Interview with Mr. Reinaldo Le Grazie: Huge global fiscal expansion has been a driving force for Brazil

Despite the political and health crises affecting Brazil, domestic markets have already started to react and show signs of recovery. In an exclusive interview to Viewpoint Amec, Mr. Reinaldo Le Grazie, former deputy Governor for monetary policy at the Central Bank of Brazil, comments on the most positive indicators that point to a recovery of the Brazilian economy. “The market is buying global assets. We are going the same way as other emerging countries. The world is doing well, and we are in the same direction,” he stated during the interview.

With extensive experience and a professional background that includes Bradesco Asset Management and Lloyds Bank, among others, and after a period (2016 – 2018) at the Central Bank, Mr. Le Grazie decided to face a new challenge: he founded Panamby Capital.
Viewpoint Amec – How do you evaluate the initial impacts of the pandemic on the Brazilian economy?
Reinaldo Le Grazie – It was an awful shock. Liquidity vanished. Initially, it severely affected supply because of the impact on the production chains and, later on, it affected demand levels. People suddenly lost their income and the governments’ role was to ensure individuals and corporations remain solvent.
How do you evaluate the monetary policy measures in the country?
Regarding the monetary side, authorities focused on ensuring that the system remained solvent. Initially, it was necessary to ensure the functioning of the financial system and, after that, to adjust the monetary policy to a much more fragile economy and to work on the credit market. The Central Bank was very efficient in maintaining the functioning of the financial system by promptly making several instruments available – some of them were not even used. The most important thing is that the Central Bank showed its leadership in ensuring the market’s liquidity.
Was the reaction time adequate?
The Central Bank adopted a slightly different approach compared to the rest of the world, which opted for a quick and significant reduction of the  Selic (target rate) in the very beginning of the pandemic. As a result of the liquidity crisis and everyone seeking more credit and cashflow, the crisis was signaling for a strong deflationary recession. Sometimes there are inflationary crises, but this time everything went down. In the first meeting of the Monetary Policy Committee (Copom), Brazil’s Central Bank decided not to opt for a more gradual strategy. Later on, it cut rates down by 0.75% and an additional cut of 0.75 % is virtually certain. Only then, it was more gradual, and I do not criticize considering that the strategy in Brazil is not wrong, but I would have adopted the top loaded approach since the beginning.
What about the results?
The cuts were important because the Interbank Deposit Certificates (CDIs) and the Selic rate make a difference in the cost of credit. Whenever there is a sharp drop in CDIs, there is a sharp drop in credit. That is why the Brazilian monetary policy was adjusted on a more gradual basis, what has come as a relief to the companies.
What will be the path for interest rates?
The Central Bank is likely to stop at 2.25 %. It can leave the door open as the future is unpredictable. But I think it will stop at 2.25 % and, according to the authority, it did what could have been done. Can interest rates be cut to a lower level? Yes, they can, but I do not believe this is going to happen in Brazil. The current nominal rate is the lowest one in the country’s history. We have a very good and solid financial system, and we should preserve that. I do not believe we will have a zero nominal interest rate.
And how is the economy reacting?
If we look at the indicators released in May, we see that almost all of them surpassed market expectations. If we look at other countries, we see that China has recovered very quickly. The United States has been recovering too. In Brazil, indicators have been slightly above expectations. They are not good, but today we expect a drop of less than 4.5-5 % compared to market expectations of a decline of up to 10 %.
How do you analyze the foreign exchange scenario?
The exchange rate was already high before the crisis at BRL 4.00 against the dollar. With the pandemic, there was an overshooting that explained the peak of BRL 5.80 – 5.90. The deep global recession in which assets of emerging countries devaluated more than assets in advanced markets explains these events. Latin America was the most affected region of all emerging regions. And Brazil was the most affected country in Latin America because, in addition to the global crisis that affected all of them, here we had a political crisis together with a health crisis.
And this situation has frightened investors away?
Brazil lost its shine, reason why it stopped attracting foreign investors, regardless the rate. Accordingly, the dollar continued to appreciate. The Central Bank took appropriate action when it decided not to interfere in its value because the inflationary impact would be very small. And then the market found its own value. BRL 5.90 was too high and the market started to adjust. The dollar helps Brazil settle its accounts but to remain above BRL 5.80 did not make sense.
What could be done to attract foreign investors again?
We must resume the agenda of reforms and maintain the fiscal austerity plan. These are the main lines of action. Concerning the reforms, the scenario is quite complex, the environment is very unfavorable, and this is very bad. Regarding the fiscal environment, authorities showed more responsibility, what is good. If they deal with these two issues, they will be able to prepare the Brazilian economy and there will be a renewed interest in the country among foreign investors.
Finally, how do you evaluate the behavior of local investors?
Institutional investors have been investing more in risky assets, both in the stock exchange and in multi-market securities. This movement will continue. Despite the increase in the price of the NTN-B (Inflation Linked Bond), the foundations’ actuarial goals will continue to push the purchase of risky assets. The behavior of individual investors was a big surprise. Unlike general expectations, individuals did not sell their portfolios, but kept them and started to buy again. This is a clear sign that the Brazilian investment industry is maturing.