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Sao Paulo Forum - April 23, 2012

Brazilian Politics, Rates and Growth Discussed at EMTA Forum in São Paulo

EMTA’s Fifth Annual Forum in São Paulo was held on Monday, April 23, 2012.  Banco Itaú hosted the event at the Itaú Cultural modern art museum in downtown São Paulo.  The event was attended by 150 investors, economists, traders, sales people and other market participants.

In opening remarks, EMTA’s Jonathan Murno thanked former Board Member Rudi Fischer for his many years of support both of EMTA and the São Paulo Forum, and expressed best wishes for Fischer in his retirement after 28 years at Itaú.

Noted Brazilian analyst Murillo De Aragão (Arko Advice and Global Source Partners) delivered the keynote address.  De Aragão’s remarks focused on the current political situation in Brazil.  The country’s model was to find a consensus because of the coalition style of government, and the country was paradoxically being prevented from enacting reforms as a result of positive economic conditions.

Despite the fact that the government has extraordinary support in Congress, each of the governing parties has a different stance on most issues.  There is general consensus against inflation, but the governing parties splinter on most other topics, such as labor reform.  Low unemployment rates discourage any move away from the status quo, De Aragão observed, while the country can also rely on large FX reserves to muddle through any potential crisis.

It is even harder to get an agreement on political reform, stressed De Aragão.  Politicians won’t voluntarily limit their options, and any reforms will be specific rather than comprehensive in nature, and then only because of a popular outcry.  De Aragão noted that expectations of politicians are so low in Brazil that the approval ratings of politicians soar when even the most basic expectations are met.

The opportunity for any substantial reforms ended with the conclusion of President Cardoso’s first term, De Aragão reasoned, while noting that the Fiscal Responsibility Law and the CPMF occurred in his second term.  “Brazilians basically don’t want to carry out reforms; we will only do so when it is absolutely necessary…our politicians aren’t going to be firemen unless there is a fire.”

De Aragão addressed the relationship between President Dilma Rousseff and former President Lula.  Echoing comments he made at EMTA’s Miami Forum in January, De Aragão stated “Dilma is the CEO but Lula is the chairman of the board; but I don’t believe Lula would run for president in the future unless there was a serious issue with Dilma.”  De Aragão specified that he didn’t believe the former president has any interest in running again, but suggested he would only do so in a crisis situation.

De Aragão took a long list of audience questions, on topics such as bureaucracy (“Bureaucracy discourages entrepreneurialism in Brazil, but at least the government is no longer completely insensitive to it as it once was”), corruption (“efforts to combat corruption are bearing fruit, and some movement has occurred with the greater empowerment of Federal police”) and the l’affaire YPF in Argentina.

The event also included a panel discussion composed of former Brazilian Central Bank directors.  In his introductory panel remarks, Itaú’s Ilan Goldfajn reminded attendees of the 12-month consensus forecasts made at the event in 2011.  Attendees last year had expected a BRL rate of 1.65 (vs 1.87 on the date of the 2012 Forum), a SELIC rate of 12.46 (vs. 9% as of April 2012) and the Bovespa at 70,019 (vs. 62.494).

Topics covered by the panel included the outlook for growth.  Affonso Pastore (A.C. Pastore & Associados) emphasized the need to increase domestic savings in order to allow Brazil to reach its potential growth rate of 4% per annum.  Alexandre Schwartsman (Schwartsman & Associados) discussed the strength of the labor market, notwithstanding the recent drop-off in Brazilian GDP.

Luiz Fernando Figueiredo (Mauá Sekular Investismentos) predicted that growth would accelerate in the 2H to 4% (resulting in a 3% annual growth rate for 2012), while acknowledging that Brazilian economic expansion is sub-optimal.  There remain many potential risks, and a deterioration in the EU economies could hurt Brazilian growth, he added.  Schwartsman attributed Brazil’s recent slowdown to internal factors, and saw potential evidence of a rebound in domestic demand.  He expected GDP growth at slightly above 3% in 2012.  Pastore noted that the path of the Eurozone was unclear until the results of the French presidential elections were known, and would continue to pose a possible threat to the Brazilian economy.

The audience patiently awaited the former Central Bank directors’ discussion of the SELIC rate, and were not disappointed.  Figueiredo speculated that rates could go to as low as 8% as economic activity had proven weaker than predictions, and because measures to stimulate the economy taken by the government had disappointed.

Pastore’s base case was for an 8.5% rate, and stressed that the COPOM’s communiqué issued shortly before the event would have shut the door on further cuts if the committee intended to keep rates at 9%.  “It appears the door remains open,” he reasoned, adding that the risk of inflation rising above 5% was small.

Eduardo Loyo (BTG Pactual) concurred that the COPOM was entertaining the possibility of rate cuts.  He reminded attendees that the COPOM minutes, due several days after the event, would give a stronger indication of future rate directions.

The annual poll of attendees was also conducted, with each audience member asked for their prediction of 2012 variables.  The results showed that attendees expected the SELIC and BRL would return to current levels, at 9.03% and 1.90 per dollar, respectively, while anticipating strong performance of the BOVESPA, to 68,479.