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Brazil: Bucking the trend

Tuesday 13 July 2010 - by Andrew Hickley

 While Europe continues to be held in the midst of a financial crisis, developing countries, particularly Brazil, are leading the way both in terms of growth and financial regulatory reform.

Brazil has already posted a 9 per cent growth in GDP in the first quarter of 2010, and while analysts have predicted a slowdown in growth rates, its economy is in much better shape than many developed countries around the world.

There are a number of reasons that have allowed Brazil to weather the global financial storm.

Plentiful natural resources have allowed for self-sufficiency, while a developing relationship with other BRIC countries - Russia, India and China - has extended trade routes.

Threadneedle Latin America fund manager Julian Thompson believes that a conservative attitude from the Brazilian Central Bank has meant that strict governance was forced upon banks.

Thompson says: “The country has an old-fashioned style banking system, whereby the Central Bank regulates banks and is less focused on consumer regulations than focused on risk, and is particularly focused on the banking sheet risks that banks run.



“The minimum of Tier 1 equity required is 11 per cent of capitalisation, which contrasts with the 2 per cent that RBS was running at one point. The less use of Tier 2 hybrid type equities was extremely important. The average banking capitalisation is higher than 11 per cent, which is really a bare minimum, but if you get down to around 13 or 14 per cent then the Central Bank starts knocking on your door and saying ‘what are your plans?’.”

Thompson also believes that the issue of transparency is well handled in terms of derivatives, which he says are “very well regulated”.

He says: “Any over the counter transaction has to be recorded on an exchange or a depository, so that if one bank makes an OTC transaction with another bank, it still has to be registered.

“This gives the Central Bank a lot of visibility. I believe that, particularly with relevance to the developing world, but also with relevance to the developed world, they’re setting the standards of financial regulation.”

Invesco associate portfolio manager Jack Deino agrees and says that Brazil is “way ahead” of most emerging markets.


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