Brazils economic importance has increased substantially in the past 10 years; consistently ranked among the 10 largest economies in the world. However, despite relevant improvements in the past decade, Brazils financial and capital markets still have room to grow and further support is needed for real long term sustainable economic development.
R5FX recently participated in the creation of a UK Foreign and Commonwealth Office report – ‘The Emerging Market Economy – Currency Internationalization’ with Brazil being the focus. Some of the key speakers at its launch included the Brazilian Ambassador to the UK, His Excellency Eduardo dos Santos & Marcio Estrela & Lucio Hellery from the Central Bank of Brazil who both gave informative speeches on the subject.
The case of currency internationalisation for the Brazilian Real was debated with Dr Sharmik Dhar, Chief Economist from the UK Foreign and Commonwealth Office highlighting a certain number of prerequisites that must be met for the process to begin.
Arguably, the most important is the removal of serious capital controls. The development of a deep and dynamic domestic financial market, as well as stable and predictable macro and microeconomic policies. This is of course easier said than done…
In recent years, the landscape has changed for many emerging market economies who are faced with the currency internationalization question. It is now more important than ever to weigh up both the economic benefits and political costs. Can a strategic currency internationalization design enable the Brazilian economy to contain the economic risks, while still being able to harness the benefits and opportunities?
The natural benefits highlighted by the Chief Economist include lowering transaction costs, tax and reducing exchange rate barriers - thus stimulating trade relations. The primary risk associated with this process is of course exchange rate volatility.
That is the potential occurrence of large and sometimes very sudden, exchange rate changes that are often unrelated to the domestic economic conditions. This external vulnerability and exposure to large exchange rate movements would bring a high degree of financial destabilization with very bad political timing.
“It is important to consider how the process of the currency internationalisation could support Brazilian growth in the best manner possible.“ One could argue that now is not the best time for that.