Exclusive-Brazil is preparing currency hedging instrument to boost foreign direct investment, says Haddad

By Marcela Ayres, Bernardo Caram and Lisandra Paraguassu

BRASILIA (Reuters) – Brazil’s government is preparing to introduce currency hedging tools this year to attract more long-term investment from abroad, Finance Minister Fernando Haddad told Reuters, in a bid to reverse a decline in foreign direct investment (FDI).

In an interview late Wednesday, Haddad said the initiative, which is currently being finalized in collaboration with the central bank, would be launched within the next 60 days.

The new measure aims to attract more foreign investment, which the government sees as key to “green” development projects that are at the heart of President Luiz Inacio Lula da Silva’s political agenda. Foreign direct investment in Brazil fell 36% to $37.9 billion in the first eight months of 2023.

Currently, investors in long-term projects in Brazil with foreign currency exposure pay taxes on currency appreciation over the course of the project – something the central bank has long described as a disincentive to foreign direct investment.

Haddad said he was confident policymakers had found a tool to protect investors from currency risks that kept them away.

“I am confident that the format will be ready, otherwise I wouldn’t be saying this. I believe it will be this year,” he said during a wide-ranging interview in his office in Brasilia.

A government official familiar with the discussions said the new hedging tools would fill a gap in the market that makes it virtually impossible to hedge currency risk in Brazil for long-term projects.

TAX CHALLENGES

Haddad’s success this year in passing new fiscal rules to curb the rise in national debt has earned him grudging respect in financial markets. But he now faces growing skepticism that he can meet his ambitious goal of eliminating Brazil’s primary deficit next year.

Positive views of Haddad, a former mayor of Sao Paulo and the left-wing Workers’ Party’s presidential candidate in 2018, rose to 65% of Brazilian fund managers, economists and financial market analysts surveyed by pollster Genial/Quaest in July as the new financial framework removed hurdles in Congress.

However, last month the same survey showed that positive views had fallen to 46% of respondents as private economists expressed doubts about next year’s budget target and called for tighter spending controls rather than relying so heavily on new revenue.

Adding to Haddad’s challenges, congressional leaders who played a key role in passing the budget framework are now proving more resistant to the administration’s efforts to extract more tax revenue from well-connected industries and interests.

Haddad acknowledged to Reuters that increasing headwinds in Congress could derail the agenda needed to meet budget targets.

For example, he said a major new revenue measure submitted to Congress as an executive order in August now needs to be resubmitted as a bill, which could delay its passage.

The measure aims to raise 35 billion reais ($7 billion) in 2024 by preventing state tax breaks from reducing companies’ taxable income for federal revenue.

Executive orders in Brazil have immediate effect but must be confirmed by the legislature within four months or they expire.

Haddad said Congress’ opposition to reviewing executive orders is an “unresolved impasse.”

“It is unfortunate because in some matters the executive order really needed to be taken into account because of its importance and urgency,” he said. “We face this limitation, but we will overcome it by submitting the bill with constitutional urgency.”

Without this measure, Haddad said, it will be “very difficult” to eliminate the deficit in next year’s budget proposal.

The secretary said congressional support for reform is even more important as economic headwinds mount, citing higher long-term interest rates in the United States and the outbreak of violence in the Middle East.

Brazil’s economy grew well above forecasts in the first half of the year, driven by a bumper harvest and strong oil and mining production. However, Haddad warned that economic performance in the third quarter was “very poor.”

“Even if Congress … confirms all the decisions made so far by the executive branch, we still have a lot of work to do,” he said, adding that the department stands ready to initiate new fiscal measures if necessary to achieve its goals .

($1 = 5.0593 reais)

(Reporting by Marcela Ayres, Bernardo Caram and Lisandra Paraguassu; Editing by Brad Haynes and Christopher Cushing)