June 2010 - Financial system: Long-term challenges
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The document discusses the challenges and advancements in Brazil's financial system, particularly highlighting the role of the National Bank for Economic and Social Development (BNDES) in facilitating long-term investments in industrial and infrastructure projects. It notes that while the banking sector has become more solid and profitable, credit remains short-term and expensive, with a need for a long-term financing approach to support significant economic growth. The document emphasizes the importance of BNDES, which is currently the primary institution capable of providing long-term funding, in addressing Brazil's evolving investment needs.
![66
Foto: crédito das fotos
June 2010
INTERVIEW
much society is willing to pay
to finance long-term projects.
One thing is the government
providing a subsidy for specific
purposes; another is what has
been done: expanding Brazil’s
production capacity.
Does the reduction of subsidies
depend on a drop in the SELIC
rate?
We are not expecting that the
TJLP rate will equal the SELIC
rate for at least 30 years but when it does,
the subsidy will disappear. Let us suppose,
however, that in times of crisis — or even
without a crisis — the financial system
becomes unable to lend money at interest
rates relatively close to international refer-
ence rates; that would mean a reduction in
investments. Without financing, investments
would fall behind, and the country would
have to pay much more in investment costs.
These must be considered as well, so the
R$1 billion subsidy would actually be much
less. Thus, the main focus should be on how
much society is willing to pay for long-term
financing.
Some economists consider that the presence
of BNDES, which can offer subsidized loans,
restricts the expansion of private long-term
credit.
During the 2008–09 crisis, it was said that
the decision of the National Treasury to
make the R$100 billion loan to BNDES was
necessary. In the future, this choice will be
seen as the best option at the time. While
the entire financial system was retrenching,
the measure signaled to markets that there
would always be credit for investment in
quality projects. After that loan, govern-
ment financial institutions
such as Banco do Brasil (BB)
and Caixa Econômica Federal
(CEF) entered the scene, and
a certain minimum amount
of credit in the economy was
maintained.
In September I talked to an
economist at a private bank
who offered two different view-
points. As a bank economist
he said: “We are looking at
the Basel II prudential rules.”
However, as a Brazilian economist he
pondered: “While banks have their eyes set
upon this indicator, the credit offer will not
move forward. But when other agents enter
the market and offer credit, the banks will
start to be concerned with their market
shares and will once again make resources
available.” In this sense the movements
especially of BB and CEF helped. After they
entered the market more aggressively, market
share started to matter [to their competitors].
This is what we see now with the expansion
of consumer credit, which has again reached
a level considered normal for the size of the
economy.
Those who think that the BNDES presence
in the market for credit is excessive argue
for a BNDES withdrawal.
We have already withdrawn from the
working capital segment; we did take up
an enormous amount of shares during the
crisis, but then we sold them. This year, in
spite of the growing demand, we expect to
disburse R$130 billion (US$72 billion) in
loans, which is less than the R$137 billion
(US$76 billion) we spent in 2009.
Our historical passion for investment
remains, though. In April last year, when
This year,
we expect to
disburse R$130
billion in loans,
which is less
than the R$137.4
billion disbursed
in 2009.](https://image.slidesharecdn.com/2010october11-150512134815-lva1-app6891/85/June-2010-Financial-system-Long-term-challenges-6-320.jpg)
![1313
June 2010
BRAZILIAN
Financial system
Economics Institute of the
São Paulo State University
and a member of the USP’s
Group for International
Conjuncture (Gacint). He
states that “Historically, the
Brazilian financial system
has only contributed to
the public segment of eco-
nomic development. Public
sector institutions such as
Banco do Brasil [BB] do
support rural financing, and
Caixa Econômica Federal
[CEF] supports real estate
financing, but with many re-
strictions. The private sector
has never committed itself to
long-term financing.”
If high inflation were
a reason not to finance
long-term, high-risk, or
low-profitability projects in
the past, today this is not an
excuse.“Theprivatesegment
is finally investing in real
estate financing, but this is
partly due to mandatory
allocation of resources,”
Simoens thinks.
Brokerage
Simoens explains that the
financial system developed
from the perspective of
functioning as a brokerage
agent for government
securities and making
hefty profits out of inflation
because client’s bank
deposits were retained at
zero cost: “By the time
prices stabilized, banks
were not prepared to face
losses derived from inflation
gains. Although the interest
on public debt has been
kept high, many private
institutions demonstrate
operating inefficiencies.” To
confront these difficulties,
the government launched
t wo aid programs to
restructureprivateandstate-
owned banks. This resulted
in the privatization and
internationalization of
numerous state-owned
banks, and higher
credit concentration.
Simoens highlights
t h e r e c e n t n e w
public sector bank
expansionary trend
that started in 2008.
Until the middle of
the 1990s, the public
financial system was
bigger than the private
system in terms of asset,
deposits, net assets
and credit indicators.
This changed with the
Plano Real economic
plan (1994), plunging
a considerable portion
of the Brazilian financial
system into crisis. As a
result, by 2007 this situation
had reversed: public sector
banks accounted for 32%
of credit transactions and
private banks for 68%.
But in 2008, public sector
financing shot up again to
42% of the total, against
58% for t he pr ivate
segment.
More aggressive action
by public sector banks led
to a credit boom — in
April 2010, total credit
had already reached 45.2%
of GDP (US$815 billion)
against 31% in 2005.
However, the supply of
credit, especially to business,
The presence
of a public
sector agent inhibits
the development of the
private financial sector
and creates distortions
by favoring groups
of interest to specific
administrations or
political parties.
Frederico Turolla
is still limited, expensive,
and short-term. One of the
reasons suggested is large
bank spreads (the difference
between the rates paid to
savers to raise capital and
the interest rates charged
borrowers).](https://image.slidesharecdn.com/2010october11-150512134815-lva1-app6891/85/June-2010-Financial-system-Long-term-challenges-13-320.jpg)
June 2010 - Financial system: Long-term challenges
- 1. Brazil’s foreign trade Interview Agenda and agreements Director of Planning of the National Bank of Economic and Social Development (BNDES) FINANCIAL SYSTEM CHALLENGES Economy, politics and policy issues • JUNE 2010 • vol. 2 • nº 6 Publication of Getulio Vargas FoundationFGV BRAZILIAN ECONOMY ThE
- 2. In this issue Interview: João Carlos Ferraz The BNDES is the only financial institution offering long-term investments in industrial and infrastructure projects. The Bank’s Chief Planning Officer says that while other banks may participate in simple operations, those involving higher risk should remain within a stable institutional structure. By Liliana Lavoratti (page 4). Financial system: Long-term challenges The banking system has recorded major structural advances in the past 15 years, such as the privatization of state-owned banks, an inflow of foreign capital, and mergers and acquisitions. This has resulted in a solid and profitable sector whose credit portfolios have low risk. However, credit is predominantly short-term, and Brazil has the highest spread and interest rates in the world. It may take some time before the system is providing long-term financing to infrastructure and industrial undertakings. By Liliana Lavoratti (page 10). Foreign trade: Agenda and agreements According to Lia Valls, a country like Brazil that trades globally must expand its network of agreements (page 20). Brazil’s economic and financial indicators (page24). The Getulio Vargas Foundation is a private, nonpartisan, non- profit institution established in 1944, and is devoted to research and teaching of social sciences as well as to environmental protection and sustainable development. Executive Board President: Carlos Ivan Simonsen Leal Vice-Presidents: Francisco Oswaldo Neves Dornelles, Marcos Cintra Cavalcanti de Albuquerque e Sergio Franklin Quintella. IBRE – Brazilian Institute of Economics The institute was established in 1951 and works as the “Think Tank” of the Getulio Vargas Foundation. It is responsible for calculation of the most used price indices and business and consumer surveys of the Brazilian economy. Director: Luiz Guilherme de Oliveira Schymura Vice-Director: Vagner Laerte Ardeo APPLIED ECONOMIC RESEARCH Center for Economic Growth: Regis Bonelli, Samuel de Abreu Pessoa, Fernando de Holanda Barbosa Filho Center of Economy and Oil: Azevedo Adriana Hernandez Perez, Mauricio Pinheiro Canêdo Center for International Economics: Lia Valls Pereira Center of Agricultural Economics: Mauro Rezende Lopes, Ignez Guatimosim Vidigal Lopes, Daniela de Paula Rocha CONSULTING AND STATISTICS PRODUCTION Superintendent of Prices: Vagner Laerte Ardeo (Superin- tendent) and Salomão Lipcovitch Quadros da Silva (Deputy Superintendent) Superintendent of Economic Cycles: Vagner Laerte Ardeo (Superintendent) and Aloisio Campelo Júnior (Deputy Super- intendent) Superintendent of Institutional Clients: Rodrigo Moura (Superintendent) and Rebecca Wellington dos Santos Barros (Deputy Superintendent) Superintendent of Operations: Rodrigo Moura (Superinten- dent) and Marcelo Guimarães Conte (Deputy Superintendent) Superintendent of Economic Studies: Marcio Lago Couto Address Rua Barão de Itambi, 60 – 5º andar Botafogo – CEP 22231-000 Rio de Janeiro – RJ – Brazil Tel.: 55 (21) 3799-6799 Email: [email protected] Web site: http://portalibre.fgv.br/ F O U N D A T I O N
