Brazil’s international reserves are at their lowest level in more than 11 years, according to data from the Central Bank (BC).
Between the end of August and the beginning of this month, the country’s dollar cushion reached US$326 billion, the same registered in April 2011.
International reserves are amounts that a country has in foreign currency.
They work as a kind of “insurance” to face their obligations abroad and external shocks, such as currency crises – characterized by a sharp devaluation of the local currency.
These reserves are distributed among bonds (a type of investment made from the purchase of debt paper from an issuing entity, which undertakes to return the amount with interest), currency deposits, and gold, among other formats.
The Brazilian reserves had last month, the sharpest losses of 2022. Between September 9 and October 10, the decline amounts to almost US$12 billion, 3.5% of the total value in the period.
The drop over the preceding 30 days was almost half the figure: US$6.2 billion, a reduction of 1.8%.
WHY DID IT DROP?
For the chief economist of Análise Econômica Consultoria, André Galhardo, the recent losses may be related to the volatility of the Brazilian currency and the Central Bank’s actions to control the devaluation of the real against the US dollar.
“The government may have used these funds to pay off short-term obligations. The Central Bank also started selling dollars on the spot market again, which helped reduce the exchange rate volatility,” explains Galhardo.
The scenario is different when we go back another 30 days. Between July 8 and August 8, the country registered a US$ 3.5 billion increase in foreign exchange reserves.
Despite the high in the middle of the year, recent falls have helped pull the result for 2022 into the negative.
In the year, the amount went from US$361.4 billion, on January 3, to the current US$326.2 billion, on October 10, a nominal loss of US$35.1 billion – or 9.7% in the period.
The drop exceeds the highest nominal level in history, recorded in 2019, at US$64.2 billion.
The amount was reduced from US$390.5 billion on June 25 of that year to US$326.2 billion on October 10, 2022, a retreat of 16%.
IS THE FALL A CAUSE FOR CONCERN?
For the chief economist at Austin Rating, Alex Agostini, no.
“The perspective is of reduction [of reserves] at least in the coming months. But, from my point of view, nothing worrisome because our level of net foreign liabilities is very positive,” he explains.
He also highlights that, as Brazil currently has a level of reserves very close to the total external debt, it is at a level that can be considered comfortable.
“We have many more resources in our assets than in our liabilities. So, it is liquid; there is enough money left over to honor all the commitments Brazil has,” he says.
André Galhardo also dismisses a worrisome scenario, but he ponders: “several studies show that the Brazilian level is comfortable.”
“Even so, such a fast decrease in the last few days turns on a warning point. For having reached a level that has not been seen since 2011, it is a point of attention,” he says.
GLOBAL SCENARIO
Alex Agostini explains that the current global scenario – of rising interest rates by major economies – has directly impacted Brazilian reserves.
That is because the reserves are formed from the entry of foreign currency into the country.
In this context, the high interest rates of economies such as the United States and European countries become an obstacle: they are much more attractive to investors when compared to Brazil.
The reason is that they are consolidated economies, with much lower risks than the Brazilian one, which ends up attracting fewer investors, even though our country has the highest real interest rate on the planet.
Agostini points out that there is still uncertainty about Brazilian politics amid the elections, which generates caution in the market.
UNDERSTANDING THE INTERNATIONAL RESERVES
Galhardo summarizes the reserves as “resources in foreign currency or equivalent in financial securities, which the Central Bank keeps for eventual problems in external accounts”.
The manager of these resources is the Central Bank. But the government can also use the reserves to, for example, write off foreign debts and to interfere in the exchange rate.
Alex Agostini explains that this can interfere directly with the country’s inflation.
“If the Brazilian real depreciates too much, it impacts international commodity prices. In turn, this impacts inflation.
“So, the Central Bank acts precisely in this way to guarantee the stability of foreign currency here in Brazil.”
WHAT ARE THE INTERNATIONAL RESERVES FOR?
Brazil adopts a floating exchange rate regime. It means that the dollar’s value fluctuates freely over the real, according to the supply and demand of the currency by the market.
In practice, the more dollar in the country, the less valued it will be against the real.
International reserves work, in this context, as a safety cushion.
They help attenuate sudden real oscillations against the dollar (with the Central Bank buying or selling dollars), providing greater predictability and security for market agents.
According to the Central Bank, the “allocation of international reserves (that is, where the money is invested) is done according to the tripod security, liquidity, and profitability, in this order.
If a country has reserves in a comfortable volume, it is less subject to speculative attack and has less exchange rate volatility.
“Generally, if you have international reserves, you have international security. Business people will not think twice before making a speculative attack [withdrawing a lot of money simultaneously].
“This empties the reserves quickly and creates a process of devaluation of the exchange rate,” explains Galhardo.
“So, in addition to shielding the country and mitigating these volatilities, having good foreign reserves also allows the Central Bank to act in the market by selling the dollar in cash and quite international bonds in the short term,” he concludes.
WHAT IS THE COMPOSITION OF BRAZILIAN RESERVES?
According to the last Central Bank International Reserves Management report, the Brazilian reserves ended 2021 distributed as follows, in currencies:
- US dollar: 80.34%
- Euro: 5.04%
- Renminbi (China): 4.99%
- Pound sterling (United Kingdom): 3.47%
- Gold: 2.25%
- Yen (Japan): 1.93%
- Canadian dollar: 1.01%
- Australian dollar: 0.97%
Division considering the types of investments of the Brazilian reserve:
- Government bonds: 89.26%
- Deposits in central banks and supranational organizations: 3.61%
- Agency bonds: 1.64%
- Stock index ETFs: 1.13%
- Securities of supranational organizations: 0.63%
- Deposits in commercial banks: 0.47%
- Investment Grade ETFs: 0.44%
- Gold: 2.25%
- Other assets, such as local government bonds: 0.58%.
With information from G1