Economy &Energy Year III - No 15 July/August 1999

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Editoração Eletrônic
Thursday, 10 July 2003.


Aumara Bastos Feu Alvim Marques(*)
English Version: Frida Eidelman


The Brazilian exchange rate policy went through a dramatic change in January 1999. The behavior of this parameter in the last half of the century was analyzed by e&e practice of taking the medium and long term perspective. By expressing the GNP in real values using the exchange rate of 1994, one finds values quite different from those using the average nominal exchange rate corrected by the American Consumer Price Index. It is shown that the Brazilian Currency exchange rate relative to the American dollar in 1994 is very close to the average exchange rate along the period and practically coincides with that of the years when the foreign exchange transfer was very close to zero (equilibrium in balance of goods and services non-related to financial factors ). The "equilibrium' exchange rate would be- 1. 40 R$/US$ in June 1999. A correlation between the deviation of exchange rate relative to the "equilibrium" rate and the foreign exchange transfer is found . Using this relation, it is estimated the exchange rate in order to generate a positive foreign exchange transfer of 4% of the GNP and this exchange rate would be 1.60 US$/R$. If the previous behavior is repeated, once the present transition is overcome, the rate will be stabilized at levels substantially lower than the present ones, taking into consideration the inflation rates in Brazil and in the United States.


The maxi-devaluation that occurred last January, which is the break of flexible exchange band regime adopted by the government in the Real Plan, rekindled the worries about the best exchange regime to be adopted and what are its effects on the economy as a whole.
The exchange rate is in itself an important variable in the economical policy. Naturally, the exchange regime adopted has greater chances for conforming to the economy that is anchored in solid economical, monetary and fiscal fundaments. Nevertheless, the choice of the exchange regime affects by itself the vulnerability of the economy vis-à-vis external crises.
The flexibility regarding restrictions on incoming and outgoing capital, adopted by part of Asian countries and by Latin American, in many cases together with high internal interest rates and overvaluation of the local currency, aiming at attracting external capital, lead Mexico then Thailand, the Philippine and the rest of Southwest Asian countries, followed by Russia and Brazil to face the financial crisis domino effect.
Countries like India and China that did not submit themselves to the fashionable regime and maintained some exchange restrictions have apparently managed up to now to be out of the disorder generated by the crisis.
After a brief historical record about the exchange policies adopted in Brazil after the Second World War, an analysis of the GNP evolution will be made according to different conversion rates as an attempt to analyze the distortions that they can cause in its behavior. From these distortions, the exchange effect, defined as the ratio between the so-called "equilibrium" rate and the exchange rate adopted, will be calculated. Finally, the value of the exchange effect, that could generate a determined amount in the balance of goods and services, will be determined.

A brief historical record about the exchange rate policies adopted in Brazil

From the end of the Second World War up to the late eighties the exchange rate rules had two basic characteristics: the official exchange rates are fixed by the government and the currency has an elevated grade of exchange restriction (reduced convertibility). As an exception along this period, in 1953 the government distributed the available hard currency in batches (allocated initially in assets according to their essentials) through the Instruction 70, when the exchange rate for each category was fixed in auctions. This system lasted until 1957 with some modifications and the government fixed the quantity of the distributed hard currency but not the value of the foreign currency.

Apart from this exception, the rates were adjusted in periods that were long or short and from 1968 up to 1989 Brazil followed a mini-devaluation exchange policy based on the variation of the purchasing power parity (PPP) following the real goals approach (according to which changes in the exchange rate alter the ratio between domestic and external prices and that affects the competitiveness of the economy with the rest of the world). In 1980, the exchange rate readjustment was pre-fixed, aiming at fighting inflation. Nevertheless, since the economy was under a large indexing system, inflation reached a three-digit value annually and the exchange rate was readjusted daily, in spite of being always fixed by the government and not by the market. The adopted exchange regime, even with this periodicity, was closer to the fixed rate concept.

The mini-devaluation policy had basically two objectives, one to avoid speculative engagements against the national currency and the other to stabilize the real remuneration of the exporting sector, therefore helping to increase exports. If on one hand this policy was positive since it brought more stability to the external commerce, on the other hand the frequent mini-devaluation was useful in distracting the attention from the need of a larger real devaluation vis-à-vis the shocks received by the Brazilian economy in the seventies and eighties.

