EMTA Hosts Five Former Central Bank Directors and Former Cabinet Minister at São Paulo Forum
Perhaps only at COPOM Meetings are there a greater number of (former) Brazilian Central Bank Directors in attendance than were at EMTA’s Second Annual Forum in São Paulo. In addition to the event’s five former Central Bank Directors (who couldn’t resist needling each other about who had left the country with higher interest rates), the speaker list also included a former Cabinet Minister. Banco Itaú Unibanco hosted the Forum on May 11, 2009 at the Itaú Cultural Center. The event, which was conducted in Portuguese with simultaneous English translation, drew over 200 market participants.
Ilan Goldfajn (Banco Itaú Unibanco) delivered a keynote presentation on “Brazil: From De-Coupling to Re-Coupling and Now Resistance.” Goldfajn began by discussing the ongoing debate of whether SELIC rates would rise after the recession ends, and opined that there was no clear answer. He ventured that the global economic recovery would neither be V- nor U-shaped, but rather L-shaped and probably starting now. Goldfajn’s base case was for a drop of global GDP of 1.5% in 2009, rebounding to 2.2% positive growth in 2010. Turning locally, he predicted a 7% decline in Brazilian GDP in 1Q 2009 would be followed by 4.9% positive growth in 2Q. Annual GDP for the country would decline by 1.6% this year but would rise 3.2% in 2010.
Goldfajn highlighted that the current crisis is unique for Brazil in that it does not include a run-up in inflation. He discussed how far interest rates could fall, with inflation below official targets, and noted inflation forecasts were converging on 4% for 2010. He concluded that real interest rates would likely to remain at low levels. In contrast, “our Achilles heel is fiscal policy,” he stated, specifying that expenditures would likely rise 12% while receipts drop 2%.
Goldfajn also addressed the BRL/USD exchange rate and stressed that the flight-to-quality to the dollar away from riskier currencies has ended with the stabilization in commodity prices. He left the audience with the question “is the real an alternative to the dollar?”
EMTA members may Click Here to access slides from Goldfajn’s presentation.
Daniel Gleizer of Banco Itaú Unibanco moderated the event’s panel discussion and polled panelists on whether a second meltdown was possible. UBS’s Eduardo Loyo expressed some skepticism about the recovery and, while not predicting a worsening of the crisis, refused to rule out that things could not deteriorate before they got better.
Luiz Carlos Mendonca de Barros (Quest Asset Management) admitted that “the crisis is more complex, or different, than those in the past,” and that thus he was “revisiting some of my previous assumptions.” While much has been made that the current situation is a correction of US consumption, and that this would be offset by a rise in consumption in China, he asked “pardon for the de-coupling error, it is clear the offset of Chinese consumption has not happened yet.” Mendonca de Barros expected Chinese growth of only about 7% despite Beijing’s efforts to stimulate the economy. He concluded that if the US and China both don’t change their consumption behavior, global economic growth will be stunted for years with repercussions continuing around the globe.
Gleizer noted that the financial markets appear to be more confident about the future than policy makers. Luiz Fernando Figueiredo of Maua Investimentos commented that not even the most optimistic person believes that the US banking crisis has been solved, although the stress test has helped by differentiating between the institutions, giving some transparency, and providing concrete figures for sufficient capitalization. Banks are gradually raising private capital, something “we never would have thought possible two months ago,” and that “banks were insolvent but they are becoming solvent.” He added that “nobody knows if we have hit rock bottom but the freefall has stopped and that has given some comfort.” Figueiredo believed that this applied to public sector officials as well as private investors.
Alexandre Schwartsman (Banco Santander), in addressing fears of higher rates resulting from expansionist monetary policies, forecast that policy makers would err on the inflation side, i.e. that stimulus would continue until it was clear that the economy was safely in recovery mode. Only then will governments turn to combating inflation. He concurred with Loyo that officials recognize that it would be very difficult to re-start the economy if stimulus measures were removed prematurely.
Goldfajn, sitting in with the panel, interjected that investors should not forget the fiscal side. “Debt in some countries will double—how will this be paid? Will taxes go up? Will expenses be cut?” he questioned.
How would European banks perform in a stress test? Loyo quickly responded that both he and Schwartsman, as employees of European banks, would defer to their co-panelists. Figueiredo speculated that the path would be similar to US banks as they had been bailed out as aggressively, if not more so, than their American counterparts.
Mendonca de Barros stressed the importance of President Lula in Brazil’s recent economic performance, crediting him as “being as important as our reserves.” The hugely popular left-wing president has “taken policy out of our concerns.” He contrasted Brazil’s political scene with the elections in India, which he said were “potentially disastrous” for economic policy. Panelists also discussed the prospects for Brazil recovering sooner than the rest of the globe, the direction of the BRL and whether it could gain from the slowdown. Goldfajn suggested the BRICs might soon become the BICs as Russia is “not keeping up.”
Concluding the event, EMTA Board Director Rudi Fischer (Banco Itaú Unibanco) announced the results of a poll taken at the outset of the meeting. Attendees forecast a BRL rate of 2.07 in one year, a SELIC rate of 9.1345% and the Bovespa at 55,907. Illustrating the return of some confidence, 66% of attendees believed that the market has already bottomed out. The event concluded with a cocktail reception. Overheard more than once were conversations on the recent news that China had surpassed the US as Brazil’s largest trading partner.
AVERAGE FORECAST FROM SAO PAULO ATTENDEES for May 2010
BRL/USD: 2.07
SELIC: 9.1345%
Bovespa: 55,907
Has the global economy bottomed out? 66% said “yes”