2012 was always going to be a test of Brazil’s new president Dilma Rousseff. Taking power, just a couple of years into the global economic recovery and inheriting a booming domestic economy she faced an unexpected stress-test. In style, Rousseff is in many ways a contrast to her politically charismatic and massively popular predecessor Lula. In substance, the expectation was that Brazil’s first female head of state would continue with the market-friendly economic policies.
In the first few months of this year the economy continued to grow strongly and, with the highest real interest rates in the world, money was flowing into the Brazilian economy. The government’s challenge was managing the flood of inward liquidity: it responded with higher IOF taxes designed to cool capital inflows and thereby stem the steady appreciation of the real, which was causing pain for exporters and domestic inflationary pressures (which in turn led to monetary tightening).
In the second half of 2011 the challenges changed, as Brazil faced the headwinds caused by the financial and economic crises in the developed world, increasingly driven by the crisis in the Eurozone. As in the 2008 global crisis – which Brazil’s economy and banking system passed through successfully (Brazil registered just one quarter of negative growth in the last quarter of 2008) – the country is enjoying relative strength. However, while Brazil’s emerging markets-orientated economy and highly regulated and robust financial system are proving resilient to the developed market woes, it is not entirely de-coupled. As 2011 draws to a close the government is easing monetary and so-called ‘macro-prudential’ measures to try to ensure growth of between 3% and 4%.
Economy
In 2010 Brazil’s growth was 7.5%, slowing to 3.5% (estimated) for 2011. In response, the government has recently been cutting the headline Selic interest rate, now at 11.5% from a cyclical peak of 12.5% in July, despite inflation still being well above the 6.5% top of its target range. The explanation for this early monetary easing can be seen in a bill the government sent to congress in October that aimed to include in the central bank’s mandate the goal of "delivering growth" - as well as its traditional sole task of targeting inflation (4.5% plus or minus two percentage points). In Brazil, with its history of hyper-inflation, the bill proved sufficiently controversial to be withdrawn, but the point had been made.
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Alexandre Tombini, central bank president |
The reasons for the central bank’s relaxation of monetary policy are as unclear as they are proving controversial. One banker who has close knowledge of central bank president Alexandre Tombini tells Euromoney that he knows Tombini has recently spent a lot of time with Ben Bernanke, chairman of the US Federal Reserve. The source says: "I can only assume that Bernanke showed Tombini some truly terrible data that is going to come out about the US economy."
That is, in essence, the official explanation - that the coming economic slowdown and its deflationary pressures enable Brazil to cut interest rates now while being confident inflation will also fall into the target range in 2012. There are other theories, however, such as that the government is using the current economic crisis to make a politically-motivated bid to cut interest rates to mid single digits. According to Tony Volpon, managing director at Nomura Securities: "The government’s strategy is in effect an attitude of ‘let’s get there first and then we will see what we will do to hold down inflation’. We believe this will ultimately not work, and we also forecast Selic to rise later in the year. Nonetheless we believe the news today is another signal that bringing Selic to single digits is now not so much a target of monetary policy, but a much more important ‘decision of state’, a major policy imperative of the Dilma Rousseff government."
Consumer credit
The government is also signalling that pursuit of growth is now driving the economic agenda with the relaxation of some of the macro-prudential policies it had introduced to temper the rampant growth in consumer credit. On 11 November the central bank reversed controls it had introduced in December 2010 to cool the growth in consumer credit for vehicles (risk weights on loans with terms of up to 60 months will now be 75% or 100% compared to 150% previously) – this following data that showed a 12% fall in new vehicle sales in October 2011 compared to the previous month. Risk weightings for payroll loans up to 60 months and some unsecured consumer loans up to 36 months have also had their risk weightings reduced to 75-100% (from 150%).
A report from Barclays says: "Arguably, the Brazilian government’s recent initiatives have been much more consistent with a policy to sustain economic growth in the current global macro environment rather than in controlling inflation. So, if the government feels the need to add more stimuli to credit/economic growth at this stage (of the current global crisis), chances are they sense the risk of a more challenging macro scenario in Brazil has drastically risen - which could be viewed as a negative by some market participants. Indeed, we note recent domestic economic data has not been particularly exciting."
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"For Brazil to create a dangerous credit bubble it would need to have a much lower cost of lending, longer durations and a higher proportion of mortgage-based lending. None of this is on the horizon" |
Barclays also notes that the relaxation in credit controls is not necessarily a positive for the banks that have been looking to respond to the slowdown by reining in the recent huge growth in consumer credit within their portfolios. However, the leading Brazilian banks are all reporting expected credit growth of about 15% next year and, although non-performing loans have been creeping up, there is the prospect for disciplined but strong banking growth.
