Eco Invest Brasil will provide credit lines at a competitive cost to finance ecological transformation projects
The Ministries of Finance and the Environment announced this Monday (26.Feb.2024) Eco Invest Brasil, the External Private Capital Mobilization and Exchange Protection Program. The IDB (Inter-American Development Bank) will allocate US$5.4 billion (or R$27 billion) to encourage the entry of foreign resources into sustainable projects in the country. Here's the complete of the statement (PDF – 168 kB).
It will be a program that will have a type of environmental insurance to make foreign investors transfer resources to sustainable projects in Brazil without suffering from the volatility of the real in relation to foreign currencies, mainly the dollar.
The IDB will act as an intermediary in contracting an international bank that will offer exchange rate insurance in Brazil. The international bank will be able to contract protection in a more accessible way and with better conditions.
“If the real devalues by a certain percentage, the investor will be protected. The insurance promises to cover the exchange rate difference, ensuring that the investor can buy dollars at a previously defined rate, thus minimizing their losses.”, said the Ministry of Finance in a note.
“This means that the cost of protecting investments against exchange rate fluctuations will be lower”he completed.
The program will be made possible via MP (provisional measure), which will allow the Central Bank to carry out operations that make exchange rate protection solutions viable. The CMN (National Monetary Council) will define the infra-legal regulations for implementing the program.
The president of B.C. (Central Bank), Roberto Campos Neto, and the Secretary of the National Treasury, Rogério Ceron, will present the program this Monday (Feb 26). The Minister of Finance, Fernando Haddad, was diagnosed with covid-19 and will not participate. He felt unwell on Sunday (Feb 25, 2024).
The model will be similar to the Safra Plan, but aiming to maximize participation in private capital. The Ministry of Finance will be responsible for regulating the credit line and defining the process and allocation of resources. There will be publication and accountability.
GOVERNMENT PROPOSAL
To the “currency hedging solutions“in operations will serve to mitigate the risks associated with currency volatility are mitigated and do not hinder investment”crucial for ecological transformation”.
The program enables capital market operations for companies and investors based in Brazil to raise funds abroad. Eco Invest Brasil will provide lines of credit at a competitive cost to partially finance investment projects aligned with ecological transformation that use foreign resources.
The initiative is part of Brazil's Ecological Transformation Plan. The program “will encourage greater integration of Brazilian companies with investors and the international financial system”.
EXCHANGE PROTECTION
There will be specific protection for ecological transition projects. The government said that the volatility of the real increases the cost of exchange rate protection for longer terms. “It is so high that it makes ecological investments in foreign currency unfeasible”he said. “There are no solutions on the national market for terms over 10 years. It is to fill this gap that exchange rate protection is proposed for ecological transition projects”, he added.
The government compared exchange rate protection to a “car insurance”. “Covers losses in case of accidents“, he said. “If the real devalues by a certain percentage, the investor will be protected. The insurance promises to cover the exchange rate difference, ensuring that the investor can buy dollars at a previously defined rate, thus minimizing their losses.”, completed the note.
It will be up to the Central Bank to be the bridge between the insurance that the IDB can take out and investors. The government will offer a special liquidity line for financing large sustainable projects. There will be financial support even in “situations of abrupt variation in the exchange rate”. The government said that the program is not intended to interfere in the foreign exchange market.
PROGRAM POTENTIAL
The president of the IDB (Inter-American Development Bank), Ilan Goldfajn, said that this program was built collectively, with the Ministries of Finance and Environment, the Central Bank and the IDB. He stated that working together is important and argued that the program has potential. The IDB president hopes that Eco Invest Brasil will be replicated around the world.
“I'm sure this path will be long, with a lot of help and contribution. The IDB is proud to be the main technical partner in the design and operationalization”, he said. Goldfajn declared that it is difficult to deal with exchange rate risk, but that Brazil cannot “there is more of an option to have investments in a smaller amount”.
“Today we have an obligation to think about how to solve old problems for issues that are much more pressing today than in the past. Time has passed and the tipping point is coming.”said the president of the IDB.
Goldfafjn said that the IDB will support the program on two fronts, with US$5.4 billion, or R$27 billion. US$3.4 billion will be allocated to help with derivatives and options and another US$2 billion in the credit line to provide liquidity.
“The idea is to support the development, liquidity and efficiency of the foreign currency protection market in the country, acting cooperatively, acquiring derivatives in the foreign market and passing them on to local financial institutions”he declared.
The objective is to increase IDP (Direct Investment in the Country) in green investment sectors, such as reforestation, low-carbon agriculture, energy transition and others.
“I think what we are doing here is symbolic. We are signing a beginning of a program of an old problem and a new emergency”declared Goldfajn. “It's symbolic too, because if it works, and I think it will work, it's an example for the world. This risk is a global problem, the solution for which will be replicated”, he added.
The president of the BC, Roberto Campos Neto, declared that it is necessary to unlock the environmental agenda. He assesses that Brazil has enormous potential, because there is concern throughout the productive sector, influencing investments and management of funds and financial flows.
“At the Central Bank, the environmental issue has been important for a long time. We have growing concerns about sustainable growth, as well as social, environmental and climate risks.”he said.
Campos Neto stated that the world is in a more “mature” in terms of sustainable growth. He said that heat waves, frosts and droughts impact food and energy prices, with a significant impact on inflation. Therefore, climate shocks have an increasing trend, which causes uncertainty about the process of future price stability.
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