Productive sector sees improvement in the scenario with falling interest rates – 07/12/2023 – Market

The approval of the Tax Reform and the fiscal framework, together with the recent release of positive economic indicators, opens space for a reduction in the Selic rate at the August meeting of the BC (Central Bank) Copom (Monetary Policy Committee), in the assessment of productive sector.

Industry, agribusiness and civil construction representatives hope that the cycle of cuts in the basic interest rate will boost the population’s income and allow the expansion of productive investments.

Chief economist at Fiesp (Federation of Industries of the State of São Paulo), Igor Rocha states that the evolution of the general price level corroborates the expectation of the beginning of the cycle of loosening of the monetary policy from August.

He says that wholesale prices have shown significant decompression, with a 1.3% drop in the IGP-M (General Price Index — Market) in the first preview of July, while the IPCA (Broad National Consumer Price Index) had deflation of 0.08% in June.

Rocha adds that the negative effect of high interest rates on the manufacturing industry is more significant than on the economy as a whole. “The manufacturing industry does not have, for example, the Safra Plan, nor market capture tools such as LCI, LCA, CRI, CRA and incentivized debentures.”

According to studies carried out by Fiesp, each increase of 1 percentage point in the real interest rate has an impact on the GDP of the manufacturing industry greater than 50% than what occurs on the total GDP.

“The reduction in the interest rate should improve the prospective scenario for the manufacturing industry. With better financial conditions, it is possible to put into practice new investment plans and stimulate the consumption of more credit-sensitive goods”, says Rocha.

According to the chief economist at Fiesp, having confirmed the beginning of the monetary policy relaxation cycle as of August, it will be possible to project a positive result for industrial production in 2024, interrupting the negative sequence of the last two years.

Executive director of competitiveness, economy and statistics at Abimaq (Brazilian Association of Machinery and Equipment Industry), Cristina Zanella adds that, since the last quarter of 2022, machine and equipment manufacturers have observed continuous declines in their productive activities due to the downturn in the domestic market and the rise in the cost of credit.

The director of the Abimaq says that the fall in the Selic rate will make room for the reduction of debt costs and financing costs. “Today the interest rate for investments, depending on the company’s profile, can exceed 20% per year, a value much higher than the return on investment. In this scenario, productive investment becomes unfeasible”, she says.

She also says that, by easing families’ incomes, lower interest rates will make room for increased consumption, which will demand more production and more investment. “These are desirable conditions for the sustainable growth of the country”, says the director.

Vice-president of Abag (Brazilian Association of Agribusiness), Ingo Ploger says that the high interest rate has directly affected small and medium-sized companies in the sector, with an increase in indebtedness and a sharp reduction in new investment projects.

“This caused the evolution of productivity to be affected. Investments in storage that are urgent in Brazil almost stopped, leaving the sector more vulnerable to market and weather conditions”, says Ploger.

The vice-president of Abag adds that, while agricultural producers in the United States stock almost 60% of their products on their properties, being able to better calibrate their sales, Brazil does not reach 30%. “The high interest greatly affected the sector”, says Ploger.

He states that, at the next Copom meeting, the necessary economic conditions, such as falling inflation and the reduction of uncertainties about the economy, must be present to allow the beginning of the Selic reduction cycle.

“There will be relief for working capital, freeing up resources for investments, which become more viable, with more adequate financing for equipment and inputs”, says the Abag vice-president.

Economist at Cbic (Brazilian Chamber of the Construction Industry), Ieda Vasconcelos says that, due to the current level of interest, the sector had difficulty renewing its growth cycle that started in the second half of 2020.

The growth projection for the sector, which was 2.5%, changed to 2% in the first half, and should be revised downwards again at the end of July.

In addition to the systematic reduction of inflation rates, the approval of the fiscal framework and the Tax Reform in the Chamber of Deputies help to improve the scenario of uncertainties in relation to the future, says the economist.

“We believe that all these facts will be considered by the Copom and that we will see the beginning of the fall in interest rates in August”, says Ieda.

She assesses that the fall in the Selic rate may help to stem net outflows of savings resources —of R$50 billion between January and June—which is an important source of financing for the sector.

“Furthermore, with the fall of the Selic rate, we expect a reduction in interest on real estate financing”, says the expert, adding that the higher the interest rate, the smaller the portion of the population that can purchase their own home.

The CBIC economist also says that high interest rates end up stimulating financial investments and inhibiting productive investments.

“The drop in the Selic is totally beneficial not only for the construction sector, but for the national economy as a whole, as it encourages productive activities that generate jobs and income”, says the economist.

President of Febraban (Brazilian Federation of Banks), Isaac Sidney says that the drop in inflation and the probable beginning of the easing of monetary policy are very positive news for the credit market.

“The drop in inflation, particularly for food, makes it possible for consumers’ real income to recover, especially for low-income ones, which should have a positive impact on defaults in this income range, the most penalized precisely by the recent rise in prices”, says Sidney.

The reduction in interest rates, continues the president of Febraban, reinforces the estimate that defaults in the individual market are close to peaking and should start a downward process over the next few months.

“And the reduction in interest rates should contribute to an improvement in financial conditions, which may also help in a recovery in the supply and demand for credit”, says Sidney.