Brazil’s national treasury has injected R$ 390.1 billion in the three banks controlled by the federal government (BNDES, Banco do Brasil, and Caixa Economica Federal) between late 2006 and October this year. During the period, the three banks’ market share of total loans rose from 36.8% to 46.6%.

The boom is a result of the government’s strategy to stimulate the economy and increase competition in the financial sector. The strategy remains active. It was just recently that the finance minister Guido Mantega announced another R$ 100 billion for 2013.

For many analysts, however, the model adopted by the government brings at least two risks. The first is financial: a very rapid credit growth may entail heavy losses in the future if there is any abrupt change in the Brazilian and/or global economy. That’s what led to the financial crisis that erupted in 2008.

“If today, with the Brazilian economy in a relatively good condition, default rates are high, what can happen if there is a turnaround?”, asked Austin Rating analyst Luis Miguel Santacreu. He argues that, currently, “the credit is walking ahead of the economy, when the ideal is that the two walk together.”

The analyst refers to the rate of expansion of loans and the Gross Domestic Product (GDP). In the 12 months ending in October, total credit in Brazil grew 16.6%, while GDP should advance about 1% this year.

At Caixa Economica Federal, the pace of credit growth has been much more significant: 45% yoy. In general, large private retail banks consider a healthy credit growth to be about twice that of the GDP, already discounting inflation.

Government Debt

The second risk experts appointed is regarding the government’s fiscal strategy: gross public debt is pressured by Treasury disbursements to banks, while the government’s net reserves (total assets minus debt) remains on a downward trend.

“If this policy is to be maintained indefinitely, it will lead Brazil to have solvency problems in the future,” said Felipe Salto, an analist at Tendencias Consultoria.

Salto notes that the Brazilian gross debt should end 2012 close to 64% of GDP, according to the IMF criteria. On average, this ratio for emerging countries hovers around around 35% of GDP. The developed nations’ debt, which caused the financial crisis, is currently at about 111% of GDP.

LCA Consultores’ Braulio Borges notes however that this data shows that the Brazilian gross debt today is not high nor low. “The issue is that prudence dictates that a government keep borrowing at low levels to have fiscal space if you face an unexpected crisis like 2008,” he said.

Former director of the Central Bank (BC), Jose Julio Senna, assesses the government must change strategy. “The problem in Brazil today is that it needs to stimulate the supply side of the economy, and not demand.The current strategy was acceptable at the peak of the crisis. But today we live in the chronic phase of the crisis, and the economy needs another kind of medicine.”

Senna doesn’t see solvency risks in Brazil today because several other countries have a worse fiscal situation. “My biggest concern is with the use of public resources that should be directed toward more pressing issues of everyday life of Brazilians, such as health, education and security.”

He adds further that loans made by private financial institutions tend to be better implemented (and hence more efficient) because there is generally no political interference in the decision.

Source: Estado de Sao Paulo

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