FX wars and market integration: "The government is fighting with the correct weapons"

Friday, February 4, 2011

Latin America's increasingly investor-friendly countries continue to make strides toward market integration, with the recent surprising, yet challenging successes of the Mercado Integrado Latinoamericano (MILA) equity market showing that Chile, Peru and Colombia can work together.

But Brazil has also been trying to keep pace with its Brazil Investment and Business (BRAiN) effort to help showcase the country and its economy as a natural hub of financial services in the Americas. Its mission may prove to be very complementary to that of MILA, adding the biggest economy in the region to the integration efforts.

BNamericas spoke with BRAiN CEO Paulo Oliveira to gauge the progress being made at the group, as well as the views of the financial and business community on recent measures by central bank BCB and the new administration of President Dilma Rousseff to take on the appreciation of the Brazilian real.

BNamericas: BCB and the government have been active in recent months on measures to stem the appreciation of the real. Can you talk a bit about the capital markets' and banks' view of recent measures limiting banks' holding of positions shorting the real?

Oliveira: The new government, first of all, has the correct diagnosis of the problem and realizes that it's not Brazil or Brazilian [in its root causes]. We are facing an environment in the world - notably with China and the US - that is behind the appreciation of the currency. The real is suffering from the global conditions, including China's policy to keep its currency devalued, as well as the international liquidity situation, with the US and the Fed trying to spur the US economy. These things are not Brazilian, and we don't have any [major] problems to correct [at home, per se].

But of course, we have to do something to stem this. It's like a fever - the cause is an infection, but the symptoms are the fever, so you have to take something to reduce the patient's temperature. The government's measures are in this line, trying to prevent overexposure to these factors.

BNamericas: And as you say, there's nothing that the government can do to really solve the issue directly. So what are the right steps?

Oliveira: That's right. This problem is somewhat cyclical, but we can take some measures inside Brazil. We have to find facilities to allow [the market] to be able to buy more US dollars in Brazil. We have to figure out how hedge funds and other fund managers in Brazil can be more open to international markets, so that we can create a flow to buy dollars, not only to export and sell dollars in reais.

BNamericas: But is there any frustration with the government's moves, or is there a real understanding of the thought process driving government policy on this front?

Oliveira: No one likes to see the possibility of deals or arbitrage being harmed, but the government is not taking any measures to deal with the stock of the portfolio or the flow of the dollar against the real to come in and out of the country. So, the government isn't doing anything to harm the law or the rules, and that's good. The government is fighting with the correct weapons.

BNamericas: Changing gears a bit, tell me more about how BRAiN's integration and roll-out process is going?

Oliveira: We're a launching a report on the proposition of BRAiN, and we are meeting with authorities in Chile and Mexico, mainly. I was in Chile [in late 2010] speaking with the head of the central bank, the securities and exchange commission, and the banking and other commissions. This process is going well, and we're preparing another report on the competitiveness of our region and a road map of how to improve [aspects of this measure].

We've also hired a former Chilean [insurance regulator] SVS head to join our team, and he will write a report on financial services regulation and legislation in the region, comparing Brazil, Chile, Colombia, Peru and Argentina, and how to integrate these into one big market.

BNamericas: What is your view of MILA? How does it help or hurt your vision?

Oliveira: MILA is going the same direction, and Peru provides an illustrative example of the [challenges and opportunities]. You can't walk in the right direction until you have the right legislation in different countries. The effort to integrate Chile, Peru and Colombia will be the same effort to incorporate Brazil later.

What we need to do, more generally, is figure out how to attract more global investment, while also giving local investors the opportunity to seek out neighboring country investment without the need to [deal with complicated exchanges and transactions]. A Chilean investor should be able - through the local exchange - to buy a Brazilian share directly, rather than going via New York to buy an ADR or having to go through OTC markets. If the local brokers in Brazil and Chile are in the same circuit, everyone will win.

BNamericas: So what are the next major events for BRAiN?

Oliveira: We have our second major report on interactivity [of markets] coming in February and our road show through Latin America about integration on three levels - regulation, technology and commercial aspects, such as how to split fees and create win-win relationships.

About Paulo Oliveira

Paulo Oliveira is general director of the newly launched BRAIN initiative. Prior to that, he was executive director at BM&FBovespa, leading the development and international divisions, as well as the business, institutional and media relations divisions.

Oliveira was also a partner at consulting group ProFinancial/ProBusiness, which specialized in strategic repositioning for large companies. He worked at Bank of New York – Credibanco in Brazil as finance director before that.

About the company

Brazilian banking association Febraban, capital markets group Anbima and stock and futures market operator BM&FBovespa officially launched BRAiN in March 2010. Other partners in the effort include Banco do Brasil (BB), Banco Votorantim, Bradesco, BTG Pactual, CETIP, Citibank, HSBC, Itaú Unibanco and Santander.