|Antonio Felix de Araujo Cintra|
After some years of impressive economic growth, the Brazilian economy slowed down in 2011, reaching an annual GDP growth of 2.7%. Dilma Rousseff''s government is not happy with the situation, however, and has decided to take some measures to increase the pace of the country''s economic activity.
This new position of the government has led to greater intervention in the economy. Until recently the Central Bank of Brazil understood that the base interest rate (known as the Selic rate) had to be kept high so inflation could be maintained under control. High interest rates were highly attractive to foreign capital, which had the effect of strengthening the Brazilian Real. That, in its turn, hurt Brazilian exporters.
Aiming at lowering the value of the Real, initially the government adopted some regulatory measures, creating a 6% tax on the entry of funds for investments in fixed-income assets and short-term loans, and restricting export financing structures that were used by some companies to bring money to Brazil and take advantage of the high interest rates. These measures had limited success and created some problems for people that were structuring real (as opposed to merely speculative) transactions.
The government then saw the international crisis, with slower economic activity in almost all regions of the world, as an opportunity to create the conditions for an important reduction of interest rates in Brazil. For that purpose, it changed the remuneration of the savings accounts widely used by lower income individuals in Brazil. The new rules on these savings accounts will effectively eliminate a floor which impeded the Central Bank from lowering the Selic rate due to the fact that a reduction would make the accounts more attractive than government bonds, in turn harming the ability of the government to get funding in Brazil. That decision was difficult from a political point of view but the government believes that lower interest rates in general will balance the negative impact of the lower remuneration from the savings accounts.
Such policy change, and especially the regulatory changes related to it, will certainly have an impact on how transactions are going to be structured in Brazil. Some new structures have already been created for the financing of exports and there are also discussions about the need to use more widely some innovative financial structures for the real estate market (which will be affected by a probable reduction in deposits in savings accounts, which are directed by law mostly to real estate financing).
This new environment will bring some new challenges to banks and other providers of finance. This series of IFLR briefings will attempt to follow-up on the trends and changes over the next 12 months.
Antonio Felix de Araujo Cintra