Brazil - Economics
The financing of development in Brazil
Licio Raimundo argues that Brazil finds itself at a veritable historical crossroad, in which the solution of new institutional sources and forms of investment will have to be found so that the rhythm of growth is not interrupted in the coming years. From Campinas.
Brazil has shown in the last years, a rate of growth not to be disdained when compared to the rest of the world, especially countries with income standards close to its own. From 2003 to 2010 Brazil grew 4.4% per year on average, with 2010 being the third placed in the whole world remaining only behind (9.9%) and India (7.8%). When compared to the previous period, between 1994-2002 (average annual growth of 2.1%) growth shows itself to not only be greater but more robust, since it is more based on the most virtuous elements of all that make up growth: investment. This former took up again rates seen in the 1970´s reaching an average GNP of 21% in the period from 2003 to 2010.
The sustainability of such a trajectory, however, depends more and more on the possibility of the obtainment of long term financing for companies that invest here can maintain and/or expand their level of investment.
As the centerpiece of such articulation is the existence of an institutional structure of long-term financing. Without such structure, it becomes much more complicated to bear the risks and costs associated to investment, given their basic characteristics.
For the construction of a solid long-term financing structure, two foundations are indispensable.
A. Construction of institutional environments focused on the constitution of funding
The mere taking in of long-term maturity savings allows the balancing of long-term asset positions relating to productive investment. Within the most important institutional forms of long term funding the following, stand out:
A.1 - Retirement and pensions schemes based on regimes of capitalization, in general managed by pension funds, make up important components that can be attracted to investment financing. Its characteristic of contractually establishing long-term maturity liabilities endow such agents with an outstanding position in the structuring of financing arrangements which support investment decisions that involve the long term.
A.2 - Investment funds that are formed from dispersed savings from society are another important source of resources. Incentives for its structuring based on long-term assets can capture an important part of this saving, especially if linked to financial and fiscal arrangements that give their quotas a higher remuneration, conducive to the longer redemption term. Such arrangements do not necessarily need to be associated to low liquidity of the quotas, it being vital for the success of such an arrangement to promote a secondary market that assures liquidity to them, guaranteeing greater attractiveness to such funds. The participation of public agents that work as market makers of these quotas may be essential.
Investment funds that are formed from dispersed savings from society are another important source of resources.
A.3 - The existence of a capital market that makes possible the placing of private long-term maturity paper, such as debentures and shares, for example, is indispensable for the construction of a solid environment of long-term financing. Such a market permits the restructuring of liabilities and access to varied sources of long-term resources, something that is fundamental for the flexibility necessary for financial arrangements aiming at the financing of productive investment.
A.4 - The existence of a private market for risk negotiation (derivatives markets) that is broad and deep, or rather, that has a wide volume of negotiations and contract forms in negotiation aimed at private risk contracts with long term maturity.
B. The construction of liquid long-term public debt
Public debt paper, not always duly considered in studies on investment financing, is vital for the attainment of a strategy of canalling funding towards the effort of investment financing.
In the first place, public debt needs to be understood in its structuring role for the construction of private strategies of capital appreciation. The existence of a public debt excessively concentrated on the short-term interests only to those who seek to escape the risks normally associated with the long term: high liquidity, market and credit risk. Not that short-term paper is not necessary in the composition of public debt. This gives greater agility to monetary policy, thereby being very important. However, the construction of a long-term profile debt, with high liquidity in its paper, even the longest maturities, is a sine qua non condition for reaching at least two objects that are essential for canalling resources to long term financing, which are:
B.1 - The attraction of private banks to the effort of funding and canalling of savings to the long term. Such attraction will only happen when the short-term public securities debt is less attractive. Its significant reduction, as a proportion of total debt and the fall of its remuneration (SELIC) are essential for making it less interesting to the objectives of banking capital that obviously will not emphatically seek other forms of allocation while there is a risk free asset that is assured a higher return and high liquidity.
B.2 - The construction of a horizon of interest rates for the risk free asset that serves as a benchmark for private calculation, both for pricing of risk and setting of discount rates (that is, the cost of capital) with a view to supplying secure benchmarks for private calculations regarding investment. Such basic conditions can (and must) be actively pursued when considering the construction of an institutional environment favorable to productive investment. Brazil, however, has still precarious conditions as far as such an institutional structure is concerned. Nonetheless, a favorable movement has been observed in the latest years.
Brazil has precarious conditions as far as such an institutional structure is concerned. But a favorable movement has been observed.
The Federal public debt, concerning the recent attempts of the national Treasury to elongate its profile is concerned, remains concentrated on the short term, with 41% of its maturities coming within up to 12 months.
The national pension funds only recently started turning to investments of long-term maturity, normally associated with economic infrastructure, something that must be celebrated but which still represents a small part of their portfolios.
Some investment funds have been structured, especially in more recent years around investment strategies that involve long-term maturity assets also associated to infrastructure. Their quantitative expression however, is still minute compared to the total of resources of this type of fund.
The banks definitively are little interested in the capital markets and thus will continue to behave as long as the rates of return of paper of the short-term public debt (SELIC) continue to be quite attractive.
Only the BNDES maintains it posture as financier of investment in Brazil. The institution, however, is showing signs of fatigue in recent years and today finds itself in a situation of having to choose between interrupting its activity of principal supporter of the finance of investment in the country or seek new sources of funding, or rather, new solutions for its own financing.
In the face of such challenges, Brazil finds itself at a veritable historical crossroad, in which the solution of new institutional sources and forms of investment will have to be found so that the rhythm of growth is not interrupted in the coming years.