Brazil
After years of demanding economic growth, Brazil is taking a breather

Place a snapshot of today’s Brazil alongside one of the country from a decade ago and you’ll spot the differences immediately. Not only have the cities become bigger and better, but its economic growth has been phenomenal.

At the last count, the custody market was last estimated to be worth around R$3.97 trillion (€1.3 trillion), putting Brazil in a strong position in meet the expectations of the global market. “A lot of the custody … consists of custodians providing their own custody. Large financial institutions that also have asset management divisions generally provide their own custody and servicing,” explains Don Linford, regional head of investor services for Latin America in the global transaction banking business at Deutsche Bank.

Having globals present in the market has proved popular among domestic providers, as “some global custodians decide they want a local provider for their cross-boarder assets”. As a result, the third-party cross-boarder assets business is worth an estimated R$869 billion (€285 billion), according to Linford.

While global banks still take on a significant position in cross-boarder custody as it flows into the country, domestic banks, valued at just over R$3trillion (€1 trillion), “continue to be the dominant players for the local custody”.

Slowing down

A comparison of the level of asset values today against the values of three years ago shows that the rate of climb has steadied, indicating an “economic slow down”.

While this may mean that local funds may not be growing as much as they have in the past, alarm bells are not ringing as “Brazil has really excelled in terms of how it handled the [2008] financial crisis, with its financial infrastructure [being] much more mature,” explains Linford.

He adds: “Brazil has a central clearinghouse, a central payment system and it has trillions of dollars in its capital means. This has proven that the Brazil market can withstand a little bit of shock.”
There is optimism around trading in Brazil, which will mean short-term adjustment of traders to keep the flow moving. But Linford says there are still investments happening in the market, which is “likely to prove a big opportunity for those who operate outside of Brazil and for those who are able to get hold of local asset managers onshore and offshore to potentially diversify their portfolios between the two places”.

Flexible taxes

Brazil has been subjected to frequent changes in taxation in the past, but a common misconception is that added taxation is from the introduction new taxes. Linford says: “Unfortunately the taxes already exist, but most of them are at a rate of zero.”

As to whether a tax is raised from zero, or lowered to zero, is down to the political environment at the time. “Depending on what policies the government is running, taxes can intensify or [ease it off] because [the tax] already exists the authorities have the right to raise it to whatever percentage they want it to be.”

Two years ago, the capital market was dealing with “a series of taxation changes in debit taxes, IOS taxes, on fixed income and foreign exchange”, says Linford. The past year has seen a more stable economy. This does not suggest that there were no changes to taxes, just that they had no impact on the capital market.

The ability to quickly change taxation can have a positive effect, and has so on areas outside of the capital market. Recently, the government “ratified the tax on produced goods as a way of intensifying [domestic] manufacturing,” says Linford.

Global game

With taxation changes on the backburner, Brazil can focus its attention on keeping up with the global regulatory game.

Brazil’s capital market is regulated and monitored by the National Monetary Council, the Brazilian Central Bank and the Brazilian Securities and Exchanges Commission, who act on recommendations from the International Organization of Securities Commissions to keep the market aligned with evolving global changes. “Local regulators do their best to keep the market to a global standard,” says Linford. “They constantly review local legislation as it relates to custodian services and how that relates to international law.”

So far, European legislation such as UCITS and the Alternative Investment Fund Managers Directive, have not had a direct impact on local markets. They do “influence how the local regulators see the local market, the laws and the rules that they develop to govern the fund industry”, but where offshore regulations have an effect is with cross-boarder providers and the “asset managers who are performing outbound transactions and keeping flows outside of Brazil,” says Linford. As Brazil has a large asset management industry, that is gaining momentum in having funds and fund structures offshore, they must comply with local and global legislation.

In some respect, Brazil is similar to EU countries in that it joined the Union of South America (UNASUR) in 2008. In the Constitutive Treaty, signed in May 2008, UNASUR aims to build “integration and unity in the cultural, social, economic and political affairs of their people, prioritising political dialogue, social policy, education, infrastructure, finance and the environment … with a view to eliminating socioeconomic inequality”.

As part of the UNASUR, the South American Council of Economy and Finance was created in November 2010 and acts as “a forum for dialogue, reflection, consultation and cooperation in economics and finance in the context of the [May 2008] Treaty”.

The council has a number of objectives, mainly to “promote the use of local and regional currencies to pursue intraregional trade transactions” to keep the Latin American economy moving, which could account for Brazil’s bumper few years. It will be interesting to see what comes from the UNASUR in the future in terms of Latin America’s capital markets.

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