Brazil advances in displacing the dollar in its trade, how would it impact Uruguay?

Brazil advances in displacing the dollar in its trade, how would it impact Uruguay?

Brazil proceed with the goal of displace the dollar as the main foreign trade currency within their relations and, therefore, in a large part of the region, in a context in which the US currency loses predominance in the businesses of other large international players such as Russia and China. In this sense, it agreed to simplify payments with Argentina, similar to the solution you implemented last week with Uruguay. What impact can this new monetary scenario have on the country?

In the last hours the decision of the government of Luiz Inacio Lula da Silva of collaborating with the complex economic situation in Argentina, establishing that business between the two countries be done in local currency instead of in dollars —thus avoiding a greater drain on Argentine reserves.

Along these lines, the measure —not yet fully defined— also seeks to help Brazilian companies that export to the neighboring country, its main foreign market for manufactured products.

The objective is ensure exporters receive payment for sales to Argentina, and maintain an important share of the export market, where more than 200 Brazilian companies do not export or do not receive payments due to lack of foreign currency at present due to this situation.

This intermediate solution occurs after, in January, both countries announced their intention to advance in talks on a common currency to execute trade payments between nations, helping in part to cut dependency on the dollar. In this way, the Brazilian decision could be understood as a first step on the path to displacing the dollar as the reference currency for commercial exchanges in the region.

The simplification of payments in local currency for Uruguayan exporters

In keeping with the announcement regarding Argentina and Lula da Silva’s intention to aspire to a increased trade in local currencieslast week Brazil also decided to simplify the procedures of the Payment System in Local Currency (SML)expanding the list of eligible institutions to operate in the infrastructure that brings together the central banks of the Mercosur partners.

According to him Central Bank of Brazil, the changes also imply the simplification and standardization of the operating procedures of the system, which allows one of the counterparties, normally the exporter, to establish the cost of its goods or services in its native currency. This Eliminates exposure to exchange rate fluctuations.

What impact would trade with local currency have on Uruguay?

Trade with Brazil is large, to the point that in April it became the main destination for Uruguayan exports, surpassing China for the first time.

In March, it had already been in second place in terms of the number of placements, which totaled 161 million dollars —a growth of 22% year-on-year. And in April, finally, he took first place with a Revenue of 730 million dollars in the accumulated of the first quarter of 2023.

Therefore, a displacement of the dollar as the currency of trade with, at least, Brazil, would imply a significant drop in dollars entering the country on a regular basis, as a result of placements in that country. This would cause the availability of foreign currency in Uruguay to decrease —even more so if other countries in the region made the same decision— but, on the other hand, a valorization of the same with respect to weight; especially if one considers that one of the arguments behind the exchange rate delay is the excess of dollars resulting from a record year of exports.

However, the most obvious would be a big change in most of the international business structure of the country, while its main trading partner would trade in local currency.

Source: Ambito

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