Exchange controls for foreign trade: understand how they work

  • 09/07/2019
  • 10 minutes

Foreign exchange controls and regimes are aspects of the utmost importance for foreign trade and other related activities. Nevertheless, professionals who work in those areas have some doubts about them, since they involve a number of details.

Since the subject is extremely relevant to the sector, we prepared this article. Because of that, we interviewed Marcos Sales, a trader, and Rafael Borborema — treasury manager. Both of them work at the Wilson Sons.

In this article, you’ll find information about foreign exchange rates, norms practiced in Brazil, and more. Read it through to the end to know more!

What are foreign exchange controls or regimes?

According to Sales, they represent a “set of governmental activities and orientations, aiming to balance the economy through changes in exchange rates and control of foreign exchange transactions”. The Central Bank of Brazil (Bacen) is the organization responsible for supervising the activities of the locals that perform the exchange of coins.

This control consists, then, of “several devices elaborated by monetary authorities. They can be carried out by the authorities themselves or by participants in the financial system, such as banks, brokerage companies, and financial institutions”, explains Borborema. That is a way to “enable the implementation of monetary policies and their respective supervision”, concludes the specialist.

Thus, we can affirm that the main national controls are:

  • foreign exchange contracts;
  • Sisbacen (ROF and IE) records;
  • Siscomex (DI and RE) records.

Sisbacen is Bacen’s Information System. It involves the ROF — Financial Operations Registry —, a registry of international debts and loans, and the IED — Direct Foreign Investment Registry —, that is, a purchase and sale control for international companies and shareholdings.

The Siscomex — Federal Revenue’s Integrated Foreign Trade System —, in its turn, consists of the DI — Import Declaration —, and the RE, which is the Import Registry.

What are exchange rates and how are they handled in Brazil?

First of all, we need to take into consideration that, in Brazil, exchange rates were fixed until 1999. Since then, they’ve been fluctuating. In a very summarized way, it can be affirmed that they represent the ratio between general prices in two different countries, in real time. “It’s an operation characterized by the exchange of one country’s currency by that of another, in order to facilitate foreign transactions”, conceptualizes Sales.

The floating rate is the current rate in most countries. In that exchange rate regime, Bacen only controls the basic interest rate and the monetary base. Thus, “it varies daily, according to foreign currency and market fluctuations”, points out the trader.

The fixed exchange rate, as the name itself suggests, is immutable: time passes and the rate is not altered. According to Sales, “usually, the country commits to buying and selling a foreign currency, such as the dollar, at a fixed price, expressed in the national currency”.

“A fixed foreign exchange rate tries to be pegged and fluctuating at the same time, but doesn’t manage to be either”, he says. In practice, this rate is unstable and occurs through interventions by Bacen, done in order to keep the national currency fluctuating between bands arbitrarily determined by the organization itself.

To Borborema, our country has evolved a lot in relation to foreign exchange policies when it switched from fixed rates to floating rates. “These changes, as well as foreign exchange controls and inflation, positively affected the lives of the Brazilian people in terms of financial planning”, justifies him.

However, “to the companies that participate in foreign trade, floating rates brought about the need for more sophisticated financial processes”, warns Borborema. After all, cambial risk — generated by unpredictable changes in currencies — may lead to huge losses, if it’s not properly treated.

How do different exchange rates influence foreign trade?

Borborema elucidates that “if we put the focus on floating rates, in force for more than 20 years in Brazil, exchange variations should be treated as one of the major influencers in the country’s trade flows”.

In order to understand this point, imagine a product totally produced in Brazil, which can be sold in the United States for US$ 100. If the producer needs to get R$ 300 to cover costs and make a profit, the parity of R$ 3,50 to US$ 1 will allow him to sell the product for US$ 90 and get R$ 315. However, if the rate falls to R$ 2,90 to US$ 1, he will have to sell the product for US$ 100, which will lead to losses.

“Higher rates favor exporters, and lower rates, importers”, sums up the treasury manager, because they interfere not only in the volume we import and/or export, but also in other matters. “The regimes determine if a factory will be implemented in Brazil or abroad, if ports and railways will move a lot of cargo, and so on”, analysis him.

How does exchange rates for import and export work?

“A country’s economy is affected by the sale and purchase of products — exchange rates are extremely critical data to those who import and/or export”, ponders Sales. Companies that act only in the Brazilian market, that is, purchase and sell in reais, might wish to conquer new markets. According to the trader, “without the knowledge about changes in import and export exchange rates, there is a risk of losing profitability”.

Therefore, before taking any action related to prices and values in the foreign market, it’s necessary to know the foreign exchange rate of the partner-country and understand well how it fluctuates. It’s also recommended that you analyze the type of payment that will be carried out between the countries. In that way, legislative notions become fundamental during the process.

It’s worth reminding that purchase value might be different from selling value, and vice-versa. “The ideal thing is that you observe how is the economy of the other country before making large financial transactions”, recommends Sales.

To have an idea, treasury work in big companies consists of monitoring currency fluctuations, as well as its tendencies and indicators. Borborema emphasizes the importance of that activity to “choose the best moment to carry out the entry and exit of resources”. Because of the high volatility of the rates, “some of the operations need to be done in electronic terminals connected to the most important banks on the market”, completes him.

Finally, comprehending foreign exchange rate regimes and their respective alterations is essential to many segments. Therefore, you need to invest in the frequent accompaniment of those factors.

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