Brazil: not as boring as it looks
The headline news in Brazil is always dramatic, often shocking, but never dull. Unlike its financial sector, which does little to excite international interest. Could that be about to change?
Recently I have attended a couple of leaving parties – not only of people leaving jobs but also Brazil.
The trend of the past couple of years (based on anecdotal evidence that probably doesn’t bear much statistical analysis) of departing bankers and those working in other areas of the financial industry has now been added to by a trickle of foreign financial media professionals beating a retreat.
Some of the reduction is natural wastage: as correspondents leave for home or new assignments, they are not being replaced. Other reductions in headcount are more decisive: positions are being cut by organizations looking to reduce costs and downsize.
“Why?” I asked a colleague. He had just suggested that the gathering we were at was a symptom of senior management at global media companies not wanting to invest in Brazil any more. He had a pithy response: “Brazil is boring”.
That reply may surprise some. After all this is a country that, in recent years, has impeached its president and had the world’s largest-ever corruption scandal land senior politicians in jail – with many more cowering behind foro privilegiado (immunity). That corruption inquiry has fed into the country’s deepest-ever recession. Throw in an Olympics and a World Cup, a horrible outbreak of a mosquito-borne virus that causes severe mental damage to unborn children and prison riots that leave dozens dead and decapitated.
The dramatic headlines continue to flow from Brazil. Last month there was a deadly outbreak of yellow fever and the uncovering of corruption in the meat processing industry that led China and the EU to ban exports from Brazil – endangering a possible and very fragile return to positive economic growth.
There is always something interesting – mindboggling even – going on in Brazil.
But the truth is that Brazilian finance is pretty dull. The banks are solid to an economically punitive degree. BTG Pactual caused excitement when it was surprisingly dragged into Lava Jato. There is an enquiry into the small number of pension funds that could lead to noisy (if containable) scandal. Otherwise, the corruption enquiry has been surprisingly absent from the financial sector so far – although one wonders what might be revealed if and when BNDES opens its books.
Take deal flow. ECM activity has collapsed. There has been just one IPO a year for the last three years. The international banks have long-since downsized equity banking teams. Local DCM is generally just another way to structure loans – the arranging bank parcelling debentures into investments for their asset management divisions. Extension down the credit risk spectrum is as limited as tenor. M&A ticks along – most of it under the radar.
Another example is the wealth management industry. This is Brazil, so it’s big of course, with around $250 billion of assets. There are, after all, lots of rich people. But with the greatest respect to private bankers, it doesn’t take a genius to advise a client to invest in fixed income products. Returns – many of which are tax-free (somehow fiscal austerity hasn’t taken aim at what are effectively subsidies for the super-wealthy) – pay so well that allocating elsewhere and adding risk makes no sense. And it’s not just the wealthy.
The few large pension funds that there are in Brazil can hit their actuarial target rate of return of 6% without thinking. The same goes for other institutional investors. Why invest in credit analysts and investment managers when you can just get great returns flowing into sovereign paper?
And so, yes, I get why Brazilian finance is boring and lacks the deal flow and diversity to excite the financial media’s interest.
But wait. Inflation is falling and so is the interest rate. Selic will almost certainly be in single digits early next year and heading only downward. It is likely the real interest rate will dip under the magic 6% within 12 months.
And then things will begin to change. How do I know? Because I saw it, briefly. In 2012, the Selic was pushed down to 7.25% by a short-sighted government policy. It was unsustainable (inflation was rising) but, briefly, things changed. Investors suddenly started looking around for risk assets that could generate return.
Clearly, this process takes time – investors need to build up the skills to react. Banks and corporates need to adapt. A whole new financing environment doesn’t appear in a few months and, as the central bank eventually began to reassert a semblance of independence to raise interest rates, the moment passed. But speak to bankers who were there and they will tell you things were changing.
This time interest rates should remain low for a cycle. Inflation is unlikely to take off any time soon because there is plenty of spare capacity (unemployment is still rising and just hit 12.6%). This will give everyone the time and the incentive to react.
There are other positive drivers too. Pensions reform will likely lead to a sharp increase in money flowing to private pension providers, and it will need investing. Oh, and there is a flourishing fintech sector.
Now is not the time to give up on Brazil. It is just about to get interesting.