Brazil's central bank eases pre-export loan restrictions
Foreign banks will be able to extend pre-export finance loans to Brazilian exporters after the Brazilian central bank eased restrictions that have been in place since March this year. However, loans will remain restricted to 360 days in length.
“This was indeed a welcome move,” comments Domicio dos Santos Neto, partner at law firm Santos Neto Advogados.
He adds that the market expects that the Brazilian Central Bank will also permit transactions of more than 360 days in the next few months.
In March, the central bank banned foreign banks from granting pre-export finance to Brazilian exporters. Financing could only be provided by the importer or off-taker and could not exceed 360 days between the disbursement and export of the goods.
This meant that pre-export finance facilities lent by foreign banks would be treated as cross-border loans and therefore taxed. Previously these export transactions were exempt from all taxation.
The original March ruling had been made with the intention of preventing the loans being used for other non-export purposes, and was part of a wider package of regulations aimed at slowing the appreciation of the Brazilian real.
The Brazilian government wanted to reduce the flow of ‘hot money’ into the country, where investors looking to benefit from Brazil’s high interest rates were making short-term investments in the country. This was causing the real to appreciate and therefore hurting Brazilian exporters’ ability to compete internationally.
To stem this flow of money the Brazilian government lowered interest rates and extended its 6% financial transaction tax to foreign loans maturing in up to five years.
However, in mid-June the Brazilian government retracted on this decision as well and will only apply the 6% tax on foreign loans of up to two years. This two-year limit had already been in place before the new rulings were introduced earlier this year.
During the four-month ban on pre-export finance transactions, the volume of ACCs, short-term one-year loans extended by Brazilian banks to exporters, soared.
“The volume of ACCs in Brazil increased more than 40% if compared with the volume we had before the changes,” reports Santos Neto.
He argues that despite the repeal of the regulation, ACCs may well remain the preferred financing option for exporters.
“Taking into account that both transactions may be entered for a maximum tenor of one year, the ACCs will continue to be more competitive than pre-export financings,” he says.
The real weakened by 2.2% in June and is 9.4% down since the beginning of the year, according to Reuters’ data.
Currencies across Latin America have weakened due to the ongoing eurozone crisis and fearful investors becoming more risk-averse and pulling out of emerging markets.
The Brazilian government had previously restricted pre-export finance loans to importers back in 1994, before retracting their decision six months later.