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NY broker predicts renewed growth and low interest rates in Brazil

Economic Expectations

OppenheimerFunds, US asset manager with about R$ 700 billion in its portfolio, said that it felt encouraged with Brazil's prospects after meeting officials from Michel Temer's cabinet
published: Jan 06, 2017 12:00 AM last modified: Jun 05, 2017 11:03 AM
Marcos Santos/USP Fund manager OppenheimerFunds has begun to see a more promising scenario for Brazil

Fund manager OppenheimerFunds has begun to see a more promising scenario for Brazil

Brazil is on the way to renewed growth and historically low interest rates. The comments are by analysts from OppenheimerFunds, one of the largest investment companies in the US, with a portfolio valued at US$ 216 billion (around R$ 700 billion at the 6 January exchange rate).

In comments posted on the institution's website, signed by fund manager Wim Vandenhoeck and senior analyst Claudia Castro, Oppenheimer assesses that the tax reforms proposed by the Michel Temer administration can promote growth and increase domestic savings.

"We believe Brazil's current monetary [managed by President Temer's economic team] and fiscal [conducted by the Central Bank] policies are conducive to long-term growth", the analysts wrote.

In the assessment of the New York-based asset manager, the greater rigour with public spending and the projected steady drop in inflation this year - expected to return to the target centre of 4.5% per year after seven years above it - will lead the Brazilian monetary authority to "most likely" accelerate the pace of cuts in the basic interest rate (Selic).

Interest rate

In October 2016, the Monetary Policy Committee (Copom) began its process of gradual cuts in the Selic, the basic rate that serves as a benchmark for lending in the country. So far there have been two 0.25 p.p. cuts to the rate, which the analysts at OppenheimerFunds believe are likely to be stepped up beginning at the next meeting, scheduled to start on Tuesday (10 January) and end the next day. Currently, the Selic rate is at 13.75% per year.

For Wim Vandenhoeck and Claudia Castro, "only by adamantly persevering and strengthening its macroeconomic framework will Brazil grow and hopefully see historically low real interest rates." "There is unfortunately no easy way out of this fallout", the analysts observed, mentioning the urgency and complexity of the economic and structural reforms adopted by Brazil.

The text explains that the comments were written after meetings between representatives of the fund, members of the Michel Temer administration and Brazilian businesspeople. After the meetings, OppenheimerFunds began seeing a more positive scenario for Brazil.

Importance of the spending cap

“[The] spending cap should be seen as an important first step in generating viable options for economic recovery and growth," the two experts argued.

“Beyond fiscal policy, Brazil’s new government has a broad agenda of initiatives designed to boost productivity and medium-term growth and to improve the business environment," they added.

For OppenheimerFunds, the government has the necessary support to approve pension reform in Congress and has made the importance of this proposal clear to the public.