Brazil Credit Growth Continues To Pick Up
By Win Thin
Brazil loan growth continues to pick up and it belies the notion that macroprudential measures are having any discernible effect on the economy. Total loans rose 1.4% m/m in February vs. 0.5% m/m in January, bringing the y/y rate up to the high for the cycle at 21%. Private sector loans showed similar gains, rising 1.3% m/m and 20.7% y/y. This comes after the weekly central bank survey showed 2011 inflation expectations rising further to 6% from 5.88% last week. Inexplicably, the survey showed a year-end SELIC rate falling to 12.25% from 12.5% last week. We have long felt that the momentum in the Brazilian economy remains quite strong, and that the central bank will likely have to fall back to more orthodox tightening measures as the year progresses. We think the market is split right now on the April 19/20 meeting, with many looking for no move. However, in keeping with our stance regarding the economy, we think it is likely to hike again but perhaps by only 25 bp instead of the 50 bp hikes seen so far this year.
We expect to see more FX and macroprudential measures in the coming weeks. This week, the authorities raised the tax on international bond issuance (tax on local entities, not foreign) to 6% from 5.38% and lengthened the tenor of bonds subject to the tax to 360 days from 90 days previously. Brazil also increased the IOF tax on credit card payments for offshore purchases. Local analysts note that the IOF is a financial transactions tax, not just for FX, and so could be widened to more transactions as the year progresses. Finance Minister Mantega said the “ideal” rate of credit growth was 12-15%, and so if loan growth continues to creep higher, more measures (either macroprudential or SELIC rate hikes) will be needed. BRL continues to firm and is close to the 1.65 line in the sand. We would expect more aggressive FX measures on any break of 1.65 down toward 1.60.