Exporters are choosing to keep hard currency abroad despite higher interest rates in Brazil. The internalization of funds has not materialized more than a year since the beginning of the tightening cycle. A survey by Valor Data based on data by the Foreign Trade Secretariat (Secex) and the Central Bank shows that the 12-month spread between physical exports and the contracted exchange rate is still at all-time high levels.

The data show that the so-called alligator mouth of the foreign exchange rate reached $70 billion by March 18, up 26% compared with the end of 2021. In September, the gap between shipped exports and the contracted commercial exchange rate was at $46.6 billion. In December, the spread totaled $55.6 billion, and in February it stood at $68.2 billion.

“Not necessarily all the funds used by Brazilian exporters are going to come. In the long run, there has to be a gap, since some money is poured into several services of large exporters abroad. So, this spread means less funds brought here,” said Marcello Curvello, the currency manager at ASA Hedge. “But today we see a contracted exchange rate much lower than the shipped one, which is not natural either. The normal thing would be it to run just a little below.”

He prefers to analyze the spread according to the balance of payments of the Central Bank, but says that, under any analysis, the gap remains very high. There are fewer reasons for such spread at the moment since a deleveraging push of large exporters has reached the targets and Brazil’s benchmark interest rate is at the highest level since April 2017, at 11.75% per year, he said.

In October, the Central Bank’s monetary policy director Bruno Serra Fernandes said in a public event that the monetary authority saw a “low commercial foreign exchange contracting in the recent period” that led to an “unusual” and “very relevant” gap in relation to the trade balance. According to him, this was due to the process of paying debts abroad and there was no relevant cash surplus of companies abroad that impacted the dynamics of the exchange rate.

Carlos Calabresi, the chief investment officer of Garde Asset Management, says that the gap, which began to widen in 2019, a move intensified in 2020 and 2021, was initially explained by the companies’ strategy of having cash available abroad in order to streamline flows to honor their debts. “But the exchange rate behaved so badly in the period, the volatility became so great, that companies began to diversify with investments abroad,” he said.

Nuno Martins, the head of structuring and sales at Bank of America (BofA), believes that companies with the largest export volumes maintain dollarized balance sheets and are mostly financed in hard currency, which implies fewer incentives to maintain large reserves in reais. He wonders whether the spread may have increased in recent months because the volume exported has grown with higher commodity prices, but the companies’ obligations in Brazilian currency have not grown in the same pace.

“I don’t think it is an issue related to a structural risk of Brazil, but the fact that companies are set up in such a way that cash management is less related to macro aspects and much more linked to risk management and balance sheet balance,” Mr. Martins said. “A company whose functional currency is the dollar manages its business in this currency. Therefore, it doesn’t make sense to amass reserves in a currency other than the dollar just to take advantage of higher interest rates.”

Mr. Calabresi, with Garde, expects a reversal of the phenomenon and notes that data has already improved given the higher interest rate regime. The monthly spread between physical exports and the contracted exchange rate fell to $3.8 billion in February from $5.5 billion in December, and the gap was at $4.7 billion in March until the 18th.

“The interest rate here is too high, the spread with the foreign exchange has gone up too much and the volatility has gone down a lot. We reached 18% of implied volatility from 16%, and inched closer to peers like the South African rand and the Mexican peso, with a volatility of 12% to 14%. You now have a worthwhile regime, while the cost of having dollars abroad increases,” he said.

The high interest spread has attracted foreign investors and is behind the appreciation of the real in recent weeks.

Mr. Calabresi also says that the internalization of funds is likely to contribute to an even greater drop in the foreign exchange rate. Garde, which holds short positions on the dollar, projects that the foreign exchange inflow will end the year at net $20 billion, but Mr. Calabresi says that “the flow to the stock exchange is so strong that we will probably have to revise this figure.” The most recent data from the Central Bank suggest a favorable foreign exchange flow of $9.5 billion this year.

Mr. Curvello, with ASA Investments, foresees a positive exchange flow of $25 billion and says that, in theory, it could be even higher if there were a greater internalization of funds from exporters. This could even contribute to a more substantial drop in the exchange rate, but the asset manager believes that the Brazilian currency will not appreciate much further. According to him, the fund today does not hold a forex spread bet on the real, but operates with a combined position with dollar sales and stock market purchases.

“We went to R$4.75 to the dollar from R$5.70 at the beginning of the year. At R$5.25, we thought it was a good size movement, so it was quite intense. I just think that the interest rate hikes by the Fed [U.S. Federal Reserve] does not match such a favorable scenario for emerging markets, with so much inflows,” he said.

Iana Ferrão, an economist with BTG Pactual, believes that the commercial flow is likely to increase this year due to the substantial increase in the balance of exports shipped because of higher commodities prices, but the gap is unlikely to be substantially reduced. “If we maintain a gap similar to that of 2022, we are talking about a trade flow of $30 billion, which is already much higher than last year,” she said.

BTG Pactual’s current expectation is that the trade balance will end the year positive at $75 billion. “We expect flow to Brazil to remain strong, not only because of commodities, which emerge clearly in the trade channel, but also for the financial channel, which has been the highlight at the beginning of the year.”

Source: Valor International

https://valorinternational.globo.com