The concern over high interest rates in Brazil is understandable. It impacts the public coffers in favour of the richest and discourages productive investment. Many analysts argue that the interest rate is too high, and that the main reason for its inaction is pressure from special interest groups, notably the financial market. Although this argument is seductive for its simplicity, it does not jibe with the complexity of the theme.
The Odebrecht scandal could be a game changer for corporate governance in Latin America, with investors demanding more transparency in the way the region does business.
Inflation targets are widely used by Central Banks throughout the world. In countries with moderate inflation, this regime helps keep inflation well behaved, with less cost to economic activity. In countries with low inflation, the risk of deflation can be mitigated by setting a suitable target. This targeting also makes monetary policy more predictable, contributing to a stable economic environment, but defining an ideal target is an imperfect science at best.
Market failures exist, and they require government intervention. But many distortions in the economic system are not necessarily the result of market failures. Often, they are born of mistaken government action, which then weigh heavily on economic activity. A good example in Brazil: banks.
Brazil’s population is aging and its retirement rules have become unsustainable. Everyone will have to work longer or retirement income will be impaired. Brazil is a relative slowpoke in its social security reform agenda, but the country is moving in the right direction.
Latin America Structured Finance Advisors, in conjunction with our partners in Brazil, used analysis of the buckets for aging bad loans to verify the findings of the rating agencies with an analysis of bad loans in 49 credit portfolios of Brazilian ABS. We found that most of the bad loans have reached 180 days past due and the percentage of delinquent loans in the earliest aging buckets have fallen below pre-2015 levels. This supports our view that Brazil’s credit crisis has peaked.
As Brazil continues to navigate itself out of one of the worst recessions in the country’s history, record volumes of agribusiness receivables certificates – or CRAs, as they are known colloquially – were issued in 2016. Investors and analysts believe the trend could continue in 2017 – especially with the industry’s first cross-border dollar denominated CRA in the offing.
Confronted with a struggling economy and constrained fiscal headroom, the Brazilian Development Bank (BNDES) has dramatically scaled back loan disbursements, leaving the private sector to pick up much of the slack. The development bank is also changing tactics in a bid to ensure projects that are vital to the country’s economy can still access important sources of revenue.
Brazil’s economic team has set itself the goal of reclaiming Brazil’s investment grade rating. Some believe, however, that the government should not give so much importance to the rating agencies. After all, they failed to predict the global crisis of the previous decade.
Sustainable energy and infrastructure projects across South and Central America are attracting attention from investors, but the outlook is challenged due to a lack of awareness on the ground.
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