MercoPress. South Atlantic News Agency

Uruguay/Brazil will operate in local currencies to ensure bilateral trade

Brazilean President Lula da Siva and his counterpart Tabare Vazquez

Uruguay and Brazil expect to have bilateral trade operations in their respective local currencies in place in a few months time, according to the Uruguayan Central Bank. The system is similar to that implemented between Brazil and Argentina and which is beginning to be operational.

“The political decision has been taken and we are in the technical analysis stage”, said Central Bank president Mario Bergara. “The agreement to have trade nominated in local currencies should be quite expeditious taking advantage of previous experiences”.

The mechanism is quite simple and basically facilitates trade operations with exporters and or importers collecting or paying their bills in local currency, thus avoiding the risks of strong currencies fluctuations in “turbulent moments”.

It is applied to all operations of goods and services and related expenses and costs such as freight and insurance.

Uruguay’s Exporters union had requested the government to make the system operational since Brazilian importers were fearful that the variations of the US dollar which is used as the reference currency for trade could have an impact on their sales costs.

“Brazilian textiles importers are under stress not knowing how much they would have to pay in Reales for the merchandise. We just want an end to the stressful situation and to work with a reliable exchange rate”, said Teresita Aishemberg, CEO of Uruguay’s exporters.

Brazil has a relatively open economy and a huge domestic market so fluctuations of its currency value vis-à-vis the US dollar does not necessarily have an impact, unless the goods or services are imported.

This has been particularly true since last October when the Real begun loosing ground against the US dollar and experienced a 35% devaluation.

Uruguay on the other hand has a more open economy, is more dependent on foreign trade and has a miniscule domestic market compared to Brazil. But its consumers are more aware and sensitive to currency fluctuations with a significant percentage of the economy working on a US dollar basis.

With the new mechanism Brazilian exporters and importers won’t have to worry about the value of the US dollar and will continue to think in Reales. For Uruguay which needs to export, it ensures Brazilian importers will not be under “currency” stress.

The mechanism is vital for Uruguay and Argentina since Brazil is their main trade partner and they need to continue exporting to Latinamerica’s largest economy.

“Trade in local currencies in moments of uncertainty ensures the chain of trade with Brazil won’t be interrupted” said Aishemberg.

The system is quite simple: the Brazilian importer registers the operation quoted in local currency in an agreed financial institution. From that moment a compensation mechanism between both central banks becomes operational and the Uruguayan central bank then extends a credit in the local currency (Uruguayan pesos) to the local exporter; similarly when the importer is from Uruguay and exporter from Brazil.

However in the case of Argentina and Brazil there has been a catch, according to Uruguayan central banks sources. Although the system has been operational for several months, it has been slow in taking off: so far only 120 companies from both countries have registered and that is because “in moments of uncertainty, even when Brazilian think in Reales, the Argentines only think in US dollars”,

This can be attributed to the impact of the current Argentine political situation ahead of the coming mid term elections which could lead to a period of instability if the ruling administration looses its comfortable majority in Congress, said Uruguayan Central Bank sources.