Access to Trade Finance in Times of Crisis


Chapter 5. Brazil’s Approach in the Face of Export Finance Constraints

Jian-Ye Wang, and Márcio Valério Ronci
Published Date:
February 2006
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A deteriorating international outlook and uncertainty about the future course of domestic economic policies during an election year led to increasing pressure on Brazil’s financial market variables beginning in the second quarter of 2002, as evidenced in a hike in the risk premium for Brazilian government securities and a sharp depreciation of the real (Figure 5.1). At the same time, rollover rates on medium- and long-term public debt fell sharply. These adverse developments occurred despite the maintenance of sound domestic policies and continued progress on the country’s structural reforms agenda.

Figure 5.1.Brazil: Real Effective Exchange Rate

(Reais per U.S. dollars of April 2003)

Source: Central Bank of Brazil.

Basket of 15 currencies, deflator CPI.

The depreciation of the real created conditions for exporters to expand their operations, and one important instrument to allow such expansion was pre- and postshipment export financing. Despite the favorable outlook for the export sector, however, foreign financial institutions started reducing the supply of export credits to Brazilian banks and enterprises. There also was a considerable increase in the cost of credit lines for 30- to 360-day financing by mid-2002. Despite a much depreciated domestic currency, the shortage of trade financing for exports was preventing export revenues from growing, which could have offset part of the impact of net outflow of private capital.

Decline of Trade Credits by Foreign Banks

The balance of interbank credit lines (including export, import and other short-term finance) fell sharply to $14.5 billion at end-2002 from around $20 billion in May 2002 (Figure 5.2). Both export and import credit lines followed similar declining trends in the period. Although export credits were gradually restored in 2003, import credits remained at low levels. A fall in import credits was partly determined by demand, as imports declined because of weaker domestic economic activity and depreciated currency (Figure 5.3). On the other hand, the fall in export credit lines seemed not to be associated with a weakening of export performance, but to the shortage of supply. The sharp depreciation of the real, especially since mid-2002, was an important stimulus to exports. In fact, despite the fall in export credits, exports had maintained an expansionary trend, while the share of export finance to total exports had decreased in the second half of 2002 (Figures 5.4 and 5.5).

(In billions of U.S. dollars)

Figure 5.2.Brazil: Bank-to-Bank Credit Lines

Source: Central Bank of Brazil.

(In billions of U.S. dollars)

Figure 5.3.Brazil: Import Credit Lines and Total Imports

Source: Central Bank of Brazil.

(In billions of US. dollars)

Figure 5.4.Brazil: Export Credit Lines and Total Exports

Source: Central Bank o f Brazil.

Figure 5.5.Brazil: Total Exports and Export Financing

Source: Central Bank of Brazil.

With an improved international outlook following the reduction in interest rates by the U.S. Federal Reserve and reduced uncertainties surrounding the macroeconomic policies to be followed by the new government, market expectations improved significantly by early 2003. As a result, constraints on the supply of export credit were eased. After a substantial increase in the second half of 2002, the net outflow of funds through short-term credit lines stabilized by the end of the year, with the rollover rate returning to nearly 100 percent (Figure 5.6). Moreover, after a critical period through August 2002, the cost of those lines converged gradually to the precrisis level (Figure 5.7).

Figure 5.6.Brazil: Credit Lines—Monthly Flow Accumulated from January 2001 to April 2003 and Rollover Rate (Bank to Bank)

Source: Central Bank of Brazil.

(In percent a year)

Figure 5.7.Brazil: Interest Rates on Credit Lines

Source: Broadcast.

Temporary Mechanism to Supply Export Finance

In August 2002, the Central Bank of Brazil (BCB) established a temporary financing mechanism to offset part of the reduction in export credit lines. The mechanism consisted of BCB holding auctions to sell foreign exchange to authorized dealers. The objective was to provide liquidity in foreign currency to the banking system by targeting the market of short-term export credits to mitigate the cutback of credit lines by foreign banks.

