Analysis: Market expects lower interest rates amid international scenario and inflation above ‘unreal’ target.

Tempo de leitura:
Compartilhe:

Inflation resilience in the United States and China’s first-quarter results in 2023 are highlights of the global economy that create room for a lower Selic rate in Brazil.

By Alberto Sansiviero, Senior Partner at Pipeline Capital Tech.

A recent survey by the Brazilian Institute of Finance Executives (IBEF) indicated that the country’s top financial executives and CFOs were more concerned about the international crisis than the Brazilian one. However, during a breakfast event held by IBEF-SP at Bank of America (BofA) last month, conversations pointed to a varied range of scenarios, some more optimistic and others more pessimistic, but all very focused on the current Brazilian situation.

Concerns about international interest rates and inflation resilience in the US and Europe were also prevalent in discussions. According to BofA’s analysis, US interest rates are expected to rise by 0.25% in May, followed by stabilization, but there is unlikely to be a drop in the second half of 2023 due to the “persistence” of rising prices and associated costs.

As a result, the scenario is one of higher inflation generated by greater “independence” from China, and the market is preparing to see the dollar continue to depreciate. In the international context, concerns about China’s GDP behavior remain on the radar, despite the definition of a 5% growth target for 2023 and the recent announcement by China’s National Bureau of Statistics of a 4.5% growth in the first quarter of this year.

In summary, the environment becomes more challenging with high interest rates, and as a result, it seems that the market wishes to bet on reductions throughout 2023. This also applies to Brazil!

Speaking of Brazil, the current Minister of Finance, Fernando Haddad, was pointed out as a positive surprise for the majority of attendees, as he demonstrates “trying to do the right thing.” However, many question his ability to influence President Luís Inácio Lula da Silva. Nevertheless, the most accepted assessment is that he stood by the president in difficult times, and therefore, Lula owes him and “should back him” for as long as possible.

The proposed Fiscal Framework is considered worse than the Spending Cap, but “it couldn’t be different.” The problem in this case lies in the expectations of market agents. It is not ideal but should easily pass through Congress, which in this term will likely act as a moderating force to limit executive radical actions.

There is also a clear expectation that the legislature will approve reasonable demands aimed at stimulating the economy. Its next relevant topic should be the tax reform, a demand chosen by the current government to discuss in the National Congress.

Everyone agrees that the inflation target of 3.25% is not real, but few believe in the possibility of revising or changing the band. The Central Bank (BC) can help “postpone the expectation of convergence to the target.” Waiting for the next meeting of the National Monetary Council (CMN) would only maintain tension and increase wear and tear. Within this perspective, in the market’s assessment, there is room for a cut in the basic interest rate.

Bank of America itself believes that the BC should announce a lower Selic soon, as the country has carried high real interest rates for a long time. The expectation is that the rate will end this year at 11% per year (a.a.) and 2024 at 9% a.a. No one expects low real interest rates in the short term. It is expected that interest rates will stabilize with annual inflation at 4.5% and, even then, nothing below 9% per year. It is considered a very challenging environment for the competitive sector, as some companies are not viable in the country with interest rates consistently at this level.

Finally, but not least important, the credit scenario remains complex. There is a fly-to-quality phenomenon in the credit offer. This means that banks, the main agents, are offering many lines to the largest and best companies, abandoning the middle market.

The phenomenon makes money expensive and scarce for most of the market, and even with a possible cut in interest rates, this should not change in the short term. Large companies end up pressured by suppliers experiencing a shortage of credit. However, they do not seem willing to play the role of banks and intermediate liquidity, taking the credit risk of these suppliers.

The perception that remains is that instruments are less important than the willingness to take risks, and with the basic interest rate at current levels, the scenario will remain difficult for a long time. It is also perceived that the capital market will need stimuli to meet the credit needs of the market. And even with tax incentives in perspective, only the largest companies will have access to capital, which will remain restricted for most organizations, at least in the short term.

By Alberto Sansiviero, Senior Partner at Pipeline Capital Tech.

Compartilhe:

Últimas Postagens

Using M&A to enter new markets or acquire new technologies

Mergers and Acquisitions (M&A) are powerful strategies for companies seeking expansion and innovation. If you are an entrepreneur or investor, understanding how to leverage

Corporate governance as the central strategy for success in M&A

Corporate governance represents a fundamental pillar in business development and expansion, especially in an environment as competitive as Mergers and Acquisitions (M&A). In a

Myths and truths about selling companies

The sale of a company is a significant milestone in any entrepreneur or investor’s journey. However, this process is often shrouded in myths and

Nubank

Our “Company of the Month” for April, Nubank, is the largest digital bank in Brazil and Latin America. It was founded in 2013 in

Connect to the best of M&A world Subscribe to our Newsletter

Pipeline Podcast “Papo de M&A”

Pipeline Capital’s podcast on mergers and acquisitions, innovation and technology.