Looking to stockpile dollars in Brazil? Not so fast

foreign currency exchange into one law, simplifying processes and allowing the Brazilian Real to become a convertible currency in the future. But, after all, what impacts would this measure have on the Brazilian economy? </p> <p>The changes were drafted to increase competition in Brazil’s concentrated financial system, as well as modernizing forex trading and giving investors more legal security. <a href="https://www.camara.leg.br/proposicoesWeb/prop_mostrarintegra;jsessionid=83F26D4DE42AFAB90D0E3B524BC07C08.proposicoesWebExterno1?codteor=1817652&amp;filename=Tramitacao-PL+5387/2019">According to the bill</a>, Brazil’s Central Bank would be able to authorize new institutions to operate on the forex trading market. Currently, only 187 banks in Brazil are allowed to transfer money abroad, and other companies interested in carrying out this service must associate with them, increasing bureaucracy and costs. According to newspaper <em>Valor Econômico</em>, banks charge an average spread as high as 0.9 percent for buying and selling foreign currencies.&nbsp;&nbsp;&nbsp;</p> <p>This rule change would allow fintechs to enter the market, fostering competition and making it easier to send funds to Brazil. Another measure that may give a boost to this market is the loosening of requirements to register credit operations abroad for small amounts, such as typical transactions made between individuals.&nbsp;&nbsp;&nbsp;</p> <p>However, the Central Bank is aiming higher than simply making procedures easier for individuals. In a press statement, the institution said that modernizing and streamlining forex processes will generate efficiency gains “with a positive impact on attracting foreign capital for both financial markets and direct investments, including long-term projects such as infrastructure and concessions.” The decision also comes at a time when the Brazilian government is eager to privatize assets and reduce the size of the state.&nbsp;</p> <div class="flourish-embed" data-src="visualisation/597983"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>Legal security</h2> <p>It is important to remember that Brazil only adopted a free-floating foreign exchange system in the 1990s, so many of the rules set to be replaced by the new bill date back to times of hyperinflation, when the Central Bank needed more control of this market.&nbsp;</p> <p>That doesn’t mean it is fully handing over the reins, however. Rather, the new bill creates a general and simpler framework, gathering all regulations into a single piece of legislation. Also, market participants will have 365 days to adapt to the new law before it comes into force. In this transition period, the Central Bank and National Monetary Council (CMN) are expected to provide further norms where necessary.&nbsp;</p> <h2>Can I pay in Reais?</h2> <p>If approved, the bill could lay the foundations to make the Brazilian Real a convertible currency. By definition, a convertible currency “can be readily bought or sold without government restrictions, in order to purchase another currency,&#8221; according to Investopedia.com. The biggest example of such a currency is the U.S Dollar, used internationally as a parameter for all kinds of business transactions.&nbsp;&nbsp;</p> <p>In practice, the new rules would allow the Brazilian Real to become more accepted abroad, making it easier to do business. However, the likelihood of Brazilian bank accounts providing support for foreign currencies doesn&#8217;t seem to be coming around any time soon.&nbsp;</p> <p>As the Central Bank itself highlights, “while updating the legal framework is an important and necessary step, making the Brazilian currency convertible is a gradual process that depends on factors such as the confidence in the country’s economy and its commercial and financial presence in the world.”</p> <p>Speaking to the press, the Central Bank&#8217;s regulations director Otavio Damaso explained that using foreign currencies in domestic accounts is not an immediate priority. If the Central Bank decided to regulate that in the future, it would likely target <a href="https://epocanegocios.globo.com/Economia/noticia/2019/10/epoca-negocios-bc-abre-espaco-para-fintechs-de-cambio-em-projeto-de-modernizacao-cambial.html">“specific sectors”</a>—such as companies working with exports—rather than individuals.&nbsp;</p> <p>Some economists warn that allowing foreign currencies in Brazilian bank accounts could lead to the risk of the “dollarization” of the Brazilian economy, which occurs when the local currency is replaced by a stronger USD in times of high inflation. <a href="https://www.eco.unicamp.br/index.php/midia/638-conversibilidade-do-real-menos-autonomia-e-mais-volatilidade">According to Unicamp’s</a> Daniela Magalhães Prates, Maryse Farhi, and Raquel Almeida Ramos, in such a scenario, the “autonomy of the monetary policy would become smaller and the foreign exchange rate’s volatility would intensify.” It is important to remember, however, that Brazil’s inflation is under control at the moment, falling close to the low end of 2019 targets.&nbsp;</p> <p>On the other hand, Patricia Pereira, an economist at Mongeral Aegon, told <strong>The Brazilian Report</strong> that “the Central Bank always operates in the market to correct any kind of malfunction, not to establish foreign exchange rates. If it creates mechanisms to make the market more modern and less sensitive, it will fulfill the goal to allow the rates to be free-floating. If the market is less dysfunctional, it will intervene less.”</p> <p>She also echoes Central Bank authorities&#8217; views that the convertibility of the BRL is a distant scenario, also because the bill must first navigate the turbulent waters of Brasilia. “It reminds me of the bill to make the Central Bank’s<a href="https://brazilian.report/money/2019/04/11/independent-central-bank/"> independent</a>. No one is really against it, but there’s no one to champion it. And we know that there are lots of important things ahead in the queue.&#8221;