Brazil to Vote on New SWF

A proposal to create a law that establishes and governs a new Brazilian sovereign wealth fund (SWF) could reach Congress this week, laying the foundation for a controversial move by the finance ministry to stem the appreciation of the BRL. The proposed SWF would be financed with 50bp of Brazil’s primary fiscal surplus, which ended the last 12 months at 4.23%, well above the stated target of 3.80%, equating to BRL13bn. To guarantee availability of funds, the ministry established a new informal target at 4.80%, pledging not to use any excess collection on public spending but instead stashing it in a fund to invest in local securities. The purpose is to stabilize FX flows and stem rapid appreciation of the BRL, says finance minister Guido Mantega. Analysts commend the decision not to spend the extra revenue, but do not see the need to create a special vehicle, noting that Brazilian assets make poor counter-cyclical investments. Credit Suisse says the fund is a weak alternative to simply increasing the surplus. And the fact that the SWF is not being used to amortize debt while its assets are likely to earn a lower interest rate than what the sovereign pays on its obligations is a major flaw, says Santander economist Alexandre Schwartsman. “Maintaining the primary surplus at the levels observed recently should not be of much help in terms of containing inflation,” he adds. On a positive note, the most recent version of the proposal appears include more practical considerations than earlier versions, adds Schwartsman.