The last restrictive exchange measure, prior to the opening to the international market, came in 1989. Due to the aggravation of the decreasing trend of the official and private credit flux, which became negative, and because the prospects for changing this condition by way of economic policies were small or even null, the government opted for the non-declared moratorium. It established restrictions to foreign payments, that is, exchange centralization, and it succeeded in retaining international reserve currency. According to Souza (1998), moratorium of the external debt or other restrictions to the national currency convertibility, even though permitting to stop the flow of hard currency out of the country in situations of latent exchange crisis, inhibit the ingress and stimulate the egress (including flight) of capital.

In March 1990, at the beginning of the Collor Administration, the floating exchange rate and the retention of assets in local currency were adopted, restricting the demand for external currency. This system established that the banks and stockbrokers should determine daily the dollar price in the market, selling and buying the American currency. Instead of having the obligation of buying and selling dollars at an exchange rate fixed by the mini-devaluation policy, the BACEN (Brazilian Central Bank) would intervene only when the goals fixed regarding the reserve currency and the monetary base so demanded. Nevertheless, in spite of the adopted regime intention of high exchange convertibility and flotation, in practice only a growing convertibility of the national currency was verified. In what concerns the exchange flotation itself, with slow intervention by the Central Bank in the official segments of the market (floating and tourism), the regime followed progressively the direction of "dirty" flotation and finally, in September/October 1991 returned to the fixed rate regime. Therefore, the market that varied the exchange rate based almost totally on the perspective of monthly inflation had again the intervention of the Central Bank, and the exchange rate (1) showed again a real depreciation, so that the trend of decreasing exports would be reversed and the liquidity crisis of the economy would be alleviated.

In what concerns the currency convertibility, it should be emphasized that in that period the transitivity from the national to the foreign currency was guaranteed, increasing the internal convertibility by allowing its retention as reserve assets (creating the alternative of investing in external financial assets or dollar-indexed assets) and the external convertibility by allowing a larger public to use foreign currency for payment or foreign exchange transfer.

Another issue is the difference between the official and the black-market quotations that overreached 100% in mid sixties and late 1988. From 1989 on, a third segment was introduced in the Brazilian open market in order to include transactions in foreign currency for tourism purposes. As this segment had flexible quotations so that it could adapt itself to relative decrease of hard currency, it became competitive with the black market for buying foreign currency not allocated to the "commercial" or "open" segment. Therefore, from this period on an increase of demand for hard currency caused an increase in the floating quotations rather than a reduction of the reserve currency. Besides the creation of this new segment, the responsibility for determining the exchange rates and the conciliation between supply and demand of hard currency was transferred to the market (financial intermediaries), what made the commercial exchange market more sensitive to interest rates, to the instability of domestic policies, mainly the balance of payments, and to exchange devaluation expectations.

Graphic 1
Black market US$ /Commercial US$


In 1990, after the reduction of the general liquidity of the economy, implemented by the government through retention of 80% of the financial assets, the tourism and black market segments came closer to the commercial segment and have not shown from this moment on high premium percentages, as demonstrated in Graphic 1. At the beginning, the Central Bank intervened indirectly in the black market by selling gold but from 1992 on, BACEN had the control of the quotations difference between the black and commercial markets by buying and selling foreign currency directly in the floating market. This exchange market unification was adopted aiming at using it later as a reliable index, that is, as an anchor for stabilization.

It should be remembered that in spite of the fact that the amount of currency present in the black market was not relevant, the difference between the floating and black market quotations is detrimental to the economic policy, since the premium stimulates exchange fraud and is a thermometer of flotation expectations of the official rate as well.

After this brief presence in the floating exchange system, the government returns to the fixed exchange rate policy, monitoring the evolution of the exchange rate in line with the inflation through periodic auctions. This policy, together with the increase of national currency convertibility, high interest rates and policies for stimulating the ingress of foreign resources, made possible the input of huge external resources and, consequently, the strengthening of international reserve currency in the country. The increase of external resources ingress occurred in spite of the small volume of financing from multilateral organizations and governmental agencies, concentrating itself in private resources.

