Economy & Energy
International Reserves: Cause of or Solution to the Present Brazilian Economical Crisis?
To defend the Real (Brazilian currency) against the attack of speculators on the Brazilian international reserves has been the major justification for the hard economical measures that have been announced for the Brazilian economy in this November 1997.
In the previous e&e issue, before the start of the present crisis in the international stock market and the attack on the Brazilian reserves , we called attention to the vulnerability of the policy of intervention in exchange and interests. We also published - without comments - the evolution of the Brazilian public debt which more than doubled in the last five years and which was one of the most relevant indicator of the Brazilian economy.
We have tried to adopt as a methodology to analyze , even the emergent problems, within the historical perspective of each parameter of the Brazilian economy and, whenever possible, in a comparative way with other countries. We understand that this care may prevent the precipitation of an analysis influenced by moment and fashion. Nevertheless, to be useful for the present time, this analysis must be opportune and for this purpose it must limit itself to the material previously elaborated and updated. It is within these limitations that we are presenting this first work that analyzes the present situation.
For this purpose it will be used our previous work for the book " Brasil: O Crescimento Possível - Editora Bertrand do Brasil 1996 " and our work within the Federal Government and the precious updated statistics about the Brazilian economy , mainly those from IBGE and from the Brazilian Central Bank.
The Amount of Reserves
The Brazilian reserves have surpassed 60 billion dollars and are constituted mainly of short term assets at financial institutions (83%). As compared to that of first world countries, they are exceptionally high as shown in the figure below. They are, in relative terms, of the same magnitude of those of developing countries that have adopted the model of open economy and free exchange . Reserves actually became a guarantying instrument for the external capital attracted to a country where the currency is convertible.
The Brazilian Central Bank publishes regularly data from the International Monetary Fund - IMF - that allow to follow the evolution of international reserves of a set of countries that includes the largest world economies and significant examples of emerging economies, among which are the main Latin American countries. Figure 1 shows that among these countries, our reserves were surpassed in absolute figures, in July 1997, by the three main world economies, Germany, Japan and the USA and the Brazilian reserves were 76% of that of the USA whose economy is ten times greater than the Brazilian one. In figures relative to the GNP it was among the three largest countries of the samples.
In what concerns the historical evolution, we see in the figure that follows that in 1992 there was a significant increase in the reserves which until then were about US$8 billion and jumped to US$60 billion in about four years.
In terms of indicators it is usual to compare the reserves to the monthly imports amount. This comparison made more sense when the reserves were used as a guaranty of the imports payment capacity. In the current situation, it would be more useful to compare it to the amount of external investments in the stock market and in bonds and even to the accumulated direct investments. It would be also useful to compare it to the Gross National Product as we have made in the previous figure. The following figure shows the behavior of two reserve parameters (1) reserves expressed as import months and (2)reserve as a percentage of the GNP.
One may notice that when the two scales used are coincident in the figure above, 6% of GNP and 12 months, the curves practically overlap, since the annual Brazilian exports have oscillated around 6% of the GNP in the last thirty years. In the last two years, imports have surpassed this figure and the curves have separated.
The relative increase of the reserve amount at the start of the nineties , in contrast to the end of the eighties, precedes the Plano Real but it is part of the openness and free exchange policy. As a matter of fact, the policy of exchange arbitrated by the government and the tolerance towards the parallel market, which had values more than twice the official rate, was substituted by a policy were the government is in control of the exchange by buying or selling dollars in the market. In this sense, Brazil started to do what other countries, individually or together, do to defend their currencies.
The volatility of the capitals that came to Brazil and the short tradition of a stable and convertible currency explain the larger conditioning of the currency reliability to the reserves volume which many consider excessive. It should be remembered that the reserves volume with a stable exchange policy becomes dependent on the interest rate which is also used to regulate the internal market. Having only one instrument to regulate two different parameters one can attain reserves higher than desirable. In any case, one can notice in Figure 1 that the level of the Brazilian reserves relative to the GNP is similar to those of Mexico and Argentina which have similar policies. On the other hand, when the exchange policy was used it was intended to value the real relative to the dollar, increasing the interests in dollars of the investors. This would indicate that the interests policy was directed to the external market what was valid mainly in fixing the exchange in the initial months of the Plano Real. In the months that followed, the exchange was used as an anchor to the Plano Real and naturally it would not follow the residual inflation.