could be freely traded and exchanged anywhere into other major currencies — said Luiz Eduardo Melin, secretary of fiscal and economic reforms at the finance ministry.

The government has no specific plan of action but is looking to implement a law allowing nonresident foreigners to hold bank accounts in Brazil, which has already been approved by Congress.

“When you start having greater demand for a currency in international transactions, that is another step toward having a convertible real,” Melin, who is also chief of staff of Finance Minister Guido Mantega, said in an interview.

“There is no program of measures. It’s not state-led, it is market-led,” he said. “The obstacles are removed as demand grows.”

With Brazil emerging as an economic powerhouse and playing a greater role on the global diplomatic stage, the country has become a magnet for capital inflows, helping make the real one of the world’s best performing currencies in 2009.

Analysts say full convertibility is still a way off due to obstacles, including restrictions on foreign exchange trading and on Brazilians holding local bank accounts in U.S. dollars.

But Finance Minister Guido Mantega said on Wednesday that Brazil had to prepare itself for the real to become a currency of international circulation as the government unveiled new local currency bills that are harder to counterfeit.

“(The greater) demand for the real has to do with a growing presence of Brazil internationally,” Melin added. “There is demand for Brazilian assets because they are assets with sustainable growth prospects.”

 

LOCAL FOREX TRADE

Moves by Latin America’s biggest economy to trade with other countries in their local currencies were part of the Brazilian real’s growing global allure which would eventually take it to full convertibility, Melin added.

Brazil already executes part of its trade with Argentina in local currency. Volumes are still low, but Melin expected them to grow in coming years and for local currency trade to take more prominence throughout the region.

A similar deal with Uruguay is expected to be signed already in the first quarter of this year while other countries in South America like Peru are also showing interest, Melin said.

“The tendency is for this to spread. I think advances of a bigger scale will be possible in the not too distant future” when local currency trade is also facilitated by access to credit, he said. For now trade transactions have to be settled on the same day and cannot be rolled over, he added.

The government has no immediate plans to establish transactions in local currency with China because the Asian nation is already Brazil’s biggest trading partner, Melin said.

Last year, the Chinese and Brazilian central banks said their countries were working on an arrangement to allow exporters and importers to settle deals in their local currency, bypassing the U.S. dollar.

Both China and Brazil have plenty of savings in U.S. dollars and it would be more important to settle trade transactions in local currency with countries that have limited amounts of U.S. currency, he said.

“The priority for Brazil in terms of trade in local currency at the moment is South America,” Melin added.

(Editing by Kenneth Barry)

((ana.nicolacidacosta@thomsonreuters.com; Reuters Messaging: ana.nicolacidacosta.reuters.com@reuters.net; +55-61-3426-7027))

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