With the opening of the economy to the international financial market, the adoption of a fixed exchange policy aiming at real goals should equate the domestic and external interest rates plus the exchange rate devaluation expectations and the non payment risks. From 1991 on, with the decrease of the "Brazil risk", the difference between the domestic and external interest rates played the role of an inductor of external capital ingress in Brazil. Nevertheless, it should be mentioned that the policy of maintaining the exchange rate at real levels makes the currency endogenous and practically eliminates the practice of an efficient and active monetary policy.

With such large input of hard currency and trying to achieve monetary stability, the Government establishes the Real Plan in mid 1994 based on explicit and flexible exchange bands. According to Baumann et alii (1996) this regime of floating bands is an attempt to introduce a certain flexibility in the nominal exchange rate in order to respond to changes in the external and internal conditions of the country and to maintain the market informed about the nominal value, the central rate of the band, so that expectations are stabilized.

Nevertheless, the combination of floating rates and high interest rates used to fix exchange bands led to exchange rate appreciation, deteriorating the commercial balance. Furthermore, the high interest rate policy increased the internal debt that, with the Asian and Russian crises at the end of 1997 and 1998, respectively, affected the reliability of external investors, causing a loss of reserve currency around US$ 40 million.

As an attempt to restrain the loss of reserve currency, in January 13, 1999, the Central Bank amplified the exchange band and increased its intervention in the spot and future markets. Another adopted measure was the unification of the existing exchange positions (2) of the free or "commercial" and the floating or "tourism" segments. Therefore, there was no difference between the two segments for the exchange rate establishment. The opportunity cost for celebrating exchange operations became the same.

Nevertheless, the initial adjustment - increases of the band - demonstrated to be small and new increases in the interest rates were inefficient. Since the capital flight continued in an accelerated pace, in January 15 the Central Bank permitted the Real to float freely. There was a strong devaluation of the Real which moved up from R$1,21/US$ to an average of R$1,52/US$ in January, R$1,91/US$ in February and R$1,90/US$ in March. The depreciation of the Real generated a significant increase in the Brazilian competitivity in the external sector that, according to the Economical Policy Memorandum to the International Monetary Fund - IMF, will generate a marked improvement in the commercial balance which will move from a US$6.4 billion deficit to a US$11 billion surplus. The Memorandum foresees that the current account deficit will be reduced from 4,5% to 3% of the GNP and in spite of that, the balance of payment will show a deficit in the next months because of the high amortization and due to the fact that the influx of capital will be recovered slowly.

In summary, the Brazilian exchange regime, having traditionally fixed rates and exchange restrictions, with mini-devaluation, following the buying power parity approach, after a short period of floating rates with growing convertibility in the beginning of the nineties, changed to fixed exchange rate regime and high convertibility, with predominance of real goals approach. From 1994 on, with the establishment of the exchange bands regime, the approach was changed to that of exchange anchor (in this approach, once the exchange rate is fixed, the other macro-economic variables adjust themselves and, therefore, they do not affect the real variables), aiming at price stabilization and finally, with the economical crisis, the exchange was permitted to float without governmental intervention.

Evolution of the Gross national Product

The data relative to the Gross National Product (3) in reais and current dollars were converted into constant US$ of 1994 in two ways:
a) using directly the values in current reais and converting them to constant dollars of 1994, dividing them by the exchange rate (Tx) and by the consumer price index of the United States (CPI - USA relative (4) to 94).

GNP (current US$) =

GNP (current R$) (1)



GNP (constant US$ 94)=

GNP (current US$)         (2)

CPI - USA (relative to 94)   

Combining (1) and (2), we have:

GNP (constant US$ 94)=

GNP (current R$)                  (3)

Tx * CPI - USA (relative to 94)

b) the values in current R$ are first adjusted according to a deflation (5) factor (relative to 1994) in order to subtract the internal inflation and then they are transformed in constant US$ 94, dividing the result by the exchange rate of 1994.

real GNP (constant R$ 94)=

GNP (current R$)          (4)

Deflation factor (relative to 94)


real GNP (constant US$ 94)=

real GNP (constant R$ 94) (5)

Tx (relative to 94)

Combining (4) and (5), we have:

real GNP (constant US$ 94) = GNP (current R$)                        (6)
  [Deflation factor (relative to 94)* Tx (relative to 94)]

Graphic 2
GNP (in billion US$ 94)

Graphic 2, representing the series calculated according to equations (3) and (6), shows the differences between the GNP calculated directly and corrected by the exchange rate and the inflation in the USA and the real GNP obtained by IBGE, expressed in constant 1994 dollars.