- 3. 3 Economy, politics, and policy issues A publication of the Brazilian Institute of Economics. The views expressed in the articles are those of the authors and do not necessarily represent those of the IBRE. Reproduction of the content is permitted with editors’ authorization. Chief Editor Luiz Guilherme Schymura de Oliveira Managing Editor Claudio Roberto Gomes Conceição Editors Anne Grant Pinheiro Ronci Bertholdo de Castro Liliana Lavoratti Portuguese-English Translator Cristiana Ferreira Art Editors Ana Elisa Galvão Sonia Goulart Administrative Secretary Rosamaria Lima da Silva Contributors to this issue Liliana Lavoratti Lia Valls Pereira Aloísio Campelo Salomão Quadros Claudio Conceição Managing Editor [email protected] From the Editor June 2010 The advances achieved by the Brazilian financial system in the past 15 years are obvious. Privatization of public banks, government aid programs to restructure private and state-owned banks, foreign capital inflows, adoption of Basel prudential regulations, and mergers and acquisitions have produced a sound, albeit concentrated system, with a credit portfolio of relatively low risk. Thus, systemic risks are minimal, as was evidenced during the recent world financial crisis. Yet there are some less positive aspects to the Brazilian financial system: it has the highest spread and interest rates in the world, and credit — despite the boom recorded in the past two years — is mainly short-term, expensive, and available mostly to consumers rather than businesses. Analysts are unanimous in predicting that it will take some time before the national banking system becomes a significant participant in Brazil’s development through long-term financing for infrastructure and industrial projects; so far these have been financed only by the National Bank for Economic and Social Development (BNDES), sometimes with subsidized funds. This is the main challenge for the banking sector at this moment: to support investments in energy, transportation, communication and such areas, so as to sustain the economic growth rate at over 6% a year. But the game has a new element: an expansion in loans by public banks at lower interest rates, which points to closer competition with private banks, something that was not that evident two years ago. The feature story in this edition shows how private banks can finance the country’s growth, as well as discussing the role of public banks within a new context of increased competition.
- 4. 44 Foto: crédito das fotos June 2010 INTERVIEW The Brazilian Economy — How will the BNDES operate amid the new wave of indus- trial and infrastructural investments? João Carlos Ferraz — We must consider the bank as a vehicle in the process initiated in 2006. In 2006, investments started to increase ahead of gross domestic product (GDP), and larger and more complex projects started to come up. There has been steady growth in production capacity, especially in infrastructure, which has not been affected by the crisis. Because most of these projects take so long to mature, they are less affected by external factors, such as the world crisis. The last survey the bank conducted suggests that gross fixed capital formation will grow three times as fast as GDP between 2010 and 2013. Currently, expectations for investment in industry and infrastructure are greater than before the crisis — the total expected for the period from 2009 to 2012 is R$859 billion (US$477 billion), against R$781 billion (US$390 billion) invested during the similar four-year period that ended in August 2008. Including the civil construction sector (homes, commercial buildings, sports facili- ties, and prefabricated structures), the total rises to R$1.3 trillion (US$735 billion). Credit outlook is for longer-term investment João Carlos Ferraz Chief Planning Officer of the Brazil’s National Bank for Economic and Social Development Liliana Lavoratti, from Rio de Janeiro So far practically alone in making long-term investments in industrial and infrastructural projects in Brazil, the government’sNationalBankforEconomicandSocialDeve- lopment(BNDES)ispreparingtoreduceitspresenceinthe Braziliancreditmarket.“Simpler,shorter-termtransactions constitute the space that other banks could occupy. In higher-riskareas,suchasinnovationorinfrastructureinvest- ments maturing in 20 or 30 years, however, maintaining a more stable institutional structure is in the country’s best interests,” says BNDES Chief Planning Officer João Carlos Ferraz. Recognizing the need to expand transactions with maturities that exceed 10 years so as to sustain economic growth, and considering the criticism of granting Natio- nal Treasury resources to private investors, the bank is leading a discussion with the Brazilian Banking Federation (Febraban), the stock market, and other financial agents to convince them of the importance of having a long-term vision for the credit market.
- 5. 55 June 2010 INTERVIEW What is the profile of these investments? Most recently they have focused on the energy area, especially oil and gas. What is remarkable is that investment in areas to ease bottlenecks, such as railways and ports, will increase by 20% in the next three to four years. The current projections represent a 55% increase over the period of 2005-2008. For 2014 and 2015, economic experts are projecting GDP growth of about 5.5% a year, on the back of strong investment — unlike today when Brazil’s economic growth largely depends on family consumption. Who will finance these long-term invest- ments? Brazil has an anomalous structure, with interest rates still heavily dependent on the short term, a vestige of those times of high inflation. Our culture is still tied to the short term. Undoing this behavior will not be easy; there are no magic solutions. Yet only a few changes are needed, such as stimulating the market for debentures, lowering the tax burden on long-term maturities, and increasing the benefits offered to the capital market. For the time being, the BNDES is the only institution able to raise long-term funding. BNDES’s funding structure relies on the Workers’ Support Fund (FAT), whose resources are remunerated not by the Central Bank’s benchmark rate (SELIC) but by the TJLP — a long-term interest rate bench- mark established by the National Monetary Council. Despite being much lower than the SELIC rate, the TJLP has been kept higher than inflation, and it is used to calculate the remunera- tion of FAT and as a reference for BNDES loan transactions. Under the Brazilian Constitution, the FAT is the basis for BNDES funding, and 40% of its resources are directed to the bank. Our mission as a development bank is fulfilled with a spread of less than 1.2% a year. This allows the BNDES to charge relatively low interest rates. This has been the situation since the BNDES was created in 1952. In recent years the BNDES has begun to lend subsidized public resources to companies. In the past two years the National Treasury granted two loans to the Bank, one for R$100 billion (US$56 billion) and the other for R$80 billion (US$44 billion). Interest rates on loans granted to companies out of the R$100 billion were partially based on the TJLP, while rates on loans out of the R$80 billion were totally based on the TJLP. The difference between what the government pays to raise funds by issuing public securi- ties (SELIC) and what the National Treasury charges on fund transferred to the BNDES (TJLP) is expected to reach R$1 billion a year. Estimating this subsidy involves more than subtracting the TLJP from the SELIC rate because the BNDES pays taxes and dividends, which also must be considered in calculating the actual cost of the funds the National Treasury conveys to BNDES for corporate loans. Many analysts seem concerned about the transparency of these operations, as well as about their tax implications. There is a subsidy, but we must consider how Brazil has an unusual structure, with interest rates still heavily dependent on the short term, a vestige of those times of high inflation.
