Brazil’s international reserves grow with IMF and lower dollar sales in 2021

​2021 was a year of recomposition of Brazil’s international reserves, which reached US$ 362 billion, the highest level in three years, according to data from the Central Bank.

Interventions in foreign exchange through the sale of dollars were the lowest in the same period (US$ 12 billion), about half of what was seen in 2020 and a third of what was done in 2019.

On the other hand, the institution maintained its strong presence in the foreign exchange contracts market, raising the stock of so-called “currency swaps”, which offer protection against the variation of the dollar, to US$ 80 billion, the highest value in six years.

A boost to reserves last year came on August 23, 2021, when the IMF made an allocation of US$15 billion to Brazil, part of the distribution of SDRs (Special Drawing Rights) to member countries. This money is recorded in the reserves and also in the external debt. If the country uses the resources, it pays interest.

The balance was also affected by the return on loans and items such as changes in investments.

The BC also uses the concept of currency position to measure its operating power. The value of reserves, discounting swap contracts and other foreign currency assets and liabilities, ended the year at $264 billion, the lowest since 2015 and 25% below the 2017 peak.

Last year was marked by a 7.4% devaluation of the commercial dollar, which ended 2021 at R$5.58 (BC Ptax rate).

The inflow of dollars into the country exceeded the outflow by US$ 6 billion. In other words, there was no leakage of resources as in previous years. This is one of the factors that explain the BC’s more concentrated performance in foreign exchange contracts and less in the spot market.

Maurício Andrade Weiss, professor at the Department of Economics and International Relations at UFRGS (Federal University of RS) and author of articles on the subject, recalls that the futures market has a higher volume than spot trades in the country. Therefore, even with a positive flow of funds in 2021, there was a depreciation of the exchange rate.

“As the main source of pressure for the depreciation of the real is in the futures market, it makes much more sense for the Central Bank to have acted with the exchange rate swap”, says Weiss. “In addition to not actually reducing reserves, it is a measure that tends to be more effective.”

Reginaldo Galhardo, manager of Treviso Corretora de Câmbio, says that the Central Bank maintained its stance of intervening according to market demand, without trying to push the currency’s appreciation.

“The Central Bank only intervenes if there is market distortion. It could spend reserves, take advantage when it hit R$ 5.70 and sell, but it doesn’t, because reserves continue to be an anchor for the country that keeps us as creditors [em moeda estrangeira]”, says Gallardo.

Weiss, from UFRGS, highlights the reserve adequacy indicator developed by the IMF (ARA), whose latest data is for the year 2020.

The International Monetary Fund shows that Brazil, with an index of 1.64, is above the level considered safe for countries that adopt a floating exchange rate, which is 1. The country was in 12th position among the listed economies. Since 2007, reserves have been above this cut-off line. In 2015, they peaked at 1.92.

The UFRGS professor states that a good part of the accumulation of reserves was due to the inflow of dollars for investments by non-residents. Therefore, he says it is important to have a high volume of resources, which, even if not used, signal to the market the BC’s ability to act in moments of capital outflow, as occurred in 2019 and 2020.

“We managed to obtain these dollars, not so much through exports, but a lot through investment from non-residents. So these dollars, ultimately, are not ours. We have more reserves than debts, but our external liabilities are greater than the reservations.”

In the assessment of Galhardo, from Treviso, the hike in the basic interest rate, which should rise from the current 9.25% to around 12% per year, could contribute to a more relaxed management of the exchange rate and a lower use of reserves in 2022. .

According to him, in addition to attracting dollars to the country, high interest rates increase the cost of betting against the national currency. In swaps, for example, the BC pays the exchange rate variation and receives the Selic interest rate in exchange. This, however, depends on a certain stability in the value of the currency in the face of elections and doubts about macroeconomic policy.