Latin Finance - November/December 2012 - 12

Brazil infrastructure

Easy does it
By Thierry Ogier and Taimur Ahmad

Lower interest rates are seen as the key to spurring much-needed private investment in Brazil’s infrastructure. But the shadow of inflation still hangs over Brasilia’s ambitious plans
razilian president Dilma Rousseff has called it a “transport revolution.” The government’s latest plan to rid Brazil of its infamous transport bottlenecks calls for $65 billion of investment in the country’s notoriously decrepit infrastructure. These, after all, are the same bottlenecks that experts say are holding the economy back – and which also mean that an oversized Brazil is becoming too constricted for its aspirations to become an economic superpower. The latest initiative calls for a vast modernization of roads and railways over 25 years, including a big push to invest some $40 billion within five years. The first contracts to build or upgrade 7,500km of roads and public-private partnerships to set up 10,000km of railway lines are due to be signed next year. The thinking isn’t new: Every government for the past 20 years has launched its own plan to reduce what is commonly known as the ‘Custo Brasil’ – the additional cost one has to bear to operate in Brazil. Progress, however, has been limited. But this time is different, say Brazilian officials and private investors. Critically, the slashing of Brazil’s benchmark Selic interest rate to a record low has now paved the way for long-term investment for infrastructure – with the aid of the capital markets. Luciano Coutinho, president of the BNDES,

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Brazil’s development bank and one of the top policymakers Rousseff’s team of tells LatinFinance in an exclusive interview that the central bank’s move will lead to a “big wave” in investment (see Parting Shot, page 72). Under the presidency of Alexandre Tombini, the central bank has cut the benchmark rate by 525 basis points to 7.25% since August 2011. At the same time, the government has tried to encourage the private sector to boost longterm investment and focused on policies to address supply-side bottlenecks, rather than simply boost consumption. The strategy, says Coutinho, is now “to attract the private financial system to help share the burden with the BNDES,” the state-owned development bank that extends loans at below market rates and is often accused of crowding out the market. Now, “we have the chance to crowd in the market to new private assets,” he says. But if inflation pressures persist or become worse, a new round of monetary policy tightening could limit the impact of such a revolution. The consumer price index registered a 5.6% increase in the 12 month-period to mid-October, and the market average inflation forecast for 2013 now stands at 5.4% – meaning that real interest rates are at their lowest level ever in Brazil. If prices don’t go any higher forcing a change in policy, the low rates might help the government goals, as big investors will be forced to find returns somewhere. “Institutional investors, pension

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November/December 2012
Latin Finance - November/December 2012

Table of Contents for the Digital Edition of Latin Finance - November/December 2012