- 6. 66 Foto: crédito das fotos June 2010 INTERVIEW much society is willing to pay to finance long-term projects. One thing is the government providing a subsidy for specific purposes; another is what has been done: expanding Brazil’s production capacity. Does the reduction of subsidies depend on a drop in the SELIC rate? We are not expecting that the TJLP rate will equal the SELIC rate for at least 30 years but when it does, the subsidy will disappear. Let us suppose, however, that in times of crisis — or even without a crisis — the financial system becomes unable to lend money at interest rates relatively close to international refer- ence rates; that would mean a reduction in investments. Without financing, investments would fall behind, and the country would have to pay much more in investment costs. These must be considered as well, so the R$1 billion subsidy would actually be much less. Thus, the main focus should be on how much society is willing to pay for long-term financing. Some economists consider that the presence of BNDES, which can offer subsidized loans, restricts the expansion of private long-term credit. During the 2008–09 crisis, it was said that the decision of the National Treasury to make the R$100 billion loan to BNDES was necessary. In the future, this choice will be seen as the best option at the time. While the entire financial system was retrenching, the measure signaled to markets that there would always be credit for investment in quality projects. After that loan, govern- ment financial institutions such as Banco do Brasil (BB) and Caixa Econômica Federal (CEF) entered the scene, and a certain minimum amount of credit in the economy was maintained. In September I talked to an economist at a private bank who offered two different view- points. As a bank economist he said: “We are looking at the Basel II prudential rules.” However, as a Brazilian economist he pondered: “While banks have their eyes set upon this indicator, the credit offer will not move forward. But when other agents enter the market and offer credit, the banks will start to be concerned with their market shares and will once again make resources available.” In this sense the movements especially of BB and CEF helped. After they entered the market more aggressively, market share started to matter [to their competitors]. This is what we see now with the expansion of consumer credit, which has again reached a level considered normal for the size of the economy. Those who think that the BNDES presence in the market for credit is excessive argue for a BNDES withdrawal. We have already withdrawn from the working capital segment; we did take up an enormous amount of shares during the crisis, but then we sold them. This year, in spite of the growing demand, we expect to disburse R$130 billion (US$72 billion) in loans, which is less than the R$137 billion (US$76 billion) we spent in 2009. Our historical passion for investment remains, though. In April last year, when This year, we expect to disburse R$130 billion in loans, which is less than the R$137.4 billion disbursed in 2009.
- 7. 77 June 2010 INTERVIEW the economy started to stabilize, we thought it was time for investments to lead growth again, so we decided to push the infra- structure and industrial projects forward. Investments tend to slow down in times of crisis; while GDP may take a year to recover, investments take two years. Once the crisis hit, by July 2009 BNDES’s credit line for machinery and equipments (FINAME) daily disbursements had dropped to R$60 million, compared to R$153 million in September 2008, so we launched the Investment Sustaining Program (PSI). The PSI is a credit line with low interest rates of only 4.5% a year. Since the PSI was launched, requests for FINAME loans have quadrupled. Aren’t infrastructure and industrial needs getting much more complex? They certainly are. The Madeira River and Belo Monte hydroelectric power plants, for instance, require different financial plans, with completely different guarantee systems and maturity terms. The argument that the BNDES must step back and leave it all to the market is simplistic. The BNDES is one of the few institutions that are experienced in long-term financing. Some analysts say incorrectly that we do not know where BNDES spent the R$180 billion (US$100 billion) funding from the National Treasury. However, we are among the few development institutions in the world that disclose the condi- tions on loans. When we granted the loan for the Belo Monte power plant, among many others, we disclosed the financing conditions in advance. The projected growth rate of more than 20% for invest- ments in railways and ports is encouraging for the country. These are complex plans that require intelligent assessment and the devel- opment of guarantees and negotiations with providers and large investment groups. Are Brazilian banks ready to participate in more complex undertakings? Commercial banks are co-investors in proj- ects like the Madeira River power plant through on-lending resources from the BNDES. They are learning to define the guarantees for bid winners, but they still don’t have an effective funding structure because they raise funds with short-term maturities. If the loans they provided had longer terms, their assets and liabilities would be totally unbalanced; that would not be good for the financial system’s health. The current structure for pricing capital is totally inappropriate for a country that is increasingly expanding its economic time horizon. In your opinion, can the current structure be maintained for some time? How would any change be made? We have been discussing this with the entire financial system — investment banks, stock exchanges, pension funds — and fairly quickly we realized that there are many opportunities for credit expansion. We must start to unlock the shackles, though. We are attentive to international experiences, especially in Peru and Colombia. As soon as those two countries’ interest rates Commercial banks are co-investors in projects like the Madeira River power plant through on-lending resources from the BNDES.
- 8. 88 Foto: crédito das fotos June 2010 INTERVIEW declined sustainably to below 8% a year, their credit markets started to move toward long-term maturities, especially for housing credit. And the pension funds started to participate. It is also widely known that taxation in Brazil is unfavorable to longer-term invest- ments, and the debentures market is very restricted. There are opportunities for companies to finance themselves, but they need tax provisions that favor these invest- ments. There are a variety of options, and the country should discuss them. There is no magic solution. Advances depend on articulation, negotiation, and above all willingness. But what role would BNDES be willing to play in this new design? For obvious reasons BNDES is leading this discussion, since we would like to see more players participating. The Ministry of Finance, the Brazilian Banking Federation, the São Paulo stock exchange (BOVESPA), and other market agents are concerned with this issue. We are still defining what might be done to allow BNDES to leave the market gradually. We will continue to operate, since this is a gradual process that may take years to consolidate. More simple investment transactions with shorter terms could be an opportunity for other banks. In contrast, for high-risk transactions, such as those relating to innovations or infra- structure investments maturing in 20 or 30 years, it is in the country’s best interest to have a more stable financing structure. The United States is planning to create two public banks, one for infrastructure and one for clean energy. The US government is aware of the necessity of a more stable financing structures instead of systems vulnerable to cyclical downturns. Is the financial market as a whole beginning to take a long-term perspective? The symbolism of Brazil hosting the World Cup and the Olympic Games in a few years is very important. We also have the vast pre-salt oil reserves. When would anyone in the previous history of this country speak of events planned to take place in 10, maybe 15 years? Since the economic time horizon is expanding, a compatible financing structure is required. That was not possible in the past, and that is why we still have a model of investments based on immediate liquidity. Our savings system is complicated, and we don’t have a loan system for housing. These are the challenges of a new country. The symbolism of Brazil hosting the World Cup and the Olympic Games in a few years is very important. We also have the vast pre-salt oil reserves. When would anyone in the previous history of this country speak of events planned to take place in 10, maybe 15 years?
- 9. The mosT TrusTworThy source of informaTion on The Brazilian economy 12 issues for only r$123 (us$62) Subscriptions: Phone (55-21) 37993-6844, Fax (55-21) 3799-6855; e-mail [email protected] [email protected] Subscribe to Conjuntura Econômica, published in Portuguese by the Brazilian Institute of Economics of Getulio Vargas Foundation, since 1947, and receive insightful economic, political and social analysis. FGV publication
- 10. BRAZILIAN Financial system Liliana Lavoratti, Rio de Janeiro T hanks to structural changes in the past 15 years, the Brazilian banking system has made significant advances. Privatization of public banks; launch of government aid programs to restructure private and state-owned banks; foreign capital inflows; adoption of Basel prudential regulations; and mergers and acquisitions have resulted in a strong — and concentrated — banking sector that is also highly profitable, with relatively low-risk credit portfolios. BRAZILIAN Financial system 1010 June 2010 challenges Long termLong term As evidenced during the world financial crisis, Brazil’s banking sector is not likely to run into systemic risks. Nonetheless, the virtues of the Brazilian banking system coexist with less- admirable aspects. Brazil has the highest spread and interest rates in the world. Credit is predominantly short-term, expensive, and intended for individual c on su m er s . A n a ly s t s unanimously predict that there will be a long wait before Brazil’s banks participate significantly in long-term financing for infrastructureandindustrial projects. These are currently financed primarily by the government’s National Bank for Economic and S o c i a l D e v e l o p m e n t (BNDES), sometimes with subsidized funds. “Financial institutions have not yet learned how to operate in a stable environment and perform their traditional role, which is to provide credit,” says Maria A ntonieta Del Tedesco Lins, an economist and professor at the International Relations Institute of the University of São Paulo (USP).