To set up the parameters to guide the auctions, a survey was conducted by the BCB to assess the turnover of each authorized foreign exchange dealer to compute its acceptable exposure under the mechanism. A quantitative ceiling for a dealer’s bid in the auctions was set at 20 percent of the dealer’s reference net worth. If a dealer purchased under such a criterion the amount of foreign exchange exceeding four times its accumulated provisions of pre- and postshipment export financing over the previous four-week period, the dealer, on the same day of the auction, had to either sell the excess amount to other authorized players in the market or deposit it at a zero interest rate at the BCB. Also, a dealer had the flexibility to sell, on the same day of the auction, part of the purchased foreign exchange to a bank authorized to operate in foreign exchange, in which case the ceiling for the bank would be set at four times its export finance operations over the previous four-week period. To encourage banks to maintain their export financing operations, export financing generated by BCB auctions in the preceding four weeks was not included in computing the bank’s foreign exchange purchase ceiling, so that the auctioned resources would be additional to credit lines available in the market.

In the first phase under the mechanism—from August–October 2002—the BCB held auctions offering foreign exchange to authorized dealers. Each dealer (a domestic bank) presented its proposal with both the amount (subject to the ceiling resulting from the survey) and interest rate in U.S. dollar terms. The bank then acquired the dollar amount with a commitment to pay in the future in reais, calculated with the exchange rate observed on the payment date and the interest rate resulted from the auction. On day two after the auction, the dollar amount was delivered by the BCB to the bank, and the resources so obtained could be used only for pre- and postshipment export finance. In this transaction, BCB’s international reserves were reduced in the amount auctioned.

The commercial bank had seven calendar days to carry out export finance operations with an exporter. If there was no matching client for the bank’s dollars, such a “free” or unused amount of foreign exchange would have to be deposited at the BCB at a zero interest rate. Typically, an exporter contacted an authorized bank for export financing with a commitment to deliver payment in U.S. dollars within a period related to the shipment of goods abroad. Such a period was fixed at a minimum of 90 days and a maximum of 360 days before the shipment, and actually averaged about 80 to 110 days.

The Bank sold the foreign exchange in the interbank market to acquire reais (bank reserves) to lend to the exporter.

In the mechanism’s second phase—from February-April 2003—upon delivery of exported goods and receipt of payment by the importer, the exporter deposited the amount in the lending bank. The bank then sold foreign currency in the interbank market to acquire reais, and up to 185 days after the auction it transferred reais (bank reserves) to the BCB to complete the process (Figure 5.8).

(In millions of U.S. dollars)

Figure 5.8.Brazil: Cash Flow of Export Credit Lines

Source: Central Bank of Brazil.

Assessment of the BCB’s Export Financing Mechanism

The BCB’s auctions between August and October 2002 were effective in providing exporters with resources to smooth out the financing shortfall in the period (Figure 5.9). Also, the costs for the participants were relatively low, as the weighted average interest rate of the auctions was on the order of 4.25 percent during the period, compared with the average of 7.35 percent offered by foreign banks (Table 5.1). The auction program was discontinued on October 18, 2002, as the amount allocated for the program was fully used. The BCB offered a total of $2.1 billion. The auctioned amount was repaid subsequently in its entirety to the BCB, and the relevant regulations were revoked.

Table 5.1. Brazil: Credit Line Interest Rates (In annual percent)
  Average 1 Minimum Maximum
Central bank’s export auction 4.25 4.00 6.10
Export Financing (ACC) 2 7.35 4.50 18.00
Source: Central Bank of Brazil.

Weighed average by the amount.

1,910 exchange rate contracts from August 23, 2002 to October 25, 2002.

(In millions of U.S. dollars)

Figure 5.9.Brazil: Bank-to-Bank Credit Lines

Source: Central Bank of Brazil.

Although the foreign exchange amount used in the program was relatively small, the interventions were effective in mitigating the impact of credit contraction during a critical period. BCB interventions and the appropriate timing of the operation might have headed off the occurrence of unfavorable dynamics, with perhaps more damaging consequences to the economy than the path that was actually followed. Moreover, the program was part of a comprehensive set of measures taken by the government at that time to weather financial shocks, including the strengthening of public finances and monetary policy supported by resources from international financial institutions. In the area of trade finance, the country’s development bank (BNDES) provided an additional $2.6 billion in trade financing funded with $1 billion from the Inter-American Development Bank and with funding from other external sources. In 2002, BNDES loans to the export sector expanded to $3.9 billion, an increase of 52 percent in the year, indicating the key role of BNDES in providing additional financing for the export sector, replacing private bank loans. The episode showed that, in order to support macroeconomic policy actions under extreme circumstances, some micro measures may be required to address specific problems, especially in the financial sector, that, if not appropriately dealt with, could produce a much larger adverse impact on the economy.