SAO PAULO: Guilherme Benchimol, the founder and chairman of brokerage firm XP Inc, has a warning: A meaningful fiscal overhaul is essential if the country is to bring interest rates down and create a better environment for investing.
“We need some kind of adjustment in the economy, regardless of who becomes president,” Benchimol said in an interview in Sao Paulo.
“It has to happen – there’s no other way.”
As Brazil gears up for a federal election later this year, the country’s public finances have become a key focus.
In 2015, the country lost its investment-grade status as widening fiscal deficits undermined investor confidence.
More than a decade later, successive federal governments have yet to restore fiscal credibility.
“No country can run fiscal deficits indefinitely,” he said.
“Eventually, it breaks down. You end up with runaway inflation, and it’s the poorest people who suffer the most. Nobody has an interest in letting that happen.”
A stronger Brazilian economy would also benefit XP, Brazil’s largest brokerage.
The company has been seeking to double its size in the coming years and lead Brazil’s investment sector.
XP worked with nearly five million customers at the end of the first quarter, with roughly 1.5 trillion reais in total client assets.
Consumers’ appetite for taking investment risks have dwindled in recent years as individuals face higher interest rates, according to Benchimol.
“People become short-term focused,” he said. “The last four years have been particularly difficult.”
Brazil’s benchmark Selic rate remains near its highest level in almost two decades at 14.25%.
While the central bank has begun easing monetary policy, policymakers have been weighing the pace of such cuts.
Higher energy prices driven by the conflict in the Middle East, coupled with President Luiz Inacio Lula da Silva’s stimulus measures ahead of a reelection contest in October, are driving price pressures.
Lula has prioritised measures to boost growth and incomes, while Senator Flavio Bolsonaro has yet to present his economic platform.
According to the latest Datafolha poll released on July 24, Lula leads with 48% of voting intentions in a potential runoff, compared to 43% for Bolsonaro.
Benchimol declined to comment on his expectations for the election. Overall, he’s convinced that Brazil will get its public finances “in order sooner or later”.
“When you compare Brazil with other emerging markets, it has a much higher tax burden than its peers, as well as much higher debt levels,” Benchimol said.
“Its population is also more heavily indebted. So, we have to make some kind of economic adjustment, regardless of who becomes president.”
Brazil’s financial system has been grappling with the fallout from the collapse of Banco Master, which shook the industry and is haunting the country’s leading presidential candidates.
Benchimol described the lender’s alleged fraud as one that “fooled everyone” and involved various branches of government.
In his view, the lesson for the entire market is to improve governance to prevent a similar crisis from happening again.
Before Banco Master’s collapse, XP and other retail platforms sold the lender’s bonds to its clients.
“It really shouldn’t be possible for something of this magnitude to go undetected for so long,” he said.
“Because everyone was fooled.
“Fraud offers lessons for everyone, from the regulator to the distributor. It’s about how you step up governance standards to ensure the system cannot be deceived again.” — Bloomberg
