Brazil has more foreign debt than reserves, so it does not need a sovereign wealth fund. Moreover, it plans to use its fund not for long-term investment but to suppress the real’s rise against the dollar.
That is an economically counterproductive attempt to interfere with the market. Since Brazil’s current account surplus is not large enough to produce an artificial rise in the real, the government should let the market rule—and thereby raise the living standards of its citizens.
Brazil’s projected 2007 growth rate of 4.7%, or 3.7% per capita, is not particularly impressive. Depending on which International Monetary Fund (IMF) figures you believe, it is either below the world’s average growth rate or marginally above it. For a commodity-rich country in an era of high commodity prices, such modest growth does not suggest that Brazil is about to lose its decades-old reputation as a land of stop-go economic policy and performance.
China, Japan, Singapore, Russia and various West Asian nations have foreign exchange reserves so large and a payments surplus so embedded that they have chosen to establish sovereign wealth funds to invest money that would otherwise remain underproductive in short-term instruments.
Brazil is not in this position. Since its foreign debt exceeds its foreign exchange reserves and its current account surplus is only 0.7% of gross domestic product (GDP), there can be no assurance that in some future crisis Brazil will not need the money. Imitating the super-rich does not make one wealthy; it could have the opposite effect.
Brazil’s central bank has a policy of non-intervention in foreign exchange markets. There would seem little advantage to Brazil in its ministry of finance attempting to circumvent this policy by intervening to suppress the real’s rise. Such an attempt is likely to prove expensive, because a government body has little chance of success in countering the trading moves of the world’s professional currency speculators.
The surge in the real is probably temporary, resulting from high commodity prices and market enthusiasm for the Brazilian economy. That somewhat misguided enthusiasm can provide the Brazilian people with cheaper imports, generating a much needed improvement in Brazilian living standards. The government shouldn’t try to stop it.