COPOM Meets Today and Tomorrow: Expect Lower Rates
The COPOM began the second-to-last meeting of the year today and the market is expecting a 50 basis point interest rate cut. We continue to believe that the COPOM and the Banco Central do Brasil (BCB) see growing problems in the non-bank financial sector and worry that these problems will weaken Brazil’s entire financial system. In our opinion Brazil continues to protect the financial system with lower interest rates in the face of inflation that is above the BCB’s own target. The financial markets seem to have the same view but few people are discussing this problem openly.
In the graph below we show that the Brazilian swap market (DI curve) is roughly in line with analysts’ expectations. The swap curve estimates are slightly higher in the beginning because they are being anchored by the current DI rate/SELIC rate at 11.87% and 11.90%, respectively. The swap market currently expects the COPOM to gradually reduce SELIC to about 10.00 in April 2012. Economists on average are looking for 10.25% in June 2012.
The next graph shows that the markets were far more pessimistic in the first week of October. The October 3rd DI curve implied that the COPOM would lower rates to 9.67% in June 2012. Since then, the market has backed off this pessimistic view and now sees a low of 10.12% in April 2012. It then sees rates raising again at the end of 2012 as the Brazilian economy responds to the stimulus and the European crisis is resolved.
Economists take a slightly different view. The graph below shows the evolution of the economist survey for SELIC forecasts put together by the BCB. Each point on the x axis represents the date that the forecast was made for SELIC in June 2012. Economists, on average, have been steadily lowering their SELIC forecasts since the end of August 2011.
The Brazilian journal Valor published an excellent survey on Friday, October 14th, that shows that economists’ estimates for SELIC vary wildly. The table below was published in an article written by Angela Bittencourt and Lucinda Pinto which was titled Markets See a Gradualist Copom and Already Project a One Digit SELIC.
Analyzing the table further, most banks see a 50 basis point cut from this meeting and rates eventually drifting to 10.5% or 10.0%. Nomura is forecasting a 100 basis point cut from this October meeting and higher rates in 2012. Banco Itaú Unibanco is expecting a 75 basis point cut from this meeting and rates falling to 9% in 2012.
The article goes on to point out that an one digit SELIC forecast was unthinkable before the COPOM’s August 31st meeting. These forecasts demonstrate a dramatic change in the economic outlook in Brazil over the last month and a half. In reality, the economic scenario is deteriorating rapidly in Brazil. Part of the deterioration is due to the international economic scene. However, Brazil has its own demons to deal with.
This past Sunday, October 16th, Fernando Nakagawa wrote an article in the journal O Estado de São Paulo (see link below, we will discuss further in another blog) that observed that the private banks in Brazil set aside more than R$1 billion in provisions for bad loans during August alone. Clearly the private banks continue to see their credit portfolios deteriorate as a result of the bubble in consumer lending in Brazil and the contagion effects from high levels of problem loans in the non-bank finance sectors.
http://www.estadao.com.br/noticias/impresso,bancos-publicos-ignoram-efeitos-da–crise-e-reduzem-reservas-contra-calote-,785997,0.htm
LatAm Structured Finance is pessimistic about the short-term economic outlook in Brazil. We are alarmed at the continuing deterioration in consumer credit portfolios and a domino-effect scenario for the business and real estate credit markets. The BCB has openly stated that it believes that consumer spending will carry the Brazilian economy through the current global economic difficulties.
LatAm Structured Finance believes that the BCB’s expectations for consumer spending are naïve and that the economy will continue to slow more than expected as a result. We currently project almost a no growth scenario for GDP in Brazil in the final quarter of 2011 and into 2012. Finally we continue to see higher losses on credit portfolios through the end of the year with some improvement coming in spring 2012.
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