Capital Markets in Brazil: Recent developments

João Manoel Pinho de Mello, Deputy Governor for licensing and resolution

Context: diagnosis, reforms and initiatives

General Information about Brazil• One of the largest countries in terms of territory,

population and GDP

• GDP: US$ 1,868 billion (2018)

• 5th largest area: 8.5 million km2

• 6th largest population: 208.5 million inhabitants (2018)

• Vast natural resources, including recently discovered large offshore oil fields

• Diversified industrial base, dynamic and sophisticated private sector, and well-structured public sector

• Vigorous democracy, with free multiparty elections and stable political system

Demographic Density - 2016

3.4023456789

1011

jan

11

jul 1

1

jan

12

jul 1

2

jan

13

jul 1

3

jan

14

jul 1

4

jan

15

jul 1

5

jan

16

jul 1

6

jan

17

jul 1

7

jan

18

jul 1

8

jan

19

jul 1

9

jan

20

occurred market expectations* BCB forecast

3.72

Macroeconomic overviewInflationy-o-y change (%)

14,25

6

8

10

12

14

jan

14

jul

14

jan

15

jul

15

jan

16

jul

16

jan

17

jul

17

jan

18

jul

18

jan

19

6.5

Policy rate (Selic) at a historical low

Inflation around the target and

anchored expectations

70

80

90

100

110

120

130

140

150

jan

11

jul

11

jan

12

jul

12

jan

13

jul

13

jan

14

jul

14

jan

15

jul

15

jan

16

jul

16

jan

17

jul

17

jan

18

jul

18

jan

19

industrial production*

retail sales*

volume of manufactured products exports (12mma)

120

130

140

150

160

170

180

190

200

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

GDP

household consumption

GFCF

Au

g0

8 =

10

0

*seasonally adjusted data

Brazil is gradually recovering its economic activity

19

99

= 1

00

Activity – Long-Term Perspective

Retail Sales x Industrial Production x Manufactured Products Exports

Economic activity

*BCB forecasts (Inflation Report – Jun 19)

Economic activity

3.096

13.298

9.166

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

*

US$

GDP per Capita in Dollar Terms

1,7

0

1

1

2

2

3

3

mar

13

jul 1

3

no

v 1

3

mar

14

jul 1

4

no

v 1

4

mar

15

jul 1

5

no

v 1

5

mar

16

jul 1

6

no

v 1

6

mar

17

jul 1

7

no

v 1

7

mar

18

jul 1

8

no

v 1

8

mar

19

economically active population (labor force)

Labor Market: Populationy-o-y change (3-month moving average)

last month of the moving average

Brazil is gradually recovering its economic activity

1,1

5,8

3,2 4,0

6,1

5,1

-0,1

7,5

4,0

1,9

3,0

0,5

-3,5 -3,3

1,1 1,10,8

-5-4-3-2-1012345678

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

*

GDP Real Growth (%)

*BCB forecasts (Inflation Report – Jun 19)

15,3

16,1

17,4

19,119,5

20,9

19,9

17,8

15,515,0

15,8

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

Investment Rate (% GDP)

Economic activityBrazil is gradually recovering its economic activity

54.2

78.8

57.0

25

35

45

55

65

75

85

mar

12

set

12

mar

13

set

13

mar

14

set

14

mar

15

set

15

mar

16

set

16

mar

17

set

17

mar

18

set

18

mar

19

public sector net debt

general government gross debt

general government gross debt - international reserves

Central Government Revenues Real Growth*

% o

fG

DP

-15

-10

-5

0

5

10

15

abr

15

ago

15

dez

15

abr

16

ago

16

dez

16

abr

17

ago

17

dez

17

abr

18

ago

18

dez

18

abr

19

y-o

-y c

han

ge (

%)

*excludes revenues from repatriation of assets abroad

Public Debt

Fiscal Indicators

Capital Markets - Diagnostic

As of 2014 the drop in private investment generated surplus savings used to cover the need for public sector financing.

A growing public debt generated a crowding-out effect. Currently, about 92% of public debt securities are in the portfolio of institutional and foreign investors; while 60% of the equities are in the portfolio of other non-financial investors;

Brazil’s market for long-term credit is underdeveloped. Historically, BNDES – Brazil’s development bank - played a dominant role in providing long-term corporate loans.

• Debate: underdeveloped capital markets cause BNDES or BNDES causes underdevelopment?

Capital Markets - diagnosticRegulatory reforms were enacted with the objective of eliminating distortions and

promoting the development of a private capital market in Brazil.

The recent performance of Brazil’s capital markets indicate that the reforms are being successful in achieving their goal.

Current Scenario:

• Inflation around the target with low interest rates

• BNDES performance in synergy with the capital market: focus on longer term financing and

for small and medium enterprises;

• Regulatory innovations fostering information symmetry and secured transactions: electronic

issuance and registration of trade notes, centralized register of credit rights, fintechs, compulsory positive credit registry.

Capital Markets in BrazilU

S$ b

illio

n

12-month cumulative flows

US$ 18,6

0

10

20

30

40

50

60

dez

10

jun

11

dez

11

jun

12

dez

12

jun

13

dez

13

jun

14

dez

14

jun

15

dez

15

jun

16

dez

16

jun

17

dez

17

jun

18

dez

18

BNDES Disbursements

The TLP and the change in the BNDES’s focus

have shown that, when the government reduces, opening space in the market, private initiative flourishes.

0

10

20

30

40

50

jan

-15

abr-

15

jul-

15

ou

t-1

5

jan

-16

abr-

16

jul-

16

ou

t-1

6

jan

-17

abr-

17

jul-

17

ou

t-1

7

jan

-18

abr-

18

jul-

18

ou

t-1

8

jan

-19

abr-

19

DebenturesAccumulated emissions in twelve months

US$

bill

ion

US$ 40,8

In % GDP, the decrease in the amount financed

by the BNDES is offset by the increase in external resources and the capital market.

Financial liabilities of non-financial corporations - Composition

2014 2018

Int. Market - Intercompany Loans 18,8% 26,0%Int. Market - registered debt 10,2% 12,3%BNDES 20,3% 12,9%Banking credit (earmarked) 27,9% 24,4%Debentures 8,9% 10,4%Securities (ex. debentures) 7,5% 8,9%Banking credit (others) 6,5% 5,2%Source – CEMEC/FIPE

In 2017 and 2018 corporate debt played a key role in corporate finance: in 2017 they increased by US$ 15,9 billion (to a reduction of US$ 26,6

billion in total bank credit); in 2018 it

represented 76% of the net additional funds raised by domestic companies.

Since 2014, BNDES role has fallen and corporate debt has risen from 22.9% to 31.3% of the

debt balance in the domestic market. In

addition, debentures account for about half of the balance of corporate debt securities.

Source – CEMEC/FIPE

Capital Markets in Brazil

Source – CEMEC/FIPE

In addition to the new role of BNDES, thegrowing use of corporate debt bycompanies in 2017 and 2018 was inducedby the fall in interest rates.

40,8

0,47

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

0

5

10

15

20

25

30

35

40

45

jan

-15

mai

-15

set-

15

jan

-16

mai

-16

set-

16

jan

-17

mai

-17

set-

17

jan

-18

mai

-18

set-

18

jan

-19

mai

-19

Debentures (US$) Interest Rate (CDI) % m

In public companies (excluding Petrobrasand Vale), external resources and capital markets account for about 2/3 of total debt, compared to 41% in the largest privately held companies. However, in these companies, external resources represent 2/3 of total debt and capital markets only 7.7%.

Capital Markets in BrazilDebenturesAccumulated emissions in twelve months

0

10

20

30

40

50

60

70

2013 2014 2015 2016 2017 2018 2019*

Debenture Promissory Note Security (financial sector)

CRA CRI FII

Capital Markets in Brazil

Capital Market Performance (US$ Bi)*Domestic Market

* Last 12 months

38.5 US$ bi

63.4 US$ bi

50%

55%

60%

65%

70%

75%

80%

85%

700

800

900

1.000

1.100

1.200

1.300

1.400

1.500

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Total (% GDP) Total (US$ billion)

May-19US$ 1,339 bi78% GDP

Total outstanding credit - non-financial sector (firms and families)

US$

bill

ion

0%

20%

40%

60%

80%

100%

Jan

-13

Jun

-13

No

v-1

3

Ap

r-1

4

Sep

-14

Feb

-15

Jul-

15

Dec

-15

May

-16

Oct

-16

Mar

-17

Au

g-1

7

Jan

-18

Jun

-18

No

v-1

8

Ap

r-1

9

Loans Securities - Domestic Securities - Int.

76%

9%

15%

62%

13%

25%

Composition

Capital Markets in Brazil

Source – CEMEC/FIPE

• SMEs have less access to lower-cost resource sources.

• Tax subsidized debentures (debêntures incentivadas) have financed, on average, around 22% of infrastructure investments.

• Debentures maturity may not cover the need of long term financing, especially in infrastructure (92% of issues with a maturity up to 14 years).

• Benefited by exemption from income tax, individual investors have a significant participation (61%) in the issuance of infrastructure debentures

Highlights:

Capital Markets in Brazil

Strategies focusing a single goal: to promote a favorable business environment

Simplification and harmonization of rules (less bureaucracy)

Equality of conditions irrespective of the origin of capital

Stimulating financial intermediation, private investment and reducing the cost of capital

Capital Market Agenda

Infrastructure financing, development of the insurance

and pension markets and broadening of the debt market

Improve the allocation of capital: reduce gradually subsidized credit and the centralized allocation of capital

Open the economy and expose it to competition

Capital Market Initiatives

Infrastructure financing, development of the insurance

and pension markets and broadening of the debt market

Cost reduction for the opening of accounts for non-residents

Development of reverse mortgage and improve home equity

Establishment of indicators of market capitalization and expansion of the information database

Disclosure of the fundamental requirements that willguide the implementation of open banking, instant payments and sandbox

Improvement of the regulatory framework for pension products

Incentives to foreign investors

Thank YouJoão Manoel Pinho de Mello, Deputy Governor for licensing and resolution