By Thierry Ogier and Taimur Ahmad
Brazilian president Dilma Rousseff has called it a "transport
The government's latest plan to rid Brazil of its infamous
transport bottlenecks calls for $65 billion of investment in
the country's notoriously decrepit infrastructure.
These, after all, are the same bottlenecks that experts say
are holding the economy back - and which also mean that an
oversized Brazil is becoming too constricted for its
aspirations to become an economic superpower.
The latest initiative calls for a vast modernization of
roads and railways over 25 years, including a big push to
invest some $40 billion within five years. The first contracts
to build or upgrade 7,500km of roads and public-private
partnerships to set up 10,000km of railway lines are due to be
signed next year.
The thinking isn't new: Every government for the past 20
years has launched its own plan to reduce what is commonly
known as the 'Custo Brasil' - the additional cost one has to
bear to operate in Brazil. Progress, however, has been
But this time is different, say Brazilian officials and
Critically, the slashing of Brazil's benchmark Selic
interest rate to a record low has now paved the way for
long-term investment for infrastructure - with the aid of the
capital markets. Luciano Coutinho, president of the BNDES,
Brazil's development bank and one of the top policymakers
Rousseff's team of tells LatinFinance in an exclusive interview
that the central bank's move will lead to a "big wave" in
investment (see Parting Shot, page 72).
Under the presidency of Alexandre Tombini, the central bank
has cut the benchmark rate by 525 basis points to 7.25% since
August 2011. At the same time, the government has tried to
encourage the private sector to boost long-term investment and
focused on policies to address supply-side bottlenecks, rather
than simply boost consumption.
The strategy, says Coutinho, is now "to attract the private
financial system to help share the burden with the BNDES," the
state-owned development bank that extends loans at below market
rates and is often accused of crowding out the market. Now, "we
have the chance to crowd in the market to new private assets,"
But if inflation pressures persist or become worse, a new
round of monetary policy tightening could limit the impact of
such a revolution. The consumer price index registered a 5.6%
increase in the 12 month-period to mid-October, and the market
average inflation forecast for 2013 now stands at 5.4% -
meaning that real interest rates are at their lowest level ever
If prices don't go any higher forcing a change in policy,
the low rates might help the government goals, as big investors
will be forced to find returns somewhere.
"Institutional investors, pension funds, insurance firms and
the like are now below their targets, so they need to diversify
their sources of fixed income," says Coutinho. "I am very
confident that the share of financing for infrastructure based
on financial instruments will grow very fast in the coming
years such as to grab at least 20%-30% of the long-term
"There is no better alternative than sound infrastructure
projects bhigh rates of return as a base for the issuance of
new fixed-income securities or bonds," he says.
Many domestic investors, who have never seen such a low
level of interest rates in their lifetime, seem ready to seize
on the opportunities.
"We have a long road ahead of us but we are on track to
reduce the cost of borrowing," said Pedro Daltro, CFO of BR
Properties, a real estate developer, at a recent LatinFinance
conference in São Paulo.
"My generation has not seen interest rates as low as
this… but it will take maybe 10 years before we are
close to international levels," he said. Such convergence to
international levels was indeed one of Rousseff's presidential
Meanwhile, doubts have already been raised regarding the
sustainability of interest rate cuts. True, the inflation
targeting regime, which was introduced in 1999, has remained in
place. But the central inflation target is 4.5%, and the
central bank has kept loosening monetary policy even when
headline inflation was above the 5.0% mark.
The central bank has argued that the external environment
and benign inflationary pressures (excluding food inflation)
were supportive of the government strategy. Luiz Fernando
Figueiredo, a former central bank director between 1999 and
2003, agrees: "We are not abandoning the inflation targeting
model. We are using a more flexible version of it," he tells
In addition to a more flexible inflation targeting regime,
the central bank has also stepped up its interventions on the
foreign exchange rate market in order to prevent the
appreciation of the real, which for all intents and purposes is
not free-floating any longer. (Indeed, the naturally volatile
Brazilian currency has hovered around two reais to the dollar
for the past three months.).
"They drew a line in the sand," says Marcelo Carvalho, chief
economist at BNP Paribas in São Paulo, who points to the
risks of such a strategy. "If commodity prices rise, there will
be no buffers - the exchange rate will not be able to absorb
the shock - and there will be some impact."