- 11. 1111 June 2010 BRAZILIAN Financial system Distortion In the past, economic uncertainties, bearing with them high credit costs and lack of options, discouraged companies from taking long-term loans from private banks. Public sector absorption of a large part of private savings was another unfavorable aspect, Ms. Lins says. “High interest rates allowed banks, as they still do, to be more comfortable lending to the government by acquiring public securities. Financing the public deficit,” she emphasizes, “distorts the classic function of financial intermediaries – lending to productive activities.” For 2010, market esti- mates are for about 20% growth in gross fixed capital. Investments of about R$168 billion (US$93 billion) a year for at least five years are needed to achieve the logistical, energy, and workforce levels required for economic growth of 7% a year. The amount cur- rently invested is less than two-thirds of this amount. Meanwhile, the Ministry of Mines and Energy says that R$214 billion (US$119 billion) should be invested over the next 10 years to ensure higher energy pro- duction. “The market is very en- couraged, and the figures are expressive. To invest the amounts needed in all areas, commercial banks must have greater participation in smaller undertakings, while BNDES continues to invest in larger projects,” says Carlos Eduardo Mellis, project financing chief at Itaú BBA, the wholesale and investment bank of the Itaú group. This should start to happen, he thinks, within two or three years, now that banks are willing to raise funds with longer maturities. Some studies show that much investment is financed out of cor- porations’ own funds, followed by loans granted by BNDES, commercial banks, and the capital market, as well as foreign direct investments. Octavio de Barros, chief econo- mist at Bradesco bank, says, “We have noticed advances in the via- bility of commercial banks offering long- term credit.” Samuel Pessôa, an economist at the Brazilian Institute of Economics (IBRE) of the Getulio Vargas Foundation (FGV), says that it may take 10 years for commercial banks to be able to compete with BNDES. “The time will come when the difference between the Central Bank’s benchmarck interest rate (SELIC) and the BNDES basic rate will diminish drastically, and private b a n k s w i l l b e a b l e to compete in the long term. This already occurs with real estate credit,” he explained. Currently, BNDES charges about 9% a year, compared to market interest rates of about 14% a year for maturities exceeding 10 years. BNDES has lower costs for raising capital because High interest rates allowed banks to be more comfortable lending to the government by acquiring public securities. Maria Antonieta Del Tedesco Lins the Federal Constitution provides that 40% of the Workers’ Support Fund (FAT), which consists of income from corporations’ social contributions (the
- 12. 1212 June 2010 BRAZILIAN Financial system PIS-Pasep program), goes to B N DE S e conom ic development programs. In April 2010 the balance of these resources totaled R$124.4 billion (US$69 billion) remunerated at lower than market rates. In addition,duringthepasttwo years, the National Treasury invested a total of R$180 billion (US$100 billion) in BNDES, charging less than what the government pays to raise funds by issuing public securities. This has generated a subsidy of R$1 billion a year to the BNDES. As a result, BNDES is able to lend at lower than market rates. Competition The redefining of the role of public banks in the develop- ment cycle that is currently occurring in Brazil is crucial to improving financing con- ditions for the private sector, says Frederico Turolla, pro- fessor at the FGV School of Economics and partner in the Pezco Consultoria Pesquisa consulting firm. He agrees with those who hold that private banks do not take up their development financing responsibilities because BNDES is such a dominant presence in the market. From September 2008 to January 2010, the BNDES accounted for 37% of all bank credit in Brazil. This share is very close to the 36% recorded by all other public sector financial institutions together and exceeds the 27% disbursed by all private domestic and international banks operat- ing in Brazil. “The presence of a public sector agent inhibits the development of the private financial sector and creates distortions by favoring groups of interest to specific administrations or political parties,” Turolla says. “This may result in macroeconomic risks that do not exist in the present.” As an alternative to BNDES, the government should strengthen existing security funds, which would enable corporations to provide the guarantees required by private banks. Another viewpoint sug- gests that since the private financial system cannot offer long-term financing, it falls on the state to bridge the market gap. This line of thought is supported by Luiz Afonso Simoens, a re- searcher at the International To invest the amounts needed in all areas, commercial banks must have greater participation in smaller undertakings, while BNDES continues to invest in larger projects. Carlos Eduardo Mellis Brazil’s banking credit Sep. 2009 to Jan. 2010 27% Private banks 37% BNDES 36% State-owned banks
- 13. 1313 June 2010 BRAZILIAN Financial system Economics Institute of the São Paulo State University and a member of the USP’s Group for International Conjuncture (Gacint). He states that “Historically, the Brazilian financial system has only contributed to the public segment of eco- nomic development. Public sector institutions such as Banco do Brasil [BB] do support rural financing, and Caixa Econômica Federal [CEF] supports real estate financing, but with many re- strictions. The private sector has never committed itself to long-term financing.” If high inflation were a reason not to finance long-term, high-risk, or low-profitability projects in the past, today this is not an excuse.“Theprivatesegment is finally investing in real estate financing, but this is partly due to mandatory allocation of resources,” Simoens thinks. Brokerage Simoens explains that the financial system developed from the perspective of functioning as a brokerage agent for government securities and making hefty profits out of inflation because client’s bank deposits were retained at zero cost: “By the time prices stabilized, banks were not prepared to face losses derived from inflation gains. Although the interest on public debt has been kept high, many private institutions demonstrate operating inefficiencies.” To confront these difficulties, the government launched t wo aid programs to restructureprivateandstate- owned banks. This resulted in the privatization and internationalization of numerous state-owned banks, and higher credit concentration. Simoens highlights t h e r e c e n t n e w public sector bank expansionary trend that started in 2008. Until the middle of the 1990s, the public financial system was bigger than the private system in terms of asset, deposits, net assets and credit indicators. This changed with the Plano Real economic plan (1994), plunging a considerable portion of the Brazilian financial system into crisis. As a result, by 2007 this situation had reversed: public sector banks accounted for 32% of credit transactions and private banks for 68%. But in 2008, public sector financing shot up again to 42% of the total, against 58% for t he pr ivate segment. More aggressive action by public sector banks led to a credit boom — in April 2010, total credit had already reached 45.2% of GDP (US$815 billion) against 31% in 2005. However, the supply of credit, especially to business, The presence of a public sector agent inhibits the development of the private financial sector and creates distortions by favoring groups of interest to specific administrations or political parties. Frederico Turolla is still limited, expensive, and short-term. One of the reasons suggested is large bank spreads (the difference between the rates paid to savers to raise capital and the interest rates charged borrowers).