If the exchange rate would be equal to the "equilibrium" exchange rate, that is, if it represented the real difference between the internal and external prices, the values calculated by equation (3) and equation (6) should be the same. Therefore, dividing equation (3) by equation (6), one can calculate the exchange effect, namely, how far the exchange rate is from the real exchange rate.

Exchange effect = GNP (constant US$ 94)
real GNP (constant US$ 94)

[Tx * CPI - USA (relative to 94)]        
[Deflation factor (relative to 94) * Tx (relative to 94)]

[CPI - USA (relative to 94)]                                    

Deflation factor (relative to 94)] * [US$ (94) / R$ (94)]

When the series is analyzed, it is noted that the Brazilian exchange rate relative to the equilibrium rate oscillated from appreciation to depreciation. In the years of economical growth and large ingress of external capital, when it was not necessary to generate surpluses in the balance of goods and services, the exchange rates had real appreciation in order to favor imports. From the debt crisis in 1982 on, when it became necessary to generate surpluses in the balance of goods and services in order to service the debt, the exchange rate showed a real depreciation. It should be mentioned as an example the year of 1983 when the government, under pressure of the debt crisis effects, decreed a 30% maxi-devaluation of the Real so that the exchange would be depreciated and the volume of exports would be increased.

Until the establishment of the Real Plan, the depreciated exchange rate was maintained, except in 1989 and 1990, when it can be noticed a balance between the real and the exchange rate in effect. It should be remembered that these years correspond to restrictions on the payment of interest (1989) through the moratorium that was decreed and to the establishment of the floating exchange and the monetary confiscation (1990). As mentioned above, the floating exchange regime did not prevailed and a slow return to the fixed exchanged rate was carried out through mini-devaluation of the exchange, aiming at changing the trend of exports decrease and alleviate the economic liquidity crisis.

Graphic 2 shows the series that, with the establishment of the Real Plan, from 1994 up to January 1999, demonstrate the exchange appreciation, adopted by the policy-markers in order to guarantee the exchange anchor necessary for maintaining the economical stability. One of the items necessary for containing inflation would be the free ingress of imports to cope with the abuses in prices, which would certainly facilitate the Real appreciation. Finally, after the Real maxi-devaluation made by the government in 1999, aiming at containing the flight of capital and stop the decrease in international reserve currency, there was a strong exchange depreciation.

Therefore, it is confirmed the idea that the government has been using the exchange rate as a variable for obtaining the necessary surplus or deficit in the balance of goods and services, depreciating the exchange relative to the equilibrium exchange, when the goal is to have a positive balance and appreciating the exchange when the aim is a negative balance. So, by determining the quantitative goal of the balance of goods and services, it is possible to determine the exchange rate necessary for generating it.

It should be made clear that the year of 1994 was chosen as the base year according to a specific procedure. The exchange effect was calculated taking different years as a base for calculation, and 1994 was chosen as reference. In fact, by choosing that year the exchange effect was closer to one, namely 1.02. As shown in Graphic 3 below, the base year (1994), when the exchange effect is close to one and the exchange deviation (one minus the exchange effect) is close to zero, shows a balance between the volume of exports and the imports of goods and services that indicates exchange rate close to real exchange rate. It can also be verified that always when the exchange effect comes close to one, as in 1953 (1.00), 1963 (0.96), 1982 (1.01), the balance of goods and services was in equilibrium. This shows the convenience of the chosen base year, enforcing the coincidence between the historical average of almost half a century and the year of 1994 taken as a base year for calculation.


