Five Former Central Bank Directors Discuss Brazilian Economic Outlook at São Paulo Forum
Attendees of EMTA’s Third Annual Sao Paulo Forum heard a high-caliber discussion of the Brazilian economy by five former Central Bank directors. The event, which was held in Portuguese with simultaneous English translation, was hosted by Banco Itau BBA on Tuesday, April 13, 2010. Approximately 200 market participants attended.
EMTA Board member Rudi Fischer (Banco Itau BBA) opened the event by reminding the audience of the poll taken at last year’s Forum predicting 2010 variables. Attendees had forecast a BRL/USD fx rate of 2.07 compared to the actual rate of 1.76 in April 2010. While the audience prediction of the SELIC rate was quite close to the rate in force at the time of the 2010 Forum, Fischer noted that the highly erroneous Bovespa call (which underestimated the stock market’s recovery by 15,000 points) demonstrated that “we are all debt players who know nothing about the equity markets!”
Former Central Bank President Affonso Pastore (1983-85) delivered a keynote presentation addressing Brazilian growth, inflation and the balance of payments. Pastore noted the “bizarre” situation of the world economy of the past 18 months with the US and Europe falling into a deep recession while Brazil was relatively unharmed, suffering a downturn of only two quarters. The major contagion to EM markets from events in developed countries, so pronounced and predictable in the past, was in this most recent instance limited. Pastore specified, for example, that unemployment in Brazil grew for a short period then returned to historic lows.
Pastore attributed Brazil’s relatively strong performance to its relatively conservative banking system. “We had our banking crisis in the past; it made us very cautious and so we had comparatively low leverage,” he observed. He praised Central Bank oversight of the banking system. “While people were sometimes critical and called our system ‘boring’ or ‘not sexy,’ this actually proved to serve us well during this crisis,” he concluded.
In addition, improved economic fundamentals allowed for the adoption of counter-cyclical economic policies, which EMTA Spring Forum panelists had emphasized as an important new development (see related story). Pastore highlighted the increased ratio of BRL-denominated debt vs. foreign currency exposure, increased fx reserves and the Central Bank’s de facto independence since the adoption of its inflation-targeting regime as major accomplishments.
Pastore, who viewed himself conservative in his forecasts, predicted 6% GDP growth in 2010. However, he raised doubts that such a rate of growth was sustainable over the long term, arguing that growth might be constrained at 4-4.5% per annum unless domestic savings rose. Pastore illustrated the correlation between investment rates and net exports in a graph, and argued that unless reforms were enacted to promote domestic savings, Brazilian growth would be hindered. (Pastore declared “I hate foreign debt,” in dismissing the alternative source of financing a current account deficit.).
Addressing inflation in the aftermath of fresh new government data, Pastore reviewed the IPCA inflation rate during 2008-09. He noted that the non-tradable sector was much greater than the core rate, and was offset by lower tradable good costs as a result of lower commodity prices. Going forward, he acknowledged that there would undoubtedly be increased political pressure on the Central Bank in an allusion to upcoming elections. However, thus far the independence of the Central Bank has been maintained and “I expect that to continue.”
Following Pastore’s presentation, fellow former Central Bank directors, led by Ilan Goldfajn (Banco Itau BBA), joined in the discussion of the outlook for Brazil. Goldfajn praised Pastore’s analysis while noting a slightly more optimistic medium-term view, arguing growth could be maintained at a 5% rate, assuming a savings rate of 22%.
BTG Pactual’s Eduardo Loyo declared it was not reasonable to assume that developed country downturns would not in some way affect nations such as Brazil; yet in his view, more than the global business cycle fluctuations, the conditions for continued financing of Brazil's current account deficits would be the key theme. He agreed that progress had been made in the country’s development, which should make financing more stable than in the past, but challenges remained. “The question is: if financing falters in one occasion or another, will the Central Bank act as it did in 2008 to provide US dollar liquidity to the market (as it saw the drying up of credit as a temporary issue) or would the Central Bank wait for the market to correct itself,” he noted.
Luiz Fernando Figueiredo (Maua Investimentos) called attention to the “unprecedented transfer of debt from the private to the public sector.” What happens next was open for debate. European creditors now often ask to be paid in advance because of the bleak outlook, especially in countries such as Greece or Ireland. He added that only now are European nations addressing the lack of safeguards of the euro system. Figueiredo concurred that Brazilian growth would depend mostly on domestic factors.
Goldfajn estimated that 1Q 2010 growth was probably above 8% with no immediate signs of deceleration. Thus, if Pastore’s 6% annual forecast proved correct, that would imply decelerating growth in coming quarters which was not currently obvious.
Goldfajn asked speakers if they were concerned about inflation, now that it has superseded the 4.5% official forecast. “Yes,” answered Alexandres Schwartsman of Banco Santander, who remarked that whenever Brazilian inflation rises, there is a popular explanation tying it simply to one factor such as the price of tomatoes, or too much rain. Instead, the truth is more complicated and is more systemic. What would the future hold? He relayed his regret in saying he didn’t know the answer and “we will have to see how it goes.”
Schwartsman, after referring to his article in O Folha do Sao Paulo discussing inflation in depth, referred to Goldfajn’s recent article on Central Bank independence, published in O Estado de Sao Paulo. Schwartsman declared that it was important to remove doubts about Central Bank independence, and despite “full evidence of its maturity in 2002/03,” questions unfortunately still linger. Addressing concern on its independence would be an important task for the next Presidential administration, he noted.
During the session, Goldfajn regularly paused to invite audience participation in the debate. When one attendee asked if there were negative surprises in store for the market, Goldfajn replied that the unpleasant shocks had already been revealed in some European countries, while also pointing out the unknown ramifications of the withdrawal of global stimulus measures.
As for the SELIC, Figueiredo admitted the chance of forecasting this correctly was low, but he expected the Central Bank to continue its work of the past decade and “act according to its mandate.” He added, “certainly we will not see a relaxation of the 4.5% [inflation-targeting] rate and I expect a 300 bp increase in the SELIC over time,” though expressing that he had no strong convictions on the exact increments of each hike. With the Central Bank already taking additional steps such as raising reserve requirements, it has shown it will also use other measures to address an overheating of the economy, he stated.
Schwartsman largely concurred, while predicting 25 bps more in total hikes than Figueiredo. Goldfajn saw 300 bps as being “in the ballpark” of likely rate hikes but voiced concern “this will not be enough.” He asserted that Brazilian analysts were wrong in January when consensus was that a rate hike had not been necessary. “Rates should have already gone up, and we are now late in the game,” he declared.
Before adjourning to a cocktail session, the panelists discussed the BRL exchange rate given the expected appreciation of the Chinese yuan vis-à-vis the US dollar. Panelists largely concurred that an appreciation of the yuan would favor Brazil as commodity prices subsequently rose. Figueiredo noted that it wasn’t long ago that only exotic hedge funds would hold BRL-denominated assets. “Now the real is just another currency in world finance,” he stated.
In keeping with tradition, attendees were polled for their financial forecasts for the next twelve months. The average forecast for the BRL stood at 1.87, the SELIC was predicted to be at 11.41%, and the BOVESPA was expected to rise to 75,348.