- 14. 1414 June 2010 BRAZILIAN Financial system Unavoidable fact Regardless of BNDES’s share in the Brazilian fi- nancial system, the solution for the old problem of how to finance development will depend on greater participation by national and international private banks. That is the opinion of Rubens Sardenberg, chief economist at the Brazilian Banking Federation (Febra- ban). “We can’t expect an answer only from the public sector,” he says. Although no one has the formula for an immediate solution, opinions are at least converging at some points, Sardenberg thinks: “First, there is an absence of long-term funding. Brazilian investors still prefer short-term transactions. They fear macroeconomic changes,andincentives a re low b e c au s e long- and shor t- term interest rates are similar. Barriers still remain, such as excessive compulsory deposits and the lack of privileged tax treatment for these transactions.” Legal uncertainty is also an issue, he thinks: “A history of constant changes in the rules is still in our minds. Moreover, the recovery of collateral following a default is still complicated, in spite of developments in this area.” Brazil still needs to do its “homework” so as to lower the costs of funding via international private capital, says Nicolas Tingas, director of the Brazilian Society for the Study of Transnational Companies and Economic Globalization (Sobeet) and professor at FGV Management in São Paulo. He explains that Brazil has the conditions to undergo a relevant expansion cycle, but it may be a mistake to trust too much in direct investment. It will come, in the form of partnerships and mergers, but only to certain projects. The other portion of investments should come from a new long-term Historically, the Brazilian financial system has only contributed to the public segment of economic development. The private sector has never committed itself to long-term financing. Luiz Afonso Simoens 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 192 182 164 164 164 161 159 156 159 158 105 95 85 88 92 90 90 87 85 88 70 72 65 62 58 57 56 56 62 60 17 15 14 14 14 14 13 13 12 10 Brazil’s banking sector concentration All banks Foreign private banks National private banks State-owned banks Source: Central Bank of Brazil
- 15. 1515 June 2010 BRAZILIAN Financial system financing model at lower costs, since BNDES will not be able to do everything by itself. As a possible solution, Tingas cites improvement in Brazilian regulation, which should include tax treatment that reduces the risk premium by lowering costs for private banks so as to make this financing modality more attractive. “There is money abroad, but investors are not always willing to face Brazil’s tax and legal costs, which are excessive,” he comments. The Ministry of Finance has announced studies to facilitate financing, at least for domestic companies. The ministry is, for instance, considering differentiated tax treatment for the issuance of debentures, which would lower business dependence on raising funds abroad. Capital market According to Frederico Turolla, another permanent challenge is to build up Brazil’s capital market, which was introduced on ly i n t h is de c ade. It s development wa s only possible after the disappearance of alleged political risks attached to governance by the left- trending Workers’ Party, whose policies were even more liberal than those of its predecessors, the Social Democrats. He says that the plunge in macroeconomic risks “was the final ingredient for the development of the Brazilian capital market.” The capital market has stimulated the emergence of a variety of alternatives in the past few years. In addition to initial public offerings (IPOs), through which new companies can offer shares on the Stock Exchange, and the issuance of debt securities star ting early in the 1990s, Brazil has seen the creation of private equity, venture capital, and equity investment funds. “This is the capital market segment that is largely responsible for the dynamism of the US economy, and it can play a strategic role in Brazil,” Turolla says. We are already seeing the effects. From January to October 2009, 29% of mergers and acquisitions (MAs) in Brazil involved private equity funds. In 2009, the country saw a record-breaking509MAs. And Brazilian private equity funds currently have R$15 billion to invest. Heavy demand for credit lines with maturities longer than 10 or 15 years stimulates market segmentation, says Sandro Marconi, head of BB’s commercial practice, which uses capital plus debt to finance telephony, energy, and road concession works that have self-sustainable promise. “We seek our niches by offering assistance to the development and financing of new undertakings; pro- Bilions of Reais 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sight deposits 46 51 66 67 76 87 105 149 132 142 Saving deposits 112 120 141 144 160 169 188 235 271 319 Time deposits 90 108 138 144 188 252 282 298 550 563 Investmentfunds 254 285 280 408 475 559 684 794 773 938 Total 501 564 624 763 898 1068 1259 1476 1726 1963 Financial system deposits (balance at end of period) Source: Central Bank of Brazil
- 16. 1616 June 2010 BRAZILIAN Financial system viding advice to investors; identifying appropriate sources; and helping with negotiations with domes- tic or foreign investors,” Marconi explains. He says that well-structured projects promising good profitability generally do not suffer from a lack of resources. Infrastructure Itaú BBA’s plans also show a great interest in infrastructure projects. Carlos Eduardo Mellis, head of Itaú BBA’s project finance area, says that last year wind energy bids alone cost R$8 billion. Some highway projects will start this year, along with the Rodoanel Leste beltway in São Paulo. The Porto Sul project in Ilhéus (State of Bahia) is also being considered. The company alsoexpectsgoodinvestment opportunities related to railways, sanitation, and pipeline construction, in addition to what the oil and gas sector needs to develop the pre-salt oil field. Improving urban trans- portation for the World Soccer Cup and the Olympic Games to be held in Brazil will boost public-private partnerships (PPPs). “Es- timates are high at R$200 billion (US$111 billion) a year in all these sectors,” Mellis said. Real estate An early indication that numerous commercial banks, not just development or public sector institutions, are starting to think in terms of long-term financing is the increase in real estate credit. “After the failure of the government National Housing Bank, private institutions resumed their operations in this niche,” saysLuisSantacreu,financial institutions analyst at Austin Rating. However, demand for credit is much stronger now due to the challenge of increasing Brazil’s production capacity. Real estate credit, which does not exceed 3% of GDP, is among the segments with great potential for expansion. The higher demand for corporate credit, a segment that has reacted positively since the end of 2009, will be clearer in the second half of this year, Santacreu says, adding, “From then on, domestic and foreign banks will take action.” With controlled default rates, financial institutions can estimate the growth of credit portfolios without risking quality, Santacreu says. “T he se c tor is optimistic about the future, although it is not euphoric andwantstoavoidsurprises, since the perspective is still somewhat cloudy. No one knows how the crisis in Europe will turn out, which brings uncertainty about possible instabilities.” He notes that “the market also takes into account a certain degree of uncertainty relating to the presidential elections in Brazil.” Future In fact, there are no magic solutions or likely short- cuts. Febraban’s Sardenberg warns: “Various problems still have to be faced, and their answers are difficult and may take some time to find. Any direction it takes will imply maintaining mac- roeconomic achievements and improving govern- ment’s fiscal position.” Luiz Afonso Simoens summarizes some aspects of the debate: “The structural changes that occurred in the Brazil- ian financial system starting in the 1990s led to interna- tionalization, privatization, and concentration trends in all relevant indicators. The concentration of credit among large banks hurts competition. It explains
