Brazil: Financial Sector Assessment Program-Technical Note on Systemic Liquidity Management
IMF Staff Country Reports, November 30, 2018
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Bibliographic details
- Published: November 30, 2018
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781484387573.002
Overview
- Brazil’s financial markets are described as generally liquid and sophisticated.
- The infrastructure supporting markets appears sound and is widely attributed by market participants to ensuring the resiliency of Brazil’s markets despite a multitude of significant shocks.
- A key foundation of market resiliency is a large structural liquidity surplus (around 20 percent of GDP) and Brazil’s substantial FX reserves.
Market liquidity and instruments
- Brazil offers a wide array of instruments which investors can use to manage and hedge interest rate and FX risks.
- Government bonds are the centerpiece of the securities markets.
- High-quality short-term liquid investments emphasized by investors include overnight repos and short-term government bonds.
- FX hedging instruments are widely available, supporting confidence to hold the Real.
Resilience and buffers
- Market participants generally have ample cash reserves that provide a key buffer against liquidity shocks.
- The combination of the structural liquidity surplus (around 20 percent of GDP) and substantial FX reserves underpins resiliency.
- Low dollarization reflects restrictions on FX investments available within Brazil.
Investor behavior and preferences
- Brazilian investors have a strong preference for high quality short term liquid investments, driven by Brazil’s history of economic instability.
- Preference is concentrated on instruments of the highest credit quality, notably overnight repos and short-term government bonds.
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