From Hedge Funds to Loans, Record Low Rates Are Reshaping Brazil

(Bloomberg) --

Brazil’s record-low interest rate is putting the economy in uncharted territory, promising to reshape everything from the real estate market to the investment landscape.

After the recent reductions by the central bank, the country’s benchmark interest rate now stands at 5.5%, almost a third of the 14.25% level of 2016. Banks such as Banco Santander are wagering that it can fall as much as an additional percentage point by the end of this year, given dormant inflation and weak growth.

While activity is taking longer than expected to react to what seems to be a longer period of low rates, here’s where the borrowing cost cuts are having the biggest real-life impact in Latin America’s largest economy:

Mortgage Loans

Mortgage loans are one of the credit lines most directly affected by monetary easing for a simple reason: almost 70% of those are provided by state-owned lender Caixa Economica Federal, at subsidized rates. In the year through August, those loans grew almost 13% compared to the same period in 2018, more than double the pace of overall lending. Average annual rates on mortgages are hovering around 8%, one of the cheapest available to consumers. A two percentage point drop in the benchmark rate gives 500,000 families per year the opportunity to buy their first house, according to Rubens Menin, the billionaire founder of Brazilian homebuilder MRV Engenharia e Participacoes SA.

Cost of Public Debt

The combination of subdued inflation and record-low rates is also easing Brazil’s debt burden. In the year through July, interest payment on government debt amounted to roughly 5% of the gross domestic product, down almost half from the end of 2015. That happens because most of federal debt is indexed either to inflation or the key rate. “One takes after the other, and they both make the debt cheaper to service,” said Jason Vieira, chief economist at Infinity Asset Management. The improvement is limited by the fact the government continues to spend more than it takes in from tax income, increasing its stockpile of debt.

Company Financing

Companies are one of the biggest winners of lower borrowing costs, according to Thais Zara, the chief economist at Rosenberg Consultores Associados. Declines in the interest rate curve and credit default swaps usually lead to cheaper long-term financing through capital markets, opening up a window for firms to sell shares or bonds at a time of heightened demand for yield. In the year through August, the amount of debentures issued in the local market reached 117.4 billion reais ($28.9 billion), up 7.3% from the same period in 2018, according to capital markets association Anbima. That growth puts it on track to break last year’s record of 153.7 billion reais.

Asset Reshuffle

The hunt for yield has reshaped not just corporate balance sheets, but also the entire investment landscape. Keeping money in savings accounts or parked in government notes becomes less attractive as returns at 5.5% hardly compare to the 14.25% of just three years ago. Brazilians have pulled almost 15 billion reais this year through August from the traditional savings accounts, known locally as poupança, and poured more than 660 billion reais into funds, according to the country’s capital markets association. Stocks and exchange traded funds are in the spotlight this year, leading the inflows.

Retail And New Players

The shift away from the plain vanilla fixed income strategy has also caused a massive change in the profile of a Brazilian investor. Entire teams have left banks to start hedge funds, which have multiplied as easy returns fade and products previously only available to wealthy individuals become more widely accessible. The number of retail investors at local stock exchange B3 SA crossed the 1 million mark last April, a number it had aimed to reach over a decade ago. The Tesouro Direto platform, aimed at the same type of investors, also reached 1 million active subscribers this year, pushing the total amount of people registered in the system to 4.5 million.

To contact the reporters on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net;Fernando Travaglini in in São Paulo at ftravaglini@bloomberg.net

To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net, ;Daniela Milanese at dmilanese@bloomberg.net, Matthew Malinowski, Julia Leite

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