- 17. 1717 June 2010 BRAZILIAN Financial system Mergers and acquisitions Buyer BuyerComprado CompradoDate Date Itaú Banco Francês e Brasileiro (BFB) Jul. 1995 ABN-Amro Bank Bandepe Nov. 1998 Nacional de Paris – BNP Comercial de S.Paulo Aug. 1995 Internacional do Funchal (Banif ) Primus May 1999 Itamarati Crefisul Sep. 1995 Bradesco Baneb (Bco.Est.da Bahia) Jun. 1999 Comercial de France Montreal Sep. 1995 BBA Icatu (associação) Aug. 1999 Unibanco* Nacional Nov. 1995 Bank of NewYork Credibanco Oct. 1999 Pontual Continental Jan. 1996 Santander Bozano Simonsen / Meridional Jan. 2000 United* Antonio de Queiroz Apr. 1996 Unibanco Credibanco Feb. 2000 Mitsubishi Tokyo Apr. 1996 Unibanco Bandeirantes Jul. 2000 Dibens Battistella Apr. 1996 Bradesco Boavista Jul. 2000 Excel* Econômico May 1996 Itaú Banestado Oct. 2000 Bandeirantes* Banorte May 1996 Santander Banespa Nov. 2000 Rural* Mercantil May 1996 Bank of América1 Liberal Jul. 2001 Deutsch Sudamerikanische Bank Banco Grande Rio Jun. 1996 Barclays e Gallicia Gallicia (50%) (parte do Gallicia) Aug. 2001 Pontual Martinelli Jun. 1996 ABN-Amro Bank Paraiban Nov. 2001 BCN Itamarati Jul. 1996 Itaú BEG - Bco.Estado de Goiás Dec. 2001 Cindam Fonte Jul. 1996 Bradesco Mercantil de São Paulo – Finasa Jan. 2002 Lavra Segmento Nov. 1996 Bradesco Banco do Estado do Amazonas Jan. 2002 Caoa Schahin Cury Nov. 1996 Bradesco Banco Cidade Feb. 2002 Galicia BCN Barclays Dec. 1996 Uinbanco Investcred Apr. 2002 Société Générale Sogeral Jan. 1997 Unibanco Banco Fininvest Apr. 2002 Lloyds Bank Multiplic Feb. 1997 Itaú Banco BBA Nov. 2002 Santander Geral do Comércio Mar. 1997 Itaú Fiat Dec. 2002 Arabian Bank ABC Roma Mar. 1997 Bradesco Banco BilbaoVizcaya Jan. 2003 HSBC* Bamerindus Mar. 1997 Trapézio S.A.(Bco.Rural) Banco Sul América May 2003 Morgan Greenfeld Irmãos Guimarães Apr. 1997 Rural Rural Mais (Antigo Banco Sulamérica) May 2003 Itaú Banerj Jul. 1997 ABN-Amro Real Sudameris Aug. 2003 Bco.Geral do Comércio (Santander) Noroeste Aug. 1997 HSBC LloydsTSB Oct. 2003 BCN Credireal Aug. 1997 Societé Generale Banco Pecúnia Oct. 2003 Interatlântico (Bco.Espírito Santo) Boavista Sep. 1997 Bank of America Fleet Boston Nov. 2003 American Express Bank SRL (associação) Sep. 1997 Bradesco Banco Zogbi Nov. 2003 AIG Consumer Finance Group Fenícia Sep. 1997 Bradesco Banco do Estado do Maranhão (BEM) Feb. 2004 Bradesco BCN Oct. 1997 Itaú Banco AGF Feb. 2004 Swiss Bank Corporation Ômega Nov. 1997 Unibanco BNL/AS Jun. 2004 Nations Bank Corporation Liberal Nov. 1997 Bradesco BEC Jan. 2006 Pactual Sistema Dec. 1997 Itaú Bank Boston May 2006 Bozano Simonsen Meridional Dec. 1997 Bradesco Alvorada Wachovia Corp.Finance Português do Atlântico Dec. 1997 Itaú Citicard Caixa Geral de Depósitos Bandeirantes Jan. 1998 Bradesco Banco American Express Jun. 2006 Flemings Graphus Feb. 1998 UBS Pactual Sep. 2006 General Eletric Capital Corporation Mappin S.A. Feb. 1998 American Express S.A.2 Banco Bankpar S.A. Oct. 2006 Unibanco Dibens Mar. 1998 Bradesco Banco BMC Aug. 2007 Mellon Bank Brascan Mar. 1998 Société Générale Banco Cacique Nov. 2007 BilbaoVizcaya Excel Econômico May 1998 Santander ABN Amro Real Jul. 2008 Crédit Suisse First Boston Garantia Jun. 1998 BNP Paribas Banco BGN Jul. 2008 Sudameris América do Sul Jun. 1998 Banco do Brasil Banco do Estado de Santa Catarina (BESC) Jan. 2009 ABN-Amro Bank Real Jul. 1998 Itaú Unibanco Feb. 2009 Itaú Bemge Sep. 1998 Banco do Brasil Banco Nossa Caixa Mar. 2009 Bradesco (BCN) Pontual Nov. 1998 *Purchasewasdoneunderthegovernmentaidrestructuringprogramforbanks(PROER). 1 Bank of America was purchased by the Nations Bank Corporation in US. 2 Changed name. Sources:CentralBankandFEBRABAN.
- 18. 1818 June 2010 BRAZILIAN Financial system low leveraging rates and excessive concentration by size of transaction. Our financial system is making a mistake that is opposite to that of foreign financial markets, whose leveraging rates became too high.” Although, default rate is the most relevant com- ponent of bank spread (contributing about a third of total spread), Nicolas Tingas thinks there is a structural economic factor that boosts interest rates: “The government itself contaminates the cost of money by guaranteeing quite high interest rates on Treasury securities sold in the financial market to cover the public accounts deficit.” Considering the Central Bank’s benchmark rate (Selic) at 9.5% a year and inflation between 4.5% and 5%, a 4% real interest rate is seen as high. Tingas adds that this situation cannot be changed without lowering the public debt to GDP ratio from 41.2% (in May) to 30%. Changes need also to be made especially to boost the access of low- i ncome Brazilians to credit and other financial services. US citizens, for example, are able to fit their car and mortgage installment payments to their wages for some decades. “Low i ntere st rate s i n the US allow this possibility. Brazilians are still financing their first car, and a significant number of persons are not able to own their homes because their income is not sufficient to pay mortgages. But this is due not only to their income, but also to high interest rates,” Santacreu says. For the Central Bank reducing disparities in fees, spreads, and interest rates depends on a series of measures that it is already undertaking. Moreover, actions to improve the rela- tionship between financial institutions and their clients have a direct impact on improving consumer credit conditions, according to the BC’s press department. In 2007 the National Monetary Council (CMN) approved new regulations for bank fees that made it easier for consumers to compare the services and prices offered by each institution. According to the BC, there is also the “bank spread agenda,” which includes standardization and transparency of credit contracts; portability of individual banking records — at the request of clients, banks must disclose their clients’ data to other institutions, allowing new relationships on more favorable bases; and wage portability — the wages and other compensation deposited in the financial institution elected by the employer can be transferred to a bank chosen by the employee at no cost. The Central Bank is con- vinced that the regulations relating to the domestic financial system are effec- tive, transparent, and can minimize business risks in general. The government itself contaminates the cost of money by guaranteeing quite high interest rates on Treasury securities sold in the financial market to cover the public accounts deficit. Nicolas Tingas
- 19. 1919 June 2010 BRAZILIAN Financial system Banks' assets and profits (Millions of Reais) Institutions Assets Net profits Assets Net profits Institutions Dec. 08 Dec. 09 Dec. 08 Dec. 09 Dec. 08 Dec. 09 Dec. 08 Dec. 09 Banco do Brasil* 521,272,817 708,548,843 8,802,869 10,147,522 ING Bank 5,092,929 2,683,448 -45,551 77,977 Itaú Unibanco* 632,728,403 608,273,230 7,803,483 10,066,608 Volvo 1,841,583 2,479,079 13,086 -246 Bradesco* 454,413,043 506,223,092 7,620,238 8,012,282 CSF 2,275,059 2,475,520 156,658 118,766 Santander* 340,635,472 342,323,741 1,580,613 1,805,899 Schahin * 1,601,712 2,437,712 31,985 26,551 Caixa 295,920,330 341,831,823 3,883,289 2,999,706 Barclays 5,202,852 2,269,164 190,981 73,487 HSBC Bank Brasil* 112,100,300 100,104,481 1,354,577 673,752 Banese 2,150,383 2,237,721 34,112 39,114 Votorantim* 72,309,956 84,800,810 901,786 801,773 IBM 2,257,016 2,026,848 684 63,091 Safra* 61,939,959 65,863,012 843,392 911,272 John Deere 1,977,199 1,845,624 36,520 9,434 Citibank* 40,479,564 41,431,264 1,339,556 1,953,357 Industrial* 1,643,735 1,787,935 36,515 38,558 Banrisul* 25,205,375 29,084,137 590,873 541,096 Banpara 1,537,896 1,773,464 78,397 43,695 BTG Pactual* 19,270,837 21,914,810 838,817 629,285 Bonsucesso 985,051 1,670,886 23,865 84,120 Deutsche Bank* 17,233,504 20,759,658 485,131 -71,725 Tribanco 1,512,700 1,667,338 57,821 41,735 BNB 16,177,235 19,154,466 421,029 459,012 Ford 1,569,222 1,509,335 46,053 49,006 Volkswagen 12,491,808 16,648,164 241,168 63,591 Banif 1,384,597 1,486,465 4,737 899 BNP Paribas 26,391,435 14,244,674 266,491 250,526 Credit Suisse 1,462,782 1,472,694 6,821 4,562 Alfa* 14,718,781 12,780,804 191,101 157,510 Honda 971,767 1,409,869 22,654 27,133 Fibra* 9,181,473 11,835,256 102,456 101,744 Paulista 1,182,528 1,403,311 14,997 -13,292 Panamericano* 8,976,475 11,590,557 95,575 174,021 Tokyo-Mitsubishi 1,880,803 1,388,680 8,221 75,731 BicBanco* 12,007,347 11,399,660 320,531 