Carvalho says a number of factors could increase price
pressures, following another year of sluggish growth in Brazil
(around 1.5%). "Economic recovery is accelerating, and the
labor market will become even tighter," he says. It's not just
that market expectations are no longer anchored on the central
inflation target: he argues that inflation will blow the top
range of the target next year (at 6.7% instead of 6.5%).
Brazilian policymakers may have gotten themselves in a bit
of a bind.
"You can't target inflation and the currency at the same
time, without having free capital flows," Carvalho says.
"Sooner or later, the authorities will need to start tightening
policies again next year, if they care about inflation."
But the BNDES' Coutinho says that pragmatism will prevail,
and the central bank will tighten if need be. Coutinho, who
obtained his PhD in economics from Cornell University, is often
referred to as "professor" by his colleagues, but he does not
mince his words at the suggestion that the new strategy might
be implemented at the expense of macroeconomic stability and
the fight against inflation.
"That would be such a stupid idea. There is no way we will
shoot ourselves in the foot by doing so," he says.
If needed, the central bank will choose to tighten monetary
policy again, but the interest rate hikes will not be as
drastic as on previous occasions. "Brazil has become a more
predictable country, which means less interest rate
volatility," says Pablo Fonseca Pereira dos Santos, deputy
secretary of economic policy at the Brazilian ministry of
Although the government has pledged to pursue
investor-friendly policies, not everybody is convinced that
this will be the case.
An immediate example of this is the privatization of the
airports. Three of them were auctioned this year, including
São Paulo's international terminals, but the winners
were not the ones that the government had expected - which has
led to delays in the privatization of other airports.
"The government is not willing to play the game for what it
takes. They want to tell investors what the return rate should
be. They don't believe in market forces. They understand the
economy as a club," Paulo Bilyk, a founding partner at Rio
Bravo, an investment firm, tells LatinFinance. "They are weary
of private enterprise. They don't have a performance-improving
agenda. They do have an agenda for a stable economy, but not
Brazil fell two places to rank 130th out of 185 economies in
the World Bank's report on the ease of doing business compared
with last year, with areas such as obtaining credit,
registering property, resolving insolvencies and protecting
investors falling in the rankings.
The BNDES, which Coutinho has headed for the past five
years, was instrumental in helping the Latin American giant
implement a counter-cyclical strategy and support investment in
the wake of the global financial crisis, thanks to massive
capital injections - over $100 billion - from the Treasury.
Since last year and until the end of 2012, an additional 100
billion reais ($49 billion) will be added. While minimizing the
fiscal cost of such measures in the longer term, Coutinho
insists that the BNDES has taken on a new role in the Brazilian
economy by promoting the importance of the private sector in
financing and the reforms of capital markets.
"This idea that the BNDES is 'crowding out' usually comes
from economists who do not know how the market works," he
"In fact, we were the main propellers of this new agenda in
suggesting the legislation - for private involvement in long
term financing/capital market reform - and adjustments in
stimulating the creation of new funds and new instruments, and
providing liquidity in the secondary market.
"The main hindrance for the big participation of private
forces in long-term finance was the very high short-term
interest rates in Brazil. Turning this page was the big novelty
in Brazil," he says.
The market response at home has been positive, although foreign
investors have been more circumspect. Some veteran executives
say they never had it so good, after decades of turmoil in
Brazil, and that the outlook is promising. "I hope we are now
in the decade of infrastructure," says Roberto Mendes, chief
financial officer of Localiza, a local car rental company and
the largest in Latin America.
There is a broad consensus that Brazil needs to advance on the
reform path - not least to offset inflationary pressures
resulting from the supply side bottlenecks - by tackling
structural issues such as infrastructure, but also education
and the lack of skilled labor. Indeed, addressing old
bottlenecks and boosting productivity would do the Brazilian
economy a lot of good.
The Rousseff government has already lowered the payroll tax in
several industries and pledged to do more in the coming weeks.
More elements of tax reform may follow, however piecemeal they
The road, no doubt, will be rocky. But as long as the central
bank can be firm against inflation, the Brazilian economy may
well emerge stronger. "Of course we do have challenges, but I'm
confident that there is no way the Brazilian macro policy could
think of abandoning price stability," says Coutinho.