a) Inflation:

Brazilian Inflation has, in just 15 years of the Plan Real, decreased systematically. But it is not completely controlled, as shown in Figure 1 below: the five indicators used (INPC, IPCA, IGP DI, IPC FIPE and the Average) were all of them above 5% in 2008 and one of them, the IGP DI was around 10 %. Moreover, the dispersion of indicators is very large, which can be seen in 1999, 2002 and in the data of 2009 (three months annualized). This dispersion reflects the different ways through which inflation affects the damage of the different classes of income of Brazilians and businesses, creating a social discomfort that has not yet expired. As economists know and explain, Brazil has many factors in its cost structure that are indexed, such as electricity rates, tolls, fines over delays in collections of taxes, etc.. A businessman who has delayed to pay taxes in 2001 and has had the monetary fines and correction rate through the SELIC, is charged today by the inflation peak of 2002.

FIGURE 1: FIVE MEASURES OF BRAZILIAN INFLATION

b) SELIC Rate:

An important element in the Brazilian economy is the SELIC rate, the so called "prime rate" of    Brazil. It is set by the Brazilian Central Bank, and is told as an important element (according to economists) to control the inflation. But it is also a question of automatic feedback of inflation, as we said above. The question that is in the air is whether a high rate as the rate of SELIC kills the inflation or not. We tested this hypothesis in a study of a simple correlation between these two variables.

Graph 2 below shows that the correlation coefficient between the two variables is very low, only 0.05 or 5%. That is, the merit of high rates SELIC on the justification of reducing inflation seems not to have support. Once all the federal debt is indexed with the SELIC rate and the buyers of the debt are the banks and funds, certainly  they thanks high rates because they can make more money with minimum risk.

       CHART 2: CORRELATION BETWEEN THE RATE OF AVERAGE ANNUAL

                INFLATION ONE YEAR PAST AND THE SELIC RATE OF THE LAST YEAR

c) Credit in Brazil

The subject of banks lending credit to companies and individuals has always been controversial: it is limited in Brazil because it is expensive? It is expensive because the default is high? Or the default is high because the credit is expensive? The fight between the banking system, certain government officials and all business sectors in fact has not been very rational. The banks have their portion of guilt and are reluctant to lower their spreads, arguing that the taxation is huge. In fact, in this argument they are right, of course. The Brazilian government has historically been "wasteful," not saving and spending more; by consequence, raise taxes in every way possible. Companies also have faults and reasons. Many evade the revenues to not pay taxes, but the complaint of the high tax burden on them is valid. Because of these facts, talk of a loan for working capital to be supplied by the Brazilian banking sector is to hear the answer  “three years is a very long term to give credit”.

Graph 3, prepared by a former director of the Central Bank[2], shows how Brazil has  the lowest credit level in relation to GDP, when compared to other countries: only 41%. But in the 41% figure, it is included a good share of the credit called "direct" that responses in 2009 by 29% of the total.  This percentage represents the amount that is mandatory to lend. So the free credit, the portion that the banks can decide to lend or not, is only 29% of GDP. It follows that Brazil is the lowest level of all other countries as can be seeing in the chart.

CHART 3: TOTAL CREDIT ASSETS IN DIFFERENT COUNTRIES AS PERCENTAGE OF GDP

The “Banco do Brasil” is making an attempt, with unilaterally means, to download the "spreads". The government forced the resignation of its chairman for not being satisfied with the search of that goal. The large Brazilian private banks should follow this trend. One could take the initiative and could use it as strategic tool.

Another important point is the initiative of the BNDES (The Economic and Social Development Bank, belonging to the Government) to provide working capital for businesses, up to 20% of gross operating revenue in 2008. The demand is very high, especially for small and medium enterprises, which are the major job’s generators in Brazil. However, current rules require that for applications less than thirty million dollars, the company seeks a bank. And then the problems start, because banks are the guarantor to the BNDES. And they argue that the risk is great. Telling the true, only large companies are having access to this kind of working capital. And unfortunately the government has been insensitive to the claims of middle and small size entrepreneurs. Here also a large retail bank could innovate, creating more flexible rules to small and medium size company’s access to cheaper working capital credit. The government in turn could create, quickly, a credit insurance to cover such cases; the fee would be paid willingly by the companies that need this working capital.

Hopefully our friend’s bankers read these notes and implement such strategies. Lets be optimistic!