Brazil Central Bank Allows Treasury to Step Up Dollar Purchases

Brazil simplified rules on foreign exchange flows and increased the amount of dollars the Treasury can buy to pay foreign debt, a move that may allow the government to step up purchases in the currency market.

The Treasury can now buy dollars or other foreign currency for debt payments as long as 750 days in advance of the debt’s maturity, according to new rules announced yesterday by the central bank. The previous time limit was 360 days.

“This measure is in line with the Finance Ministry’s efforts to avoid the appreciation of the real,” Zeina Latif, ING Bank NV’s chief economist in Sao Paulo, said in a phone interview.

Brazil’s real has gained 25 percent in the past 12 months, the third best performer amid the 16 most traded currencies tracked by Bloomberg, putting exporters at a disadvantage by making their goods more expensive in dollar terms. President Luiz Inacio Lula da Silva imposed a 2 percent tax on foreigners’ purchases of stocks and bonds Oct. 19 in a bid to stem short- term foreign inflows and limit the currency’s gains.

Since then, the real has dropped 4.6 percent to 1.8012 per U.S. dollar.

Brazil’s federal foreign debt dropped 4.53 percent to 97.31 billion reais in February, the Treasury said yesterday in a report distributed in Brasilia. The average maturity of Brazil’s foreign debt is 5.96 years, the Treasury said.

Brazil’s international reserves totaled $243.8 billion as of March 23, a 20 percent increase from a year earlier. The central bank, after the global credit crunch, resumed buying dollars on the spot market on May 8, 2009, to build up reserves.

Simplifying Procedures

The new regulations on dollar purchases by the Treasury are part of a plan to reduce red tape and streamline rules on flows of foreign exchange in and out of the country.

Central bank President Henrique Meirelles said the changes are aimed at simplifying procedures for the government and companies that need access to the foreign exchange market. The new rules will also lower transaction costs, he said.

Brazil’s central bank is seeking to “improve the way the market works, give the market more fluidity, improve price formation,” Meirelles told reporters yesterday in Brasilia. That will help avoid market “price distortions,” he said.

As part of the changes, the central bank scrapped a requirement that companies get authorization to send capital abroad. Now, it will only be necessary to register the transaction at the central bank.

Meirelles said the new rules aren’t intended to change the price of currencies trading in Brazil. The changes aim only to increase competition on international money transfers and lower costs, he said.