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Saturday, July 26, 2014

Brasil Injects $20 Billion Dollars Into The Banking Sector


Last updated: July 25, 2014 7:33 pm

Brazil injects $20bn into banking sector

This frame grab from Cadena Nacional shows Brazilian President Dilma Rousseff addressing the nation on radio and TV on June 10, 2014 in support of the FIFA World Cup Brazil 2014 which will start next June 12. AFP PHOTO/Cadena Nacional--/AFP/Getty Images©AFP
Brazil is freeing up more than $20bn in its banking system as Latin America’s largest economy struggles to escape the grip of “stagflation” ahead of presidential elections in October.
While economists say Brazil could end the year with inflation above the upper limit of the target for the first time in a decade, the country is expected to grow less than 1 per cent. Data next month may show the economy even slipped into recession in the first half of this year.


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With little leeway to change interest rates, the central bank announced a series of measures on Friday to ease banks’ reserve requirements, and changed the risk calculation for some loans, injecting an estimated total of R$45bn ($20.2bn) into the economy.
Under the new rules, banks will be allowed to use up to half of their reserve requirements on term deposits to boost credit operations or to purchase loan portfolios from eligible financial institutions.
The central bank also nearly tripled the number of institutions eligible under that programme to 134 from 58 previously and, in a separate announcement, adjusted minimal capital requirements for retail credit operations.
It said the move was designed to “improve the distribution of liquidity in the economy” and was largely seen by economists as a way to unwind the so-called macroprudential measures introduced from 2010 onwards to rein in the country’s credit boom.
After impressing investors with growth of 7.5 per cent in 2010 – the highest rate in more than two decades – Brazil has since struggled to outpace developed countries, with forecast growth this year of only 0.97 per cent.
While Brazilians have continued to enjoy rising wages and record low unemployment, recent data suggests the job market is finally starting to adjust to the country’s gloomy economic outlook, endangering President Dilma Rousseff’s chances of re-election.
The central bank’s rule changes were largely welcomed by banks themselves. In a rare statement from the chief executive of Itaú-Unibanco, the country’s largest non-government bank, Roberto Setubal said the rules would “create the conditions to boost credit in some sectors of the financial market where liquidity was more restricted”.
However, economists were less impressed. “The problem in Brazil is not funding or credit supply – both amply available from state-owned banks – it is low credit demand owing to the lack of business confidence,” said Tony Volpon, an economist at Nomura.
Investors in Brazil frequently complain about government meddling in industries such as oil and gas, sudden regulatory changes, and one of the world’s most time-consuming tax regimes.
Alberto Ramos, an economist at Goldman Sachs, also gave warning that the measures threatened to undermine the central bank’s own monetary policy and “the ongoing quest to disinflate the economy and realign inflation to the elusive 4.5 per cent target”.
Only last week, the central bank voted to keep interest rates steady at 11 per cent for the second consecutive meeting, despite 6.51 per cent annual inflation.