318,204 Credit Agricole 1,195,703 1,247,806 38,591 21,284 BBM * 14,177,926 10,595,552 93,754 68,956 Sumitomo 1,484,422 1,181,246 12,833 -26,222 BMG* 7,192,009 10,257,197 240,748 522,344 Fator* 1,009,312 1,123,158 7,797 52,294 Sicredi 7,190,702 9,095,631 21,122 26,837 Goldman Sachs 905,375 1,103,694 7,682 -59,534 Banestes* 8,524,501 8,944,222 161,285 131,163 Rendimento 758,885 973,145 25,440 15,135 BMB* 6,765,507 7,861,817 43,034 40,389 Modal* 782,068 956,543 59,680 18,363 Basa 7,239,780 7,805,744 215,850 26,300 KDB do Brasil 1,549,708 946,725 3,398 -60,675 Gmac 8,820,179 7,764,261 137,198 140,687 Matone 586,865 871,123 -47,715 -1,657 Abc Brasil* 7,494,921 7,377,224 150,088 151,154 Cargill 621,470 864,397 -16,424 10,889 Cruzeiro do Sul* 5,694,852 7,352,446 -130,573 107,479 GE Capital 1,701,909 805,548 -40,743 -63,198 JP Morgan 8,858,570 7,246,572 94,304 73,970 Guanabara 766,047 783,969 10,056 15,218 Daycoval* 6,830,983 7,060,828 200,150 211,088 Rodobens 702,065 731,378 36,174 33,755 Societe Generale* 6,480,050 7,008,149 -148,806 -81,650 Dresdner Brasil 1,880,653 706,879 -14,800 -49,220 Pine* 6,196,880 6,984,014 132,987 85,086 Brascan* 661,301 701,404 1,040 -4,934 Rabobank 7,683,719 6,968,786 70,603 58,187 Moneo 486,385 646,919 11,362 10,558 Bancoob 5,123,953 6,801,937 -11,095 19,088 Morada 272,193 595,976 6,706 13,209 BRB* 5,620,546 6,612,133 110,317 190,455 CommercialTrust 651,875 518,734 -14,380 5,706 IBI 5,612,296 5,768,403 58,600 -449,849 Maxima* 219,303 443,170 10,970 25,351 Mercedes Benz 4,626,412 5,637,762 43,133 15,641 Semear 255,039 434,835 -468 9,411 PSA Finance Brasil* 3,843,436 5,340,044 47,713 60,693 BPN Brasil 424,346 419,272 3,049 -11,902 Clássico 3,585,232 4,849,050 141,591 37,021 Tricury 372,743 408,648 22,338 16,545 Sofisa* 4,510,095 4,677,127 92,201 10,586 BRP 348,192 386,135 4,797 3,724 CNH Capital 4,657,517 4,374,752 48,221 -255,953 Intercap* 379,646 382,501 -4,386 -6,087 Fidis 3,230,094 3,539,810 54,101 105,560 Ficsa 168,784 353,113 4,167 14,969 Rural* 2,503,362 3,443,985 50,854 49,851 VR 557,845 345,344 -10,658 12,888 Lage Landen 3,173,532 3,351,145 21,025 -5,952 Intermedium Banisa 257,990 343,776 6,233 12,718 Morgan Stanley 1,722,691 3,027,423 94,911 78,100 Luso Brasileiro 292,897 332,525 1,092 -13,488 BVA 876,749 2,971,340 6,811 48,426 LloydsTSB Bank 309,561 310,735 12,741 -1,257 Toyota* 2,672,721 2,854,955 25,135 37,155 Cedula 202,107 305,263 11,610 10,024 Paraná Banco* 1,977,783 2,823,119 84,127 104,301 JBS 155,764 273,384 -525 1,801 Westlb 3,814,276 2,769,511 59,170 56,179 A,J, Renner 217,033 270,771 4,619 2,834 Indusval* 2,225,397 2,730,202 71,773 12,778 Caixa Geral 135,987 256,970 -3,553 37 * Financial group consolidated data. Source:Austin Rating TOTAL 2,919,224,072 3,206,757,802 40,830,586 42,440,365
- 20. 2020 June 2010 Brazilian Foreign Trade Lia Valls Pereira Thedifficultiessurrounding the end of the World Trade Orga n i zat ion ( W TO) Doha Round negotiations have led to debate over the role of multilateralism in today’s world. WTO’s decisions are taken by a consensus that, until the Uruguay Round (1986-1994), consisted of developed countries: the United States, Japan, Canada, and the European Union (the Quad). Quad relevance in global trade at the time meant that the negotiations reflected primarily the interests of those countries. But things have changed. The emergence of a new group of nations having an influence on international trade has resulted in the creation of other alliances that could effectively influence trade talks. The constitution during the Doha Round of the G20 — a group in which Brazil, China, and India are prominent — was a milestone in multilateral negotiations. The perception that the order established after World War II needs to be reviewed is under discussion within the financial sphere, though global trading countries are considering changes to the WTO. However, beyond the debate, bilateral and regional agreements are proliferating. According to the WTO, 271 preference agreements are currently in force. Although the WTO accepts these agreements, t h e y c o n t r a d i c t t h e multilateral principle that all countries should enjoy equal trade treatment. The Strategy Brazil’s strategy for the failed Doha Round has been criticized by business l e a d e r s a n d f o r m e r diplomats. The strategy is said to have supported the WTO to the detriment of the negotiations, especially with developed countries. It is worthwhile to notice that the modest offers that the EU made to Mercosur in the agricultural area in 2004 reflected some skepticism about the consequences of multilateral talks. The resumption of trade talks with the EU in July this year is motivated partly by the lack of Doha Round results and partly by Spain’s presidency of the European Union — given the economic and cultural ties, Iberian countries seem more likely than other EU members to come to agreement with Latin A merican countries. The success of the negotiations, however, is not guaranteed. France, Ireland, and some Eastern European countries refuse to negotiate agricultural issues. The agreements the EU has entered into are not with the large agricultural exporting countries of Central America, or with Peru and Colombia. What is being, or has already been, negotiated? An analysis of Brazil’s Agenda and Agreements Lia Valls Pereira heads the Center for International Economics of IBRE-FGV.
- 21. 2121 June 2010 Brazilian Foreign Trade recent foreign trade helps to understand better Brazil’s trade agenda. Global trader What has happened with trade in the first four months of 2010 suggests that Brazil’s agenda is to be a global trader. Brazilian exports to Latin America, the Caribbean, and Asia are of similar volume, almost 25% each. For imports Asia is Brazil’s principal supplier (30%), closely followed by Latin America (27.4%). The high Asian percentage in both cases is mostly due to China, whose share in both Brazil’s exports and imports is 13.2%. China is the main destination for our exports, surpassing the United States with 10.7%. For imports, the United States is our principal supplier (14.7%). In Latin America and the Caribbean, Brazil trades more heavily with its South American neighbors, who account for 18.7% of exports and 14.6% of imports. The EU is third among Brazil’s principal export and import partners, ahead of the United States. The difference between exports to developing countries and to developed countries is 13 percentage points: The first group accounted for 55.5% of Brazilian exports in the first four months of 2010. For imports, devel- oped countries represented 51.2%, while developing countries corresponded to 48.7%. The description of trade flows by product points up differences between the markets. Asia and the EU buy basic and semi- finished products, while manufactured goods go heavily to Latin America (44%), the vast majority of them (83%) to South America. The EU gets the second highest amount of manufactured goods, followed by the United States. Trade with Asia in manufactured goods is far from balanced. Brazil sends 7% of its exports there, but Asia sends 35.5% of our imports. The situation is somewhat reversed for Latin America: Exports of 44% contrast with imports of 13. 5%. Developed countries account for 41% of Brazilian manufacturing sales, while developing countries are responsible for 59%. Thus, both markets are relevant. The constitution during the Doha Round of the G20 – a group giving prominence to Brazil, China, and India – was a milestone in multilateral negotiationsBrazilian foreign trade structure by regions/product groups Products/Regions Exports Imports Basic products 100.0 100.0 Asia 41.57 5.62 European Union 23.82 2.33 Latin America, the Caribbean 10.9 31.8 United States 8.1 6.4 Africa 2.9 34.2 Others 12.7 19.7 Developed Countries 42.1 Developing Countries 57.9 Semi-finished products 100.0 100.0 Asia 34.1 3.7 European Union 23.3 19.4 Latin America, the Caribbean 6.1 44.4 United States 11.8 8.4 Africa 5.6 2.7 Others 19.1 21.6 Developed Countries 53.6 Developing Countries 46.4 Manufatures 100.0 100.0 Asia 7.0 35.5 European Union 21.1 25.2 Latin America, the Caribbean 44.0 13.5 United States 13.6 16.6 Africa 5.4 2.6 Others 9.0 6.6 Developed Countries 41.0 Developing Countries 59.0 Source: Secretariat of Foreign Trade (Secex) of Ministry of Development, Industry and Foreign Trade, www.desenvolvimento.gov.br.
