30th October, 2018
The main economic adviser to Brazilian President-elect Jair Bolsonaro has proposed reducing the nation’s foreign reserves to pay down public debt, the newspaper Valor Econômico reported today.
Paulo Guedes, a founder of Brazilian Investment Bank BTG Pactual, whom Bolsonaro has tapped as his economy minister, believes Brazil has an excessive liquidity cushion, the report said, citing an unnamed source who helped to develop the far-right lawmaker’s government program.
Brazil built up most of its current stock of US$381 billion in foreign reserves during former President Luiz Inácio Lula da Silva’s 2003-2010 government, as part of measures aimed at earning investors’ confidence in the administration.
Credit agencies have repeatedly cited Brazil’s lofty level of foreign reserves as a positive influence on its sovereign rating. Yet the central bank paid for the reserves, mostly comprised of low-yield bonds, with public debt that leaves the government paying billions in interest. Reducing the amount of foreign reserves would mean selling dollars in the market, potentially adding support to the Brazilian real. A Bolsonaro representative did not immediately respond to a request for comment.
According to the website of the O Globo newspaper, Guedes proposed that the central bank could sell its reserves during a currency selloff, instead of the currency swaps it has traditionally used to smooth volatility.
The proposal fits into a larger debate about the optimal level of foreign reserves, which has engaged economists on both ends of the political spectrum. For example, former leftist presidential candidate Ciro Gomes, who placed third in a first-round vote this month, had proposed using some of Brazil’s foreign reserves to inject capital into state development bank BNDES.