Economy & Energy
Year I - No 5
Nov/Dec 1997
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Page
Biomass
and Eletric Generation
Brazilian International Reserves
Energy: Social and Economical Aspects
e&e
Team
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Graphical Edition:
MAK
Editoração Eletrônica
marcos@rio-point.com
Revised:
Monday, 21 July 2003
The Evolution of the Reserves along Time in other Countries
The following figure shows how the reserves in some developed countries evolved relative to the GNP of each country
Figure 4
It should be noted that the most economically significant countries in the west, USA, France, Germany and United Kingdom maintained their reserves within a plateau, different in each case, but relatively constant relative to the GNP. Canada and Italy had a reduction and a recuperation period in their reserves. Japan, in a consistent manner, increased its reserves from 2% to 5% of the GNP. In the case of the USA there was a systematic reduction of its reserves until the first semester of 1995 (Mexico’s crisis) when there was a recovery to the 1991 level, followed by a new decreasing period until July 1997. Probably this new crisis that reached the eastern countries, with consequences in Latin America, should help to recover the American reserves since USA’s bonuses are used as a haven in uncertain periods in other markets.
It is of special interest to Brazil to follow the evolution of reserves in other developing countries, mainly Mexico and Argentina since the period includes the adoption of similar economical exchange policies and the attack to the Mexican reserves and its repercussions in Brazil and Argentina, the so called "tequila effect". The values relative to the GNP are shown in the following Figure 5.
Figure 5
It can be verified that the attack on the Mexican reserves, resolved with currency devaluation and substantial external aid ,was followed by the attack on the Argentine reserves, resolved without currency devaluation, with external support and a vigorous economical adjustment. Afterwards, the attack was on the Brazilian reserves, resolved with elevated real interest rates and reduction of inflation risks by implementing the Plano Real. Countries such South Korea and Australia have not suffered the tequila effect.
Nevertheless, it should be noted that South Korea increased its reserves after the Mexican episode and that they were decreasing since mid 1996. Korea, as it is known, has strongly devaluated its currency during the present crisis and is waiting (end November 1997) for IMF’s aid. In a way, the pattern observed in Mexico - increase of reserves by increase of internal interests and fast decrease of reserves due to lack of confidence from investors - was reproduced in Korea.
Direct Cost of Reserves
Reserves are mainly short term assets remunerated, in the best case, with international rates. One can have an idea of the interest rates received by comparing the interests received by Brazil with the value of its reserves at the beginning of the year. The government pays for the resulting investments an interest rate fixed by the internal market. For calculation purposes, we have considered that the money has been invested in federal bonds.
Money from abroad, when invested in Brazil, is converted from the original currency (considered as American dollars) to the Brazilian currency (presently named real) where it receives interests that we have considered as those of the Treasure’s bonds. For calculating the gain of a foreign investor the local currency is converted to dollar again.
In periods of dollar exchange rates much different from the official and paralel exchange rates this gain would include the difference between the different types of exchange rates. For simplicity, we suppose that the investments have been made in a legal way passing through the official exchange rate. The difference since1991, when the free exchange was established is not much significant.
Figure 6 that follows shows that the average monthly cost of the reserves was positive or negative according to the considered period. The gain accumulated between 1980 and 1991 was practically zero and it is understandable that this market would not attract foreign investors
Figure 6
From 1992 on , the reserve cost to Brazil about US$500 million monthly or US$ 6 billion annually. Until the Plano Real was launched, the accumulated gain was US$ 18 billion, and then it dropped to US$10 billion due to the losses in the conversion from cruzeiros to URV and to dollar. From the launching of the Plano Real up to now (October 1997) the reserves have cost directly, by the difference between external and internal interests, considering the exchange rates, about US$ 20 billion.
If the real interest rate internally used would have been a consequence of the policy of attracting dollars - it was practically zero between 1980 and 1991 - the cost of maintaining the reserves would have been multiplied by a factor of 2 or 3.
Even though the reserves, as we have tried to show, represented a considerable burden to the Brazilian economy they constitute now a positive factor in order to face the present crisis in the world markets. Another positive factor is the quantity of assets to be privatized.
Probably after this crisis is overcome - in our assessment this has good chances to happen - it will be time to discuss if the price paid was not too high and if there existed less burdensome mechanisms to guaranty the currency stability. Half a million dollar monthly, or even twice, should the present interest rates persist, seems an exaggerated price. It is 1 to 2% of the Brazilian monthly GNP.