- 22. 2222 June 2010 Brazilian Foreign Trade The structure of bilat- eral trade agendas shows a high percentage of manu- facturing imports (above 90%) from the EU, the US, and Asia. Manufacturing exports flows to the US (40%) and the EU (53%) are relatively balanced. Exports to Asia are concentrated on basic products (69%). Mapping trade flows shows the diversity of Brazil’s interests in terms of demand, but its agenda should include multilateral prospects. Agreements Free trade agreements are already effective among all countries in South America.1 The most recent are with Colombia, Ecuador, and Venezuela (2005) and Peru (2006). Domestic manufac- turers have criticized the agreements for distinctly liberalizing trade terms. In general, Brazil allows immediate free access of most products to its market, although it does not always get a similar benefit from its partners: Full liberalization terms for Andean countries are from five to ten years.2 More recently Brazil has entered into other agreements, one with Israel in April 2010, and another with India effective in June 2009, though the Indian agreement so far covers only 450 products. An agreement on preferential taxes encompassing some 1,000 products has been signed with the SACU, whose members are South Africa, Namibia, Botswana, Lesotho, and Swaziland, but it has not yet been submitted to Congress for approval. Since 2002 Brazil has engaged in trade talks with Mexico on the definition of a free trade area, but the talks have not yet reached a conclusion. An agreement affecting the automotive sector, entered into in March 2003, provides for reciprocal reductions in import taxes. A preliminary agreement with the EU on creation of a free trade area was signed in 1999. By 2004 negotiations had advanced and full agree- ment seemed to be closer, but European offers in the agricultural area were con- sidered insufficient: simply expansion of Brazil’s export quotas currently in effect The high Asian percentage in both cases is mostly due to China, whose share in both exports and imports from Brazil in the first four months of 2010 was 13.2%. Bilateral trade structure: January- July 2010 (in percentage) Asia European Union Latin America and the Caribbean United States Africa Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Basic products 69.0 2.7 44.3 1.5 18.6 26.2 30.8 6.2 28.3 68.4 Semi-finished products 18.9 0.5 14.5 3.5 3.4 10.1 15.1 2.2 18.0 1.5 Manufatures 12.0 96.8 40.3 94.9 77.8 63.7 53.3 91.6 53.5 30.1 “Source: Secretariat of Foreign Trade (Secex) of Ministry of Development, Industry and Foreign Trade.”
- 23. 2323 June 2010 Brazilian Foreign Trade and reduction in tariffs on Brazil’s exports exceeding quotas. Moreover, the gains applied primarily to ethanol exports.3 Barriers Before negotiations can go forward, the EU must first come to an understanding with members that defend agricultural protectionism. ConsideringEurope’scurrent crisis, free trade offers are likely to be rare. And what might be demanded from Brazil? In 2004, domestic businesses did not welcome EU’s demands in the services and government purchases sectors. Agreementsarealsobeing discussed with Jordan, Turkey, Morocco, Egypt, the Gulf Cooperation Council, and Pakistan. Given how extensive the trade agenda is, some priorities have to be defined. Mercosur and South America’s integration deserve further negotiations that go beyond trade issues. A comprehensive agreement with Mexico might consolidate intra- industry trading among trans-Latin companies. A trade agreement with the EU would be welcome, but an approach to the US would be needed to avoid trade diversion. Ineffective multilateral negotiations cause losses to the global economy. To compensate, a country like Brazil with a global trade agenda must expand its network of agreements. 1 All agreements into which Brazil has entered can be found the website of Secretariat of Foreign Trade (Secex) of Ministry of Development, Industry and Foreign Trade, http://www.desenvol- vimento.gov.br/sitio/interna/index. php?area=5. 2 SeeanalysisonIBRE’swebsite,Applied Economy Center – International Eco- nomics, http://portalibre.fgv.br/main.j sp?lumChannelId=8A7C8233253AEA0 A01253B0A09222084. 3 A detailed analysis of this offer was carried out by H. Kume and others (IPEA Discussion Texts nos. 1054 and 1296. Available on www.ipea.gov.br, under “Publications – Texts for Discussion”). Regions' share in Brazilian foreign trade, January-April 2010 (in percent) 6.2 18.7 4.3 24.9 10.8 4.7 22.2 42.5 55.5 2.8 14.6 7.1 30.0 14.8 2.7 21.7 51.2 48.7Exports Imports Exports 6.17 18.69 4.26 24.91 10.81 4.74 22.21 42.51 55.49 Imports 2.79 14.57 7.13 29.97 14.78 2.65 21.71 51.22 48.69 Central America and the Caribbean South America Africa Asia United States Middle East European Union Developed Countries Developing Countries Source: Secretariat of Foreign Trade (Secex) of Ministry of Development, Industry and Foreign Trade.
- 24. 24 IBRE’s LetterEconomic and financial indicators BRAZIL Real wages rising After a slight decline between January and May of 2009, real wages have begun to grow again, influenced by labor market demand and low inflation. The brisk pace of the Brazilian economy, supported by the fiscal stimulus measures and loose monetary and credit policy, has sustained real income growth despite an acceleration of inflation in recent months. In the first quarter real income grew at an annualized real rate of nearly 4%. Some segments are now facing shortages of skilled labor that are pushing up wages and prices. Unemployment falling Usingseasonallyadjusteddata,theunemployment rate in April 2010 fell to its lowest level (6.7%) since 2002. Between September 2008 and June 2009 favorable developments in the service, construction, and public sectors more than offset the largely negative results of the industrial sector. Unemployment is likely to continue declining in the second quarter of 2010; the May FGV Labor Market Survey indicates that consumers expect strong labor demand. Industry at full speed ahead Domestic demand brought about a sharp increase in industrial capacity utilization throughout the second half of 2009. Encouraged by subsidies for purchasing machinery and equipment, the industry returned to investing heavily, as recorded by IPEA’s machinery purchase index. The FGV industry capacity utilization index grew by 7 points, to 85%, in the 12 months through March 2010. It appears from recent developments that industry capacity utilization may stabilize or grow more slowly over the coming months. Inflationary pressures, originating from the expansion of profit margins to pre-crisis rates and the strength of domestic demand, threaten the government’s inflation target. The Central Bank is expected to continue raising interest rates cautiously in the near future to curb inflation. Great fiscal divide between advanced and emerging economies A striking fact of the global crisis is the major deterioration in the structural deficits in advanced compared with emerging economies. The structural deficit (the deficit adjusted for tax revenue losses resulting from the business cycle) is projected for 2010 at –4.8% of GDP for advanced countries compared to –1.5% for emerging countries. Except for Canada and Germany, advanced countries entered the crisis with much larger fiscal structural deficits, which were aggravated by huge fiscal stimulus packages to shore up their economies. In contrast, emerging countries entered the crisis with fiscal surpluses and thus had room to stimulate their economies without deepening fiscal imbalances. June 2010 24 For additional series and methodology contact: Industry and consumer surveys: (55-21) 3799-6764 or [email protected]; Price indexes and data bank services: (55-21) 3799-6729 or [email protected]. IBRE website: http://portalibre.fgv.br/ -10,0 -8,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 Norway US Japan Ireland Spain UK France Portugal Greece Canada Germany Advanced Emerging India SouthAfrica China Russia Argentina Indonesia Turkey Mexico Brazil Structural fiscal balance as a percent of GDP 2010 Source: IMF Fiscal Monitor, May 2010.