Brazil to Create SWF?

From Jonathan Wheatley in the FT today.

Brazil SWF to counter rising currency

By Jonathan Wheatley in São Paulo

Published: December 9 2007 22:10 | Last updated: December 9 2007 22:10

Brazil will create a sovereign wealth fund with the primary aim of intervening in foreign exchange markets to counter the appreciation of Brazil’s currency, according to finance minister, Guido Mantega.

“It will have the function of reducing the offer of dollars in the market and helping the real to appreciate less,” he told the Financial Times.

His statement adds to controversy surrounding the fund, first announced by Mr Mantega in October. Since then, funding plans and objectives have undergone several revisions. The uncertainty has caused concern among investors and officials at the country’s central bank. The SWF appears to differ substantially from funds operated by other countries.

Under Mr Mantega’s original plan, the SWF would have drawn on Brazil’s foreign reserves, which have risen quickly this year to about $180bn. That plan sparked a behind-the-scenes row between the finance ministry and the central bank.

Darwin Dib, economist at Unibanco, a São Paulo bank, said the plan was unorthodox and that that level of firepower would have no lasting impact on exchange rates. He said the proposal raised doubts over the government’s commitment to Brazil’s floating exchange rate regime.

“The big victory for the central bank,” a central bank official said, “is that the fund will have nothing to do with Brazil’s foreign reserves and nothing to do with the central bank.”

But in an interview with the FT in Brasília last week, Mr Mantega said the fund would indeed affect the accumulation of reserves and would share the central bank’s source of funding at the national treasury.

Under current rules intervention in currency markets is the sole prerogative of Brazil’s central bank.