EMTA Forum in São Paulo - April 14

EMTA FORUM IN SÃO PAULO
Tuesday, April 14, 2015 

Hosted by 

4:00 p.m. Panel Discussion 

Constantin Jancsó (HSBC Bank Brasil) – Moderator
Rafael Guedes (Fitch Ratings)
Luiz Fernando Figueiredo (Mauá Sekular Investimentos)
Afonso Bevilaqua (PUC-Rio)
Alexandre Schwartsman (Schwartsman & Associados)

5:00 p.m. Cocktail Reception 

Additional Support Provided by Fitch Ratings and MarketAxess. 

Complimentary for EMTA Members / US$695 for Non-Members. 

Brazilian Inflation-Targeting Regime and Prospects Under Finance Minister Levy Dominate EMTA Sao Paulo Panel Discussion

Following EMTA’s New York seminar on Brazil, a panel of Brazilian experts gave their own perspective at EMTA’s Annual Forum in Sao Paulo.  The event was hosted by HSBC on Tuesday, April 14, 2015 and drew a standing-room only crowd of over 100 market participants.  Simultaneous English translation was offered for the Portuguese-language panel.

Constantin Jancso (HSBC) returned to his role as leader of the panel discussion, covering such topics as credit ratings, inflation targeting, and fiscal adjustments.  Jancso noted that when his firm had earlier predicted a 1.2% contraction in Brazilian GDP in 2015, the estimate had seemed pessimistic; but later, the Street had more or less come to a consensus around this figure.

Rafael Guedes (Fitch Ratings) provided commentary on the factors behind Brazil’s credit rating, following his firm’s recent adoption of a “negative outlook” on Brazil’s BBB grade.  Guedes noted that the country’s fiscal account had deteriorated sharply in the run-up to the presidential election, but that new measures were being implemented in the new administration.  This was a “challenging moment” for the new team, and was occurring in the context of weakness in the economies of Brazilian trading partners, such as the EU and China.  “We need another agenda of economic reforms,” he concluded.

Luiz Fernando Figueiredo (Maua Sekular) predicted a 1.5% contraction in growth, with a slightly positive growth figure in 2016 “if confidence improves.”  He added that 2015 was a year “when fiscal and quasi-fiscal adjustments, tariff changes and other measures must all be made, as well as a more active monetary policy.”  Figueiredo expressed concern that confidence measures remain low, and questioned whether they would be only temporary in nature.

Professor Afonso Bevilaqua (PUC-Rio) analyzed Brazilian inflation.  “The economy is in a downturn, but that is no reason not to fight inflation,” he emphasized, underscoring that “even in the context of small growth, inflation is a challenge because high inflation in recent years has lead to high inertia.”  The Central Bank needs to focus on the 4.5% inflation target “no matter what,” and not allow it to rise to the upper band of tolerance levels as it did previously.  “We all know the solution…monetary policies must be calibrated to achieve the 4.5% target,” he asserted. 

Figueiredo concurred that the Central Bank should focus on the inflation target, and saw renewed seriousness about this goal as a reason for optimism.  While conceding that he had forecast inflation in 2016 at 5.6%, he didn’t rule out that the Central Bank could achieve its target with proper policies.  “There is uncertainty, but there are good signs that the Central Bank is taking steps to bolster its credibility,” he concluded.  Moderator Jancso noted his own forecast was similar, at 5.5% inflation.

Guedes also underscored the importance of being able to deliver on the inflation goal.  “4.5% inflation is not an aggressive target at all…and has been a stable target over the last ten years, with the goal of reaching global levels,” he stated.  He also spoke on the need for Brazil to achieve at least 2% GDP growth, saying anything below 1.5% would not be enough to sustain the country’s debt dynamics.  Investment in technology was paramount.
In Bevilaqua’s opinion, the appointment of Finance Minister Levy could be the turning point for the restoration of the growth process in Brazil, as the government was attempting to correct the fiscal deterioration of the last six years.  Although the crisis phase seems to have ended, Levy would face political challenges that needed to be addressed before the recovery phase began, he believed. 

Figueiredo also addressed risks to the Brazilian economy.  Now that more sound economic policies were being enacted, the risk remains that these changes would be reversed, although chances of that were declining in his opinion.  Congress’ acceptance of the permanence of policy changes, including fiscal adjustments, would be a crucial factor.  Bevilaqua noted that US rate hikes also remained a risk to Brazil, especially if the transition was abrupt. 

The delay in US rate hikes has bought some time for Brazil’s necessary adjustments, Guedes commented, but the new economic team knows it has work to do.  Debt levels were too high, and short-term adjustment needs were of greatest importance.  “Now that it isn’t raining in the house, we need to fix the roof before it rains again,” he asserted.