An executive of one of Brazil’s largest private Banks has urged that his country promote economic growth by removing macroeconomic constraints to private investment and capital market development.
“Private sector investment is clearly the strategic factor in achieving sustainable growth in Brazil,” said Sergio Zappa, executive director in charge of Capital Markets and Financial Institutions for União de Bancos Brasileiros S.A. – Unibanco.
“Growth implies investment, savings and mobilization,” he said. “The public sector can no longer be the driver. The capacity for the public sector to invest is small. The challenge is to the private sector – the debt capital markets and the banking system – as the mobilizer of domestic savings.”
Delivering a keynote speech during a seminar on capital markets development at IDB headquarters in Washington, D.C., Zappa said Brazil needed to “break a vicious circle” in which there is a lack of capital because of unfavorable macroeconomic conditions.
“We must attack on all fronts simultaneously,” he said. He listed excessive debt, high interest rates, and burdensome taxes as three major macroeconomic constraints to private investment and overall economic growth.
After inflation was curbed in 1994 with the Real Plan, debt increased from 27 percent of GDP in 1994 to 50 percent in 1998. Since then debt has remained at a high ratio, while real interest rates soared to more than 20 percent in the 1990s before dropping to a still high rate of between 10 to 12 percent from 1999 to 2003.
With a tax burden at 40 percent of the GDP, and spending cuts curbed by law and the constitution, “we are pretty much at the limit of any fiscal solution to our dilemma,” Zappa said.
To demonstrate the country’s lack of capital investment, Zappa said debt securities and bank credit in Brazil account for 33.7 percent of the GDP compared with 200 percent for Europe and 181 percent in the United States.
Debt capital markets “never really took off” in Brazil because they had to compete with government overnight securities, which Zappa called “a three-headed monster” that offered high yield, liquidity and “theoretically no risk.”
On the positive side, he said, Brazil’s balance of payments is solid and should achieve a surplus of over $27 billion during 2004. Institutional savings – bank, pension and insurance funds – have grown from 25 percent of GDP in 1998 to 45 percent in 2003, offering liquidity and investment resources.
He described Brazil’s capital markets as sophisticated and well equipped to perform when macroeconomic conditions are ripe.
“Every time you see interest rates go down, you see migration to private sector securities and to longer securities, creating the yield curve we long for in both banking and capital markets,” Zappa said.