Imagine what would happen in a country whose state development bank – which accounts for around 50% of corporate credit – decides suddenly and substantially to cut the level of its funding to the private sector.
And, at the same time, its government also changes the interest rates that the development bank charges from a subsidized rate far below the country’s base rate to one that is very close to that base rate (and therefore much closer to lending terms available from private-sector banks).
Imagine this is happening in a country with huge infrastructure needs; a really big country of more than 200 million people and one rich in many of the commodities most sought after by the rest of the world. And suppose that the country is also coming out of its worst-ever recession and the consensus GDP growth forecast for the next year is closing in on 3%.
Imagine that foreign investors, starved of yield in home markets, are looking for large markets with positive real rates. This country’s domestic investors are also looking to invest in risk products – many for the first time – as declining interest rates mean that pension funds cannot generate actuarial returns by holding sovereign fixed income paper.
Imagine that other institutional investors begin to diversify investments. And the very large private bank market is also moving into credit risk, market risk and liquidity risk – again for the first time and with a lot of liquidity to be deployed.
Just imagine what would happen to this country’s domestic credit markets. They would blossom as the state steps back and burgeoning credit and equity financing needs meet an awakening appetite for risk and tenor among investors.
If all goes as it should, this is the scenario that will be playing out in Brazil in the next five years. Imagine that.