Brazil Political Comment´s latest guest is Roberto Troster, chief economist of the Brazilian Banking Federation (Febraban).  Mr. Troster has wide experience of banking and is the author of a number of books. He is a regular commentator on economic affairs in the Brazilian and international media. In this interview, he discusses Febraban´s projections for the main economic indicators for this year and for 2007, the current credit boom, and how Brazil´s top banks have managed to become among the most efficient and profitable in the world. (Note: Roberto Troster stood down from his position shortly after this interview appeared after publicly criticising government proposals to reduce interest rates.)

Roberto Troster: The present Selic rate of 14.75 p.a. is the lowest since the monetary policy committee, the Copom, was created in 1996 and the lowest rate set by the Brazilian Central Bank since April 1975. The rate of the cut has been running at 0.50% but it looks as though this will slow down to 0.25%. This would take the rate to 14% by the end of this year. The latest Febraban survey of about 50 financial institutions shows an average projection for the Selic of 14.14% for December 2006.

Troster: Despite the current international turbulence in the Middle East, higher oil prices and uncertainties about American interest rates, the domestic macroeconomic outlook in the short and medium term is stable. All the inflation indices and expectations are consistent with lower interest rates and there is no threat to price stability on the horizon. Therefore, interest rates should continue to fall and our survey shows analysts working with a Selic rate of 13.15% in December 2007. Single digit interest rates could arrive in 2008 but only if a lot of work was done on factors such as cutting public expenditure and ensuring that current resources are better spent, reforming areas such as labor regulation and the judiciary, and rationalizing the tax system. This requires political determination, and it is likely that some improvements could take place in the beginning of the next government. 

What are the prospects for GDP growth?

Troster: Lower interest rates are leading to better prospects for GDP growth. Our survey shows a slight increase in the latest market projections to 3.61% and 3.66% for 2007. One of the drivers of domestic growth is the greater availability of credit. There is expected to be an increase of around 18% for this year as a whole. This would mean an injection of R$716 billion (around US$325 billion) by the end of the year, equivalent to 34% of GDP. 

Troster: Price stability has come about thanks to a combination of a consistent monetary policy by the Central Bank, some fiscal adjustments which have been made in recent years and the appreciation of the Real which has helped Brazil´s external adjustment. Although the higher Real has had an adverse effect on some sectors, it has helped reduce the country´s foreign debt. Our survey shows expectations of an exchange rate at US$1.00/R$2.20 by the end of this year and US$1.00/R$2.32 by the end of 2007. In terms of inflation, the market expects the IPCA index to come 3.88% in 2006 and 4.42% by the end of 2007. This is within the government´s inflation target. 

      

Troster: Not really. Consigned credit is limited to 30% of payroll so there is a ceiling. The

risk is also much lower for the banks since it is widespread and the amounts involved are generally low. Even a potentially higher risk from groups like pensioners is covered through life insurance policies. 

Troster: Brazil´s first bank was established in 1812 so there is a lot of banking history and

experience. The banks had to adapt in the mid 90s after the Real Plan ended very high inflation and ended the instability which had allowed them to make their money by overnight lending. They had to start diversifying and make their money by providing credit and services. Many of them did not succeed and were taken over or collapsed. However, we now have some very strong banks which are financially sound and use the most modern technology. They are as good as any banks in the world. Some foreign banks that came here during the last decade and thought they would take over learned the hard way and found the Brazilian banks were very strong competitors. On the other hand, some foreign banks have done well, such as HSBC, ABN AMRO and Santander and we even have some of their representatives on the governing body of Febraban.
   
Of the top three private banks, two – Itau and Unibanco – are controlled by family groups while other leading banks, such as Safra, are family owned. Is a position like this tenable in the modern world?

Troster: It is true that Itau and Unibanco are run by members of families which have shareholdings but their positions are very small. These banks are traded not only on the Brazilian stock exchange but also as ADRs in New York. They also have outside members on the board of directors, including foreigners. So they are a blend of family tradition and modern management. The top executives of all three banks are tough professionals. Itau, for example, is now a multinational with operations in Argentina and Portugal. It was interesting to note that when it bought Bank Boston´s operations recently, it did not just acquire those in Brazil but also in Uruguay and Chile. There certainly used to be some families and private owners which interfered in the daily affairs but the banking business has changed a lot in recent decades. I remember when I first started I worked for a traditional bank in São Paulo where the owner even had his own elevator. Arranging a meeting with him took two days and everything had to be arranged perfectly in advance. Nowadays you can pick up the phone at seven in the morning or seven in the evening and the CEO will be at his desk and available to talk to you.

Troster: Febraban is not like bankers´ associations in  other countries, such as the American Bankers Association. It is responsible, for example, for negotiating salaries and conditions with the bank employees union. At the same time, it looks after the interests of its members which number around 126. It has a number of departments covering areas such as labor relations, technical aspects of banking and an economic area which I head. This means it is both a bureaucratic body, which is obliged to assume responsibility for certain areas and, at the same time, a dynamic organization pushing for change. As a result, we are in constant contact with government bodies.

© John Fitzpatrick 2006