Brazil providing protection to shield investors from forex risks

Brazil is planning to expand the use of foreign exchange protection mechanisms in an effort to attract more international players to bid for contracts in different sectors of the economy. 

"The federal government is creating mechanisms to include foreign exchange protection in the concession contracts to be offered in different areas," George Santoro, executive secretary of the transport ministry, told BNamericas.

"These guarantees will be provided by the national treasury and they will stimulate more competition, more interest from international companies in the upcoming bidding processes," he added.  

The most recent auctions in Brazil for concession contracts, mainly for highways, have seen little competition between bidders, and experts claim that exchange rate risks are one of the main reasons for this.

"We still only have very few participants in [highway] auctions, they’re still highly concentrated. In Colombia, for example, where there is also a series of highway tenders underway, there’s more competition, as well as in Paraguay," Daniel O'Czerny, director of global infrastructure finance for Latin America at Citigroup, told BNamericas in a recent interview.

"Perhaps Brazil would need to bring in more flexibility regarding currency in contracts, somehow introducing hard currency into contracts to attract more interest, for example, from European companies, but that's easier said than done," he said.   

As part of the government's efforts to generate more appeal for its tenders, on Monday the finance ministry announced additional forex protection for contracts related to the energy transition and sustainable projects, under a program called Eco Invest Brasil.

"This initiative, part of Brazil's ecological transformation plan, is aimed at stimulating foreign investments in sustainable projects in the country and offering exchange rate protection solutions, so that the risks associated with exchange rate volatility are mitigated and do not hinder these investments, which are crucial for Brazil's ecological transformation," the finance ministry said in a statement.

The Inter-American Development Bank (IDB) will also play an important role in this initiative, acting as an intermediary to contract an international bank that will offer exchange rate protection in Brazil. 

A total of US$5.4bn from the IDB will be applied to a credit line and foreign-exchange coverage for foreign investments under the program.

"Exchange risk is a factor that hinders investments in emerging markets like Brazil, contributing to the current deficit in investment in sustainable infrastructure and other large-scale green projects," IDB said in a release to announce the cooperation between the development bank and Brazil's finance ministry, environment and climate change ministry and central bank.  

IDB President Ilan Goldfajn also underscored: "We need to change the level of financing to face the impacts of climate change. The financial innovations that the government of Brazil and the IDB are promoting have the potential to increase the level of green investments. This program will help Brazil on its journey to ecological transformation and strengthen a more resilient, sustainable and prosperous economy."