beyondbrics

One unintended consequence of Petrobras’s forthcoming share issue may be its impact on the value of Brazil’s currency, the real. Petrobras hopes to raise as much as $32bn from minority shareholders and, if other recent big issues are any guide, some 80 per cent of that will come from foreign investors.

The real has already rallied strongly against the US dollar in anticipation of the issue. On Wednesday the dollar fell 0.11 per cent in Brazil to R$1.725, down from a peak of R$1.865 in early June – in spite of two rare currency auctions during the day by Brazil’s central bank.

If $20bn or more were to enter the country at one time it could easily send the exchange rate below R$1.60, with predictable consequences for Brazilian exporters, already suffering after several years of a strengthening real.

But as financial daily Valor Econômico reported this week (in an article available here to subscribers) market players are counting on the government to neutralise the Petrobras effect.

Recent experience suggests it may succeed. When Banco Santander of Spain floated its Brazilian operation in October 2009, it raised R$13.2bn – 80 per cent from foreigners. On that occasion, Brazil’s central bank bought the entire influx without letting it pass through foreign exchange traders.

One option Valor says is under consideration in the case of Petrobras is for Banco do Brasil – a government-controlled commercial bank that is Petrobras’s biggest foreign exchange operator – to sell the inflow to the central bank, bypassing the market in the same way.

But Petrobras may not want to sell its dollars at all. Its business plan for 2010 to 2014 involves capital expenditure of $224bn. Its local content targets are stringent, rising from 37 per cent to 65 per cent. Yet since the bulk of investment will take place under the lower limit, Petrobras will need access to about $140bn over the coming four years.

Far from disposing of its dollars, it will use them up pretty quickly – and, more than likely, come back to capital markets for more.

But there could still be a long-term impact on the exchange rate. There is a lot of capital in the world looking for higher rates of return than can be had in developed markets. A successful Petrobras issue could open the doors to many more. There is a queue of Brazilian companies waiting to see how it goes. Even if the central bank steps in to buy all their dollars, it will have to add them to its growing pile of foreign currency reserves – making the real an even more attractive prospect.

Related reading:
Brazil stakes future on $75bn Petrobras offer, FT
Petrobras’s share issue: just the beginning?, beyondbrics
Brazil’s oil valuation: politicians score ahead of investors, beyondbrics