Financial Daily from THE HINDU group of publications
Tuesday, Jun 01, 2004
Money & Banking
Brazilian businesses bemoan high interest costs
Curitiba (Brazil) , May 31
FEAR of recurrence of hyper inflation is making it difficult for the Brazilian authorities to retract from the policy of high interest rates; but businesses bemoan high costs of borrowing.
With the central bank-controlled benchmark overnight lending rate at 16 per cent, even the best of borrowers cannot get money at less than around 20 per cent a year. For most corporate borrowers, "3 per cent per month" is the norm.
Last week, the Brazilian central bank refused to cut rates, killing hopes to the contrary.
Businessmen understand the concerns about inflation, but point out that inflation has come under control from about 17 per cent a year ago, it has come down to around 5.25 per cent now and is expected to decline to 4.5 per cent in a years' time. Analysts have said that the central bank not slashing rates was in the context of expectations that the US Federal Reserve might raise short-term interest rates, something that could trigger flight of capital from Brazil.
"Cheap money," says Mr Luiz Alexandre Pinto, Director of Smagon, a company based in Curitiba that produces automotive and industrial bearings, when asked what he would want from his Finance Minister. "Given the (cheap) money, we will expand," he told Business Line.
Smagon, an Rs 50-crore company, has found for itself a niche in the Brazilian replacement market, where multinational giants such as Federal Mogul supply to the OEs. The market is good now and is growing at about 5 per cent a year, but for a quantum leap in business, the company has to invest in both expansion and modernisation. The problem is in finding the money for it.
Apart from the fact that Brazil's economy declined 2 per cent last year, there is market evidence to show that the dear money policy has impacted on jobs. Unemployment rate has increased from 10.9 per cent in December 2003 to 12.8 per cent now, something embarrassing for President, Mr Lula di Silva, who heads the Labour party.
Mr Fernando Barbosa, who runs a Fiat dealership in Ponta Grossa, says he had to close down two of the three points of sales and downsize staff from 85 to 40, in the last two years. This happened at a time when Fiat wrested market leadership from Volkswagen for the first time in 30 years.
While the car market is good, the competition is tough. Dealers are having to contend with lower commissions and compete with direct and Internet sales, says Mr Barbosa. Expansion of operations could help bring down overheads, but again, the problem is the high cost of the money needed for expansion.
Businessmen complain that the dear money is getting in the way of growth at a time when opportunities for growth are ample.
"The market is hot now," says Mr Luiz Ben-Hur Loures, who runs TransTupi, a public-cum-tourist bus company, based in Araucaria. For TransTupi the market is hot because air fares for intra country travel have gone up and there is a consequent growth in demand for tourist buses. The company could buy more buses if only the banks would lend money cheaper.
Mr Alceu Vezozzo, who runs a string of five-star hotels in southern Brazil, says that occupancy levels have fallen from about 70-80 per cent five years ago, to 50 per cent now, as fewer people have money to travel.
"The best business to be in Brazil today is banking," notes Mr Newton Dan Faoro, an IT consultant. Banks, which pay less than 12 per cent for deposits, enjoy huge spreads.
Some politicians share the concerns of businessmen over high cost of money. "The only country that has a higher interest rates than Brazil is Angola," says Mr Rafael Greca, a legislator in the state of Parana and a former Federal Minister for tourism.
He notes that there are no tensions such as war in Brazil and the business environment is good, and there is no reason why interest rates should be high. Mr Greca, whose party supports the ruling coalition at the centre, says he expects President Lula to bring do something about it.
Businessmen also complain about the high rates of taxes, which aggregate to some 36 per cent on sales, plus an income-tax on profits. They see little prospect of an easing of tax rates, with the government needing all the money it can get to meet its own external and domestic interest obligations. The Government's debt is about $425 billion, more than 80 per cent of the GDP.
The Other Reality: All this however is only a part of the picture. The other part is much rosier.
While the interest rates are punishingly high, it has been coming down. The benchmark overnight rate was 26.5 per cent last year.
While the economy slumped 2 per cent last year, it is expected to grow 3.5 per cent this year. Exports, helped by Chinese buying, are set to touch $82 billion, $9 billion more than last year.
So if this trend continues, interest rates could soften in the coming months.
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