Brazil, Still a Banker’s Paradise

        Still a Banker's Paradise

in Brazil rank among the planet’s most profitable with
returns on equity that are the envy of bankers anywhere.
An overdraft facility can cost the customer nearly 200 percent
a year. Credit card finance and personal loans run over 100 percent
a year. Most personal loans are made to pay off existing debts.
Richard Hayes

Accumulated inflation
for this year through the month of April is 6.15 percent, as measured
by the IPCA (¯ndice de Preços ao Consumidor Amplo—Extended
Consumer Price Index), one of Brazil’s several inflationary indices. The
target for 2003 is 8.5 percent. To me this looks impossible to achieve.
Due to the persistent increase in prices, although velocity has diminished
since November, Central Bank president Henrique Meirelles has stated that
it is not yet possible to lower interest rates.

COPOM (Comitê
de Política Monetária— Monetary Policy Committee) will
meet late May. Until declarations by Meirelles in Madrid, on May 16, it
was thought that monetary policy might be relaxed somewhat giving a boost
to the sagging economy. Several ministers and vice president, José
Alencar, have spoken out recently criticizing the stratospheric interest
rates currently prevalent in the market.

At 26.5 percent per
annum, Brazil’s SELIC or base rate in real terms is one of the highest
in the world. The banks in this country rank among the planet’s most profitable
with returns on equity that are the envy of bankers anywhere. An overdraft
facility can cost the customer nearly 200 percent p.a. Credit card finance
and personal loans run over 100 percent p.a. This discourages people from
borrowing to finance new purchases. Most personal loans, it is reported,
are made to pay off existing debts. Individuals may spend as much as 30
percent of their income on interest and other bank charges.

Loans to business
have actually declined this year. Very few lines of economic activity
can profit using such expensive borrowed money that accounts for as much
as 25 percent of production costs in certain industries. The average interest
on corporate loans is now 60 percent as opposed to 45 percent a year ago,
according to one study.

Banks use a large
portion of their deposits to purchase government bonds. Cash rich companies
also invest in government securities rather ran risk investing in productive
facilities that could create more jobs. Were the central bank to lower
interest rates, banks’ profits would be adversely affected, but perhaps
economic activity could be somewhat reactivated.

Car sales are in the
doldrums as are those of home appliances, TV sets, computers and other
electronic gear. The cost of financing these big-ticket items is a discouraging
factor. Unemployment was 12 percent in March with little improvement in
sight. Real wages declined by 7.7 percent from March of 2002 through March
of 2003, according to the National Confederation of Industry.

Tough fiscal and monetary
policies, plus a valiant attempt to initiate reforms of the pension and
tax systems, have inspired at least temporary confidence on the part of
investors, lenders and international organs. Laudatory comments were made
by James Wolfensohn and Horst Köhler, presidents of the World Bank
and IMF respectively, as to Brazil’s conduct. More than US$ 5 billion
has come into the country so far this year in the form of bond issues
of banks and a few select corporations such as Petrobras, Votorantim and

The government placed
a $1 billion issue that was oversubscribed. IMF targets are being met
so that another $9 billion of the $30 billion facility arranged last year
by Pedro Malan and Arminio Fraga is available. Foreign reserves are in
excess of $40 billion. The real has strengthened to around US$ 1 = R$
3 or less. The stock market is at its highest level since the crisis over
Lula’s possible victory started last year.

Less Risk, Still

The risk of a Brazilian
default is perceived to have diminished due to the conservative stance
assumed by Lula and members of his economic team. But the same structural
problems that existed a year ago still have not been resolved. Much of
the inflow of hard currency is for interest arbitrage operations that
can be reversed when conditions change. The quality of the new money should
be examined before assuming that Brazil is out of the woods.

The sole FDI (Foreign
Direct Investment) of significance that I have noticed this year is that
of StoraEnso, the Finnish/Swedish pulp and paper giant, which is investing
in a 50/50 joint venture along with Aracruz to produce eucalyptus cellulose
in southern Bahia. The Veracel project will involve total investment of
US$ 1 billion and will create export revenue along with jobs in the region.
The details of this worthwhile project may be seen on:
Brazil needs more of this type of investment.

Lula’s government
must grapple with the matter of interest rates. If Meirelles should succumb
to external pressure and lower interest rates, international confidence
in his ability to determine monetary policy independently could cause
a reversal of the current euphoric atmosphere prevailing with regard to
Brazil. The coming week will be a good test of Lula’s resolve to maintain
orthodox policies to the short term detriment of those who elected him.

As to central bank
autonomy, the Lower House of Congress passed for the second time a constitutional
amendment that would make it easier to grant independence to the central
bank. This is a move in the right direction, as it will alter complicated
article 192 of the Constitution. Now, when the time is deemed right, such
a measure may be voted upon separately rather than as part of an overall
regulation of the financial system as stipulated previously. I doubt if
the issue of central bank independence will be broached very soon as the
chances of approval of this very polemic move are nil at present and the
pension and tax reforms have priority on Lula’s legislative agenda.

However, the PFL (Partido
da Frente Liberal—Liberal Front Party) now in opposition, has threatened
to introduce such a measure to test Lula’s party, the PT (Partido dos
Trabalhadores—Workers Party). As part of the coalition that supported
former president Fernando Henrique Cardoso, the PFL was in favor of this
sensible policy in the past but the PT, who now say they want it, knocked
it down. It remains to be seen if this is just part of PT’s PR and adman
Duda Mendonça’s window dressing to give Lula and the PT a moderate
sheen or if their convictions have truly changed.

Internal Rifts

The reforms gallantly
presented by Lula to the congress in April are moving at a snail’s pace
in the CCJ (Constitution and Justice Committee) of the Chamber of Deputies.
Not all the PT members of this key committee are in favor of the changes
in the pension system. Some feel that taxing retired government workers
on their pensions is unconstitutional. Also other committee members belonging
to parties that in theory support Lula’s government are against this feature
of the proposed reform as well as increasing the minimum age for retirement
eligibility. In order for the proposed reforms to ever reach the floor,
this committee must agree on their content. It will be an uphill battle
to accomplish anything significant. Look what is happening in France over
proposed changes in pension benefits!

Much attention has
been given in the press to the internal problems of the PT. Three quite
vocal opponents of Lula’s policies may be expelled from the party. These
folks have not accepted the neo liberal stance of Lula’s government and
advocate a moratorium on the foreign debt, breaking relations with the
IMF and other radical moves. Should they be expelled from the PT, they
will be welcomed by the open arms of José Maria de Almeida, president
of the PSTU (Partido Socialista dos Trabalhadores Unificado—United
Workers’ Socialist Party), a party much farther to the Left than the PT
was before its pre election face lift that helped them win the presidency.

Zé Maria, as
his followers call him, says he will start another party. They have a
nucleus of public workers, including school teachers, which will keep
the Left in the news as they promote traffic-stopping demonstrations such
as those staged May 15 on São Paulo’s Avenida Paulista and near
Praça da República.

It will probably take
another two or three months until it becomes obvious to foreign observers
that Lula’s reform measures will stay bogged down in Congress. If they
emerge, the bills may be so watered down that the numeric improvement
in the nation’s steadily increasing chronic deficit, caused mainly by
interest payments and pension costs, will be at best only slightly alleviated.
Perhaps we will be happily surprised by a sudden surge of civic responsibility
on the part of legislators in Brasília.

Richard Edward
Hayes first came to Brazil in 1964 as an employee of Chase Manhattan
Bank. Since then, Hayes has worked directly and as an advisor for
a number of Brazilian and international banks and companies. Currently
he is a free lance consultant and can be contacted at




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