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AmericasNovember 2 2020

How banks can help build a better post-Covid Brazil

Brazil is looking at how to bounce back in a more sustainable way with healthier cities and wider access to financial services.
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Brazil hard hat

Like many others across the world, Brazilians have been looking at their government’s response to the coronavirus pandemic with a mix of frustration, anger and confusion. While the country was climbing the global ranking, both in terms of caseload and death toll — the world’s third and second largest, respectively — its president, Jair Bolsonaro, continued to undermine the situation. When asked by journalists about the spiralling infections in May, he responded: “So what? What do you want me to do?” 

But with the curve now sliding down and economic prospects improving, Brazil feels more optimistic. For many, from policy-makers to businesspeople and financiers, the debate has moved to more hopeful ground, attempting to draw conclusions on what worked best during the emergency and how they can build on it.  

Brazil was attempting to boost lacklustre economic prospects as the first coronavirus case appeared in February. Gross domestic product (GDP) growth continued to hover around 1% after the disastrous recession of 2015 and 2016. The fear was that Covid-19 would travel fast among the most vulnerable living in packed, precarious favelas and those exposed to poor sanitation. Currently, nearly one in seven Brazilians lack access to clean water, while almost half of sewage is untreated: an issue that has obