Now go. Or not? – 08/04/2023 – Marcos Lisboa

The possibility of a credit crisis became a matter of concern. Some companies and financial institutions are reporting much lower profits or even high losses.

The data suggest that the moment is one of caution. However, there are still no signs of a severe generalized crisis, as concluded by a recent report by Cemec Fipe.

However, these are worrying times, which should not be surprising given our track record.

Apparently, some companies did not incorporate into their analyzes that Brazil is a country of high volatility, in which the prices of different assets, interest rates, inflation and economic growth can be surprising in the short term. And they are not prepared for it.

Data comparing the frequency and severity of crises in Brazil with that of other countries may be useful. We had a drop in per capita income in 14 of the 40 years between 1980 and 2019, according to World Bank data. Performance equal to or worse than ours is only observed in poor or oil-dependent countries, in addition to Argentina.

In rich and middle-income countries, most have seen a drop in per capita income in six years or less, with some cases in seven years or less.

In the good years, our per capita income even grew faster than in developed countries: 2.8% against, for example, 2.2% in the USA. However, in the frequent bad periods, it dropped significantly: on average, 2.6%, against, for example, 1.6% in the USA, 1.5% in Australia or 1.2% in Denmark. Even in the good years, however, it grew much less than in many emerging countries.

With many strong falls in per capita income over the years, not offset by slightly more intense recoveries, Brazil became comparatively poorer. We grew, on average, 0.9% per year, surpassing only poor countries, Argentina and Mexico.

We are well behind rich countries (USA and UK with 1.7%, for example) and neighbors like Chile (3%) and Colombia (1.7%).

Inflationary spikes have been recurrent in Brazil, as in 2002, in the first half of the last decade and in this period after the pandemic. Currently, high inflation affects Brazil and developed countries, but this did not occur in previous periods. Sometimes, inflation here takes off from what happens in the main rich and emerging countries.

Higher inflation ends up leading to increases in the basic interest rate set by the Central Bank (Selic). At the beginning of the first Lula administration, for example, the Selic rate reached close to 18% above expected inflation in the following 12 months. In his first term, it averaged close to 12%, and is now around 8%.

Everything indicates that we have specific problems that result in this high volatility, higher frequency of crises and low average growth.

Equally volatile has been government intervention in the economy. Sometimes the government tries to control prices to dampen the perception of inflation. It was like this a decade ago, with voluntary measures in fuels, in the energy sector and in public tariffs; This was the case in the last government, again with interventions in fuel and energy prices, this time through opportunistic changes in taxes.

Intervention in the electricity sector in 2013 left debt liabilities, compromised supply expansion and resulted in high energy prices in the medium term.

The recent change in the maximum interest rate for payroll loans resulted in a blackout in the supply of credit.

The Judiciary also frequently interferes in legally perfect contracts to favor one of the parties to the detriment of the agreement. This occurred, for example, in the last decade in car financing contracts, benefiting defaulters.

The Yellow Line concession in Rio was literally broken with tractors and court injunctions.

Some interventions can be successful, as Bernardo Guimarães commented in a recent column in this Sheet, in which he compares the interest rate ceiling on overdraft facilities and a recent similar measure on payroll loans, but with very different results. But this requires carefully analyzing the causes of the problem.

Detailed diagnoses, analysis of the impact assessment and the opportunity cost of public resources, in addition to opening up the microdata that the government used in its work, would help to separate proposals for adequate interventions from those that were deliberate and disastrous.

However, this generally does not happen. Contrary to good practices, official action sometimes acts opportunistically on the symptoms, without technically identifying their causes or assessing the possible consequences of the intervention.

Likewise, little use is made of outcome evaluations to improve existing policies, or stop those that have failed.

The result is a country with a volatile economy and arbitrary public interventions, with frequent changes in the rules of the game, which discourages investment and harms growth.

Some companies and banks, especially the new ones, sometimes seem to forget the country in which they live. In good times, they bet that this time will be different, and they invest as if conditions were going to remain the same for a long time.

A few years ago, the Selic dropped to 2% and there was a lot of credit available. In some cases, the result was too much debt.

Many did not incorporate, in their analyses, stress scenarios to assess what could happen to their businesses if there was a relevant increase in inflation, an abrupt change in interest rates or a significant drop in economic activity. Nor do they seem to have analyzed the possibility of arbitrary intervention in market rules by the government or the judiciary.

Arbitrariness and volatility are recurrent in Brazil. And the portion of the private sector that does not pay attention to this is doomed to suffer severely. Better to prepare for storms even in good times, which is far from the case now.