How a low base rate can support Brazil’s recovery

As a longer period of a record low benchmark rate becomes more likely, Brazil's government should find room for more investments.

Currently, the Selic rate is 5.5%, with more reductions expected as inflation is under control but the economy remains sluggish.

“What is important is the fact that the country consolidated a one-digit interest rate environment with less volatility. This will have an important consequence for the markets, with the transference of cash from the financial market to the real economy,” André Esteves, founder and major shareholder of BTG Pactual investment bank, said during an event.

In the past, with a double-digit base rate, local investors parked their money in government bonds.

The base rate, used also as a benchmark for government bond yields, is an important indicator for public expenses. Right after pensions, paying interest is the second highest item of federal expenses. 

But with pension reform advancing in congress and a low base rate, the major expenses seem stable in the medium term. 

Despite fiscal challenges, the outlook presents cause for optimism, because the government remains able to stem long-term investments, for example in infrastructure, together with private investors.

CAPITAL MARKET TRANSFORMATION

While a base rate reduction will still take some time to make a financial impact, rapid changes in the capital market will help local companies raise cash more cheaply. 

Companies raised 335bn reais (US$81.7bn) from debt and share issues in the first nine months of the year, up from 238bn reais in the year-ago period, according to the most recent figures of finance and capital markets association Anbima. 

By contrast, banks’ lending to companies fell by 1.5% in the 12 months through August, according to the most recent central bank figures.

Capital markets thus have become a cheaper source of financing for companies than the banking sector.

This situation developed as the appetite for higher risk assets increased.

BONDS MARKET 

To further facilitate infrastructure financing via capital markets, the government wants to change debenture regulations.

Currently, this instrument offers tax exemptions to individual investors, but the government plans to extend these tax breaks to international funds and pension funds, an economy ministry spokesperson told BNamericas.