Government launches program to guarantee exchange rate protection in ecological transition – 02/25/2024 – Market

The government of Luiz Inácio Lula da Silva (PT) will launch, on Monday (26), a program to remove one of the main barriers highlighted by investors to attract foreign capital and finance projects linked to the energy transition: the risk of variation in the financing exchange rate.

An MP (provisional measure) will be issued to create the External Private Capital Mobilization and Exchange Protection Program, which provides for a partnership with multilateral organizations to enable credit lines for projects by offering hedge (protection) against exchange rate variations.

A fund will be provided to guarantee hedge operations and reduce the impact of exchange rate volatility on financing, especially long-term financing.

The MP should not bring a defined value to the fund. But government members heard by the Sheet guarantee that the program will not require primary expenditure from the Budget. In other words, it will have no impact on the fiscal target.

The most promising areas identified by Finance Minister Fernando Haddad’s team are renewable energy (solar and wind), low-emission hydrogen, SAF (sustainable aviation fuel) and electric mobility (vehicles that use electricity to power the engine as an alternative to fossil fuels).

The fund may receive financial resources from the partnership with the IDB (Inter-American Development Bank), from the National Treasury’s single account or even from fundraising.

In any case, it will not have a primary impact (on the Budget), because the risk of operations will lie with financial institutions. There will also be no equalization of financing rates by the Treasury, according to people with access to the text of the MP.

It will be a financial expense (those resulting from the payment of a government debt or the granting of a loan taken by the government).

Government research with investors on recommendations to increase the inflow of external resources for projects placed the impact of exchange rate variations at the top of the problems.

Another barrier to attracting foreign savings – the complete exemption on exports and investments – was addressed with the advancement of tax reform, approved by Congress at the end of last year and now in the regulatory phase.

With the removal of these two bottlenecks, the economic team considers that Brazil is paving a path to take advantage of investment opportunities to attract the investments necessary for GDP (Gross Domestic Product) growth and increased productivity.

Experts also point out the need for more stability in regulatory frameworks so that Brazil does not run the risk of losing this new wave of investments in the world for green (environmentally sustainable) projects, as shown in the seminar on energy transition, organized by Sheetlast week in celebration of its 103 years.

The new program is part of the Brazilian Ecological Transformation Plan, which has been coordinated by the Finance Minister’s team.

In addition to the partnership signed with the IDB, the program will have support from the World Bank and the United Kingdom.

The official announcement will be made in São Paulo by ministers Fernando Haddad, the president of the Central Bank, Roberto Campos Neto, and minister Marina Silva (Environment). On the international side, the president of the IDB, Brazilian Ilan Goldfajn, the ambassador of the United Kingdom in Brazil, Stephanie Al-Qaq, and the vice-president of the World Bank for the Latin America and Caribbean region, Carlos Felipe Jaramillo, will be present.

For the development and implementation of the External Private Capital Mobilization and Exchange Protection Program, the Brazilian government has an initial contribution of US$ 1 million (around R$ 5 million), from resources from the Sustainable Infrastructure Program of the United Kingdom (UK SIP) to be accessed by the IDB.

The non-refundable technical cooperation agreement will last approximately three years. In a document to which the Sheet had access, the Secretary of the National Treasury, Rogério Ceron, says he expects technical support in four financial products in the context of the program.

Firstly, it cites the “financing and incentives for the acquisition of derivatives [contratos financeiros cujo valor é derivado de outro ativo] and the establishment of a counterparty protection mechanism against credit risks”, offering foreign exchange derivatives to cover investments aligned with the Ecological Transformation Plan.

Next, it refers to a mixed financing mechanism to mobilize external savings via capital markets for ecological transformation (subsidized line).

The third product mentioned is contingent financing for liquidity and minimizing the impacts of exchange rates on investment projects aligned with the Ecological Transformation Plan. According to the text of the letter, a line is being structured with the support of the IDB as a moderate instrument for managing exchange rate risk.

Finally, it talks about financing for the structuring of Ecological Transformation projects, adding that a financing model will be designed considering other existing ones.

Ceron also says he understands that technical cooperation can be a “window of opportunity” for other emerging countries to benefit from the exchange of experiences, especially in the context of the G20.

Investment has been structurally low in Brazil for decades. To change this situation, the government designed the energy transition plan and created the New PAC (Growth Acceleration Program). Now, it intends to connect these two initiatives with a currency protection program.

The program does not interfere with the value of the exchange rate nor does it intend to “dirty” the floating exchange rate system, in which the price of the currency is defined by market conditions. This point was even clarified to President Lula when the project was initially presented to him.

With currency hedging, a company that took external financing or a foreign investor who carried out a project aimed at the ecological transition of solar panels, for example, will have insurance against currency devaluation if it encounters a change in the exchange rate at the same time. throughout implementation.

Today, this protection is very expensive for long-term projects, making this type of insurance prohibitive.