Graphic 3

Foreign transfer (r) of resources and exchange deviation (d)

Graphic 3 shows the inverse relationship between exchange deviation and foreign transfers. Taking the eighties as example, after the 1982 crisis the Brazilian currency was depreciated relative to the equilibrium rate, making negative the exchange deviation and positive the foreign transfer of currency resources. Based on this idea and with data concerning the foreign transfer (6) (r), the relationship between the exchange deviation (7) (d) and the foreign transfer of currency resources was calculated by fitting the data linearly with a coefficient equal to 0.51, as shown in Graphic 4. This coefficient may be considered high taking into account the simplicity of the model that uses only an explanatory variable for determining the exchange deviation

Graphic 4

Transfers × Exchange Deviation

Based on this adjustment, the exchange rate necessary for reaching surpluses goals in the foreign transfer of currency reserves can be calculated. Therefore, considering the goal foreseen in the Economic Policy Memorandum for the IMF of 03/08/99, of US$ 11 billion for the commercial balance (8), corresponding approximately to 2.13% of the GNP of February 1999, as well as the forecast of balance in the transfer non-related to financial factors goods and services of 1.14% of the GNP, the exchange rate necessary for generation such surpluses can be calculated. The calculated exchange rate at present prices (June 1999), that is, without considering the future inflation for reaching the accorded balance would be about R$ 1.40/US$. But if the foreseen foreign transfer for paying interests is around 4% of the GNP, as in the eighties, the calculated exchange rate would be R$1.60/US$.

The exchange rate deemed adequate should reflect the external competitivity of a country and the confidence of economic agents on fundamental macro-economical factors but the exchange difference, calculated here using the present rate, is due to the uncertainty of the agents and this can also be verified by the high interest rates now paid by the Brazilian economy.

Therefore, according to the calculations presented here, the equilibrium exchange rate for fulfilling the foreseen commercial balance surplus for the International Monetary Fund is well below the rate now in effect. Even if we estimate as 4% of the GNP the amount necessary for servicing the debt, the equilibrium rate, namely 1.60, would still be below the rate presently in effect. Therefore, with this relatively optimistic perspective, it should be emphasized that as soon as the government succeeds in re-establishing the agent's confidence on its economic policy, the present exchange rate shall go back to the equilibrium level necessary for the intended balance of goods and services and so the negative effect that devaluation may cause to the stabilization policy of the government will be lessened.

Finally, it should be remembered that this work demonstrates the power of the exchange rate as a parameter of the economic policy and its manipulation can influence the real variables of the economy such as the flux of goods and services.


(1)The exchange rate (RS$/US$) is said to be depreciated when it is necessary more reais vis-à-vis one dollar, that is, there is a devaluation of the real relative to the dollar

(2) It should be made clear that even though the exchange positions are unified, the exchange operations of each segment should continue to be conducted in each specific market.

(3)The historical data concerning the GNP were obtained from the National Accounts published in the Conjuntura Ecônomica periodic of Fundação Getúlio Vargas - FGV, while the most recent data were taken from Press Releases of the Central Bank. The GNP in current dollars was calculated by the average exchange rate, according to FGV.

(4) It should be made clear that the expression "relative to 1994" is the value supplied for the year divided by the value for 1994, that is, the United States Consumer Price Index relative to 1994 is USA -CPI of the year divided by USA-CPI of 1994.

(5) The deflation factor for recent years was the GPI-DI calculated by FGV and for the rest of the series, the deflation factor was that implicit in the GNP.

(6) The National Accounts published in the Conjuntura Ecônomica periodic of FGV gives the non-factors values of imports and exports of goods and services. The calculation corresponding to foreign transfers would therefore be the difference between exports and imports. It should be added that factors means debt service (interests), which are not included in transfers calculation.

(7) The Exchange Deviation is just the calculation of one unit minus the exchange effect; this adjustment was made aiming at permitting the series to pass through the zero point, corresponding to the equilibrium point.

(8) The forecast of the non-value balance of goods and services was calculated by fitting linearly the balance of goods and services and the commercial balance in the last ten years, with an optimal correlation of 97%.


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(*) This work contains preparatory material for a post-graduation thesis in Economy in the Brasilia University.

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