Interview with Eduardo Guardia: Fiscal challenges and opportunities for asset managers
The Brazilian economy is heading towards global levels of lower interest rates, opening up opportunities for the asset management industry. In an exclusive interview to Viewpoint Amec, Mr. Eduardo Guardia, former Ministry of Finance and current CEO of BTG Pactual Asset Management, talks about the post-pandemic economic scenario and reveals the asset’s strategies to explore other classes of assets to complement the fund’s flagships.
“The traditional products have been performing well this year and we are reinforcing our strategy focused on illiquid assets,” Mr. Guardia says. With extensive experience in the private and public sectors, the economist comments on the measures taken by the government and the Central Bank to respond to the crisis. Mr. Guardia, who actively participated in the development and approval of the Proposed Constitutional Amendment (PEC) on the government spending “ceiling”, shows concern about the fiscal imbalance in a post-pandemic scenario. Read below the full interview:
Overview Amec – How do you evaluate the government’s measures to respond to the economic crisis caused by the pandemic?
Eduardo Guardia – There are several important points to be mentioned. The first one is that the government had a timely and relevant reaction. The measures had uneven effects, however. But let’s talk about what has worked and what has not worked. The emergency financial aid that benefited 60 million people was a very positive measure. When we analyze data on wage, we see the importance of these measures to mitigate the effects of the crisis. For example, the disposable income grew in the second quarter due to the emergency aid.
What other measures are noteworthy?
In another front, the Central Bank did a great job ensuring the liquidity of financial markets by taking a number of measures, among which the reduction of Reserve Requirements and a liquidity line to the secondary market. A measure it should have taken was to provide support to small and midsized companies. At the very beginning of the crisis, the government announced the release of R$4 billion (around US$ 750 million) funded by the National Treasury, but the program had so many restrictions for the borrowers that only a small portion was released – I guess only R$2 billion (US$ 375 million).
What about concerns with fiscal imbalances?
That’s the point I would like to make. Everything that has been done by now was based on the emergency PEC that allowed a temporary increase in government spending. It is a crucial approach because the current legal framework indicates that this increase is restricted to 2020. This is the central point. If for any reason the restriction is loosen, the Brazilian fiscal environment becomes a point of concern and is put at risk. We had no other choice. Despite the already challenging fiscal situation facing Brazil, there was no other option but to take measures to protect the country from the crisis and mitigate its effects. The fiscal expansion is done. We are talking about a likely deficit of some 13% of the GDP.
What about the debt-to-GDP ratio?
The gross debt is expected to exceed 90% of GDP, maybe 95%. The fiscal expansion was a proper measure, but it has to be temporary. The possibility of loosening the rule to maintain the fiscal expansion for the next years worries me a lot. We would have to pay the fiscal expansion with a debt increase. This is a possibility that has to be thoroughly discussed and the reform agenda has to be resumed to ensure the spending ceiling for the next years.
How do you evaluate the operations and perspectives for capital markets in the financing of companies?
The level of interest rates was the major change in Brazil. Today, we are discussing whether Selic will be 2.5% or 2% p.a. We are at the end of the cycle for interest rates reductions, which are now at a very low level. We know that interest rates around the world were already low, but in Brazil it is the first time we have lower rates for a longer period. This significantly impacts on the economy and allows lower financing costs for businesses, opening up the possibility of developing long-term financing lines in the Brazilian capital market. We have never experienced anything like this in Brazil.
What are the future possibilities with this new level for interest rates?
This new environment opens up possibilities such as the financing of infrastructure projects that demand longer term funding. From a business perspective, the lower interest rates definitely have a positive effect for companies, and that is reflected in stock prices, which have been recovering well. They have not fully recovered compared to the pre-Covid period, but Ibovespa is operating above 100,000 points. When Will [Landers] showed to be optimistic [in an previous interview to Amec] one and a half month ago, he was right. The stock exchange has been performing well since then and we believe it will continue like that.
Could you comment about the BTG’s strategy?
We are following this major change in the Brazilian economy and in the financial market. BTG Pactual has prepared itself for this period. Our strategy is to continue to focus on our flagship products, such as equity and credit funds. In addition to these traditional ones, which have been performing well this year, we are also reinforcing the strategy on illiquid products.
Are you also focusing on ESG products?
The group has several initiatives, not only the bank but also the asset management branch, all of them focused on the selection of assets that comply with sustainability and good governance principles. We are launching products with these characteristics. I would like to highlight a very interesting one: the timberland investment funds that are already part of our portfolio. We already had timberland investment assets globally. Now we will be launching a forestry fund aimed at the reforestation of degraded areas. We are bringing this view into our products. There are other initiatives we will be announcing in due course.
How to you evaluate the development of ESG factors?
The topic has been under discussion for some time and now it is a very clear trend. Investors are increasingly demanding that not only the companies they invest in but also their products respect the environment, are sustainable and in compliance with good governance principles. The pandemic has been a driving force of this trend that was already clear for all of us. This is irreversible, it is a process that will become more and more relevant over time.
How is BTG advancing in the use of digital platforms for the distribution of products?
Our operations in this field are very robust. We have the BTG Digital’s initiative, which is an important area. Today, investors want to communicate with the financial institution through apps in a simple, transparent and prompt way. That is why we are expanding our digital platform. We are also starting to operate in the retail market, which is an excellent opportunity for the bank. When we talk about investments, which are closely related to my area, it is important to mention that the BTG Digital’s platform is open. Investors have the best financial products in the market at their disposal.
Could you give more details about the open platform concept?
Investors access the platform not only to buy products of BTG Pactual Asset Management. We have to compete with the other assets, as it happens in other platforms of the market. Our open platform allows us to get closer to investors and expand the range of products we make available to them, mainly individuals. It is a significant and rapid change. The asset understands this evolution and has been preparing itself to offer new products, mainly illiquid products, both in the domestic and foreign markets. The challenge is to be a top asset manager that performs well and still be prepared to place new products of the real economy, ESG, real estate, and pension products, which have been expanding as well.
