UPDATE: Brazil Sovereign Wealth Fund Idea More A Pipe Dream - WSJ.com

UPDATE: Brazil Sovereign Wealth Fund Idea More A Pipe Dream - WSJ.com: "*
OCTOBER 16, 2009, 5:06 P.M. ET

By Riva Froymovich
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--Despite the enormous influx of capital going into Brazil, a sovereign wealth fund in the near term is little more than a pipe dream.

According to recent reports, Brazil's government is planning to set up a new sovereign wealth fund to invest dollars that the central bank buys on the spot market to limit the sharp appreciation of the local real currency against the dollar.

But Brazil needs all the money it can get to pay for its budget deficit and public debt. Second, much of the capital in flows boosting the real are private and do not go into the government coffers.

Moreover, if Brazil takes anything away from the historic financial crisis the world is just beginning to get over, it is that the country needs to build and preserve domestic reserves to shield it from another bubble. Given the growth in Brazilian assets over the last year, a bubble may not be far off. Brazilian stocks hit a 16-month high Thursday and the real has gained 37% against the U.S. dollar this year.

A sovereign wealth fund is a higher-risk investment portfolio, wielded by monetary authorities or central banks to diversify surplus reserves outside of the economy and potentially make a profit.

Asked again this week about plans for such a fund, a Finance ministry spokeswoman said Friday, 'We have had a lot of requests for comment on this, but the Finance Ministry has no comment on the subject.'

Brazil's reserves have swelled in recent months, up to $231 billion, on the central bank's actions - a testament to recovering risk appetite and Brazil's appeal as a growing and relatively stable economy.

But, economists say this is deceiving.

'There is nothing about wealth in that fund because Brazil does not have a fiscal surplus to capitalize on,' said Alberto M. Ramos, a senior Latin America economist at Goldman Sachs in New York.

Brazil's government is spending well beyond its means. The country's 12-month public sector primary budget surplus declined in August to 1.59% of gross domestic product, well below the year-end target of 2.5%. Primary figures don't include service costs on debt. With such costs included, Brazil posted an August nominal deficit equal to 3.53% of GDP.

'The only way to capitalize is to issue more debt. Then it would be a sovereign debt fund rather than wealth, because there is no wealth being created,' said Ramos.

Brazil is a net borrower.

Foreign debt rose in August to $204.1 billion from $195.9 billion in July. Dividend and profit remittances by multinationals increased to $1.9 billion from July's $1.75 billion. Meanwhile, the central bank predicted a rising current account deficit in 2010 to $29 billion from an estimated $18 billion this year.

Noted Latin American country risk specialist Armen Kouyoumdjian asked: 'How can you say I am putting money aside when you are not even covering your expenses?' He added that Brazil has the largest stimulus program in Latin America, which will increase its debt even more.

Brazil's government may be floating the idea of a wealth fund for the prestige it carries. This may also be the government's way to tell the central bank to intervene more, according to Affonso Pastore, former Brazil Central Bank President and adviser for GlobalSource Partners. But, analysts say the country must reinvest in itself to fund development, rather than try to turn profits with money abroad.

Brazil already tried to launch an outside-looking sovereign wealth fund last year, but had to change plans when the financial crisis struck. Monetary authorities realized they needed to use those dollar reserves for their originally intended purpose, selling dollars in order to stabilize the market.

'The downturn has led to a reconsideration of what really represents too much reserves from a pure currency standpoint,' said Alan Ruskin, head of global strategy at RBS.

He said Brazil's central bank will probably want to build reserves even more before investing them.

The central bank is the other hurdle in the government's supposed plans. It is in the market daily trying to prevent further appreciation of the real, and another authority affecting the foreign exchange market could be counterproductive.



-By Riva Froymovich, Dow Jones Newswires; 212-416-2217; riva.froymovich@dowjones.com