International reserves reach record $280 billion

The Central Bank (“BC”) announced yesterday (October 14) that Brazil’s international reserves had reached a record level of $280,096,000,000. In a report accompanying the announcement, the BC revealed that the main reason for the spike in the level of reserves was due to purchases of dollars on money markets in order to stem the devaluation of the US currency and the resultant valuation of Brazil’s currency, the real. Even so, the dollar continues to fall, closing out yesterday at R$1.661 buy, and R$1.663 sell – levels very close to where they were before the international financial crisis began at the end of 2008.

The BC says that daily dollar purchases in October, up to October 8, totaled slightly over $2.760 billion. And for the 25-day period between September 8 and October 8, with two auctions per day, purchases totaled $18.1 billion.

Brazil’s reserves got another boost at the same time with the capitalization of Petrobras operation at the end of September, when a total of $10.757 billion entered the country.

In a note, the BC explained that the reserves are invested in highly safe and liquid assets, such as US Treasury bonds, fixed income or multilateral institutional deposits (like the IMF and World Bank).
Roberto Piscitelli, professor of economics at the University of Brasilia (UnB) says the transport costs of such a large amount of international reserves is “not cheap.” But reserves are a cushion, protecting the country from external threats such as the 2008 international financial crisis. They also make the country more attractive to foreign investors who see the reserves as a sign of solid policy and safety, the UnB professor admitted.

Piscitelli goes on to say that measures adopted by the government so far (BC auctions and the increase of the Financial Operation Tax (“IOF”) have not been sufficient to halt the devaluation of the dollar (and increasing valuation of the real). He calls the measures “palliative” and says more “powerful” action is called for, such as reducing interest rates so that dollars will not continue to flow into Brazil seeking high yields. [note: as Brazil buys US treasury bonds (for safety), the Fed buys them also, with very different consequences: the Fed is flooding the market with cheap dollars and the dollars immediately seek an attractive return – like the 10.75% interest paid in Brazil]
“Why should Brazil pay the highest interest in the world while many other countries have lowered their rates to almost zero?” asks Piscitelli.