Financial newswires breathlessly reported this week that MSCI’s Brazil Index (MXBR0FN) had fallen to the cheapest level since 2006 (compared to global shares) after investors withdrew US$869m from the country’s mutual funds (to date this year). Bloomberg noted that Brazil is “alone” among the four largest emerging markets to post outflows this year. International investment banks including the likes of JP Morgan issued hurried notes advising clients to reduce their Brazilian stock holdings amid a concerted campaign led from the top by President Dilma Rousseff to force a reduction in the country’s entrenched high interest rates, including a move last week to lower the government-guaranteed minimum rate of return on the most popular savings account in the country, the so-called poupança.
“Rousseff has settled on a crowd-pleasing target as part of her campaign to lower interest rates: some of the world’s most profitable banks”. Bloomberg intoned, quoting senior fund executives who noted that “government interference in the economy may be accelerating, with pressure on bank margins”. “This could undermine the health of the financial system and thus of Brazil’s ability to continue to weather an uncertain global environment,” according to a 4 May note from Deutsche Bank.
There is some irony in London-based bank executives complaining about ‘government interference’ across the Atlantic, when the same executives were only recently bailed out by the UK government, at taxpayers’ expense. This is the very scenario that Rousseff insists that she wants to avoid in Brazil.
This week’s aggressive rhetoric was prompted by a comment written by Rubens Sardenberg, the chief economist of Brazil’s private banking federation (Febraban). In Febraban’s 7 May weekly report, Sardenberg wrote, “You can take a horse to water, but you can’t make it drink”. Sardenberg made it clear that Brazil’s private financial sector is not inclined to acquiesce to the government pressure to reduce interest rates. The Rousseff administration was furious. Officials from the office of the presidency replied via the daily O Globo, “You can’t force a horse to drink water, but he can also die of thirst”.
The president and her finance minister Guido Mantega demanded an explanation, forcing Febraban to distance itself the very next day from the report, suggesting (rather unconvincingly) that Sardenberg was not speaking on its behalf. However Murilo Portugal, the president of Febraban, only recently tried to pass off the blame for Brazil’s high banking spreads on the government, declaring that costs, including high reserve requirements and taxes, made up 70% of spreads. With that attitude Febraban was already well on the wrong side of Rousseff and Mantega. Notably, the big state banks have already dramatically slashed their lending rates, which should oblige the private sector to follow suit sooner rather than later. As we went to press on 10 May, Banco do Brasil, the country’s largest state bank, announced further cuts, this time for small- and medium-sized businesses, following on from previous moves in April.
Febraban is adamant, however, that overall market conditions right now are not conducive to any such moves. Sardenberg questioned whether the government campaign would have any effect on credit. He noted that Brazil is living an “economic paradox”, whereby on paper the deterioration in external conditions opens up space to reduce domestic interest rates, but at the same time also demands caution of local economic agents – i.e. the private sector banks – at a time when the sector is already closely monitoring a rise in the rate of non-performing loans. Added to this are fears that the Selic (expected to be cut from 9% to 8.5% this month) will go back up in 2013 on faster growth/inflation, squeezing consumers anew.
The government is utterly dismissive of such caution and is equally adamant that the banks have ample room to funnel additional credit to the domestic sector in order to shield Brazil from the worsening effects of the global crisis. With local elections due in October, the government is anxious to shore up the economy, which has cooled rather faster than expected, led by a slump in industry. On Labour Day (1 May) President Rousseff slammed the “perverse logic” of the financial system and said that administrative and other banking fees in Brazil amounted to “daylight robbery”.
The average lending rate for consumer loans in Brazil was 44% in March, compared to 9.5% (on average) in the US, according to Brazil’s central bank. Despite the latest private bank concerns, it is the case that Brazil’s (public and private) financial sector is not only well capitalised and very profitable but also highly regulated – so that under- or non-performing loans make up a small percentage of total lending. Delinquent loans accounted for just 7.4% of all consumer loans in March, up from 5.7% in December 2010, according to the central bank. Other bankers are more sanguine about the latest policy pressures - “They are doing the right job, protecting growth and employment,” said Ronaldo Patah, the head of fixed income at Itau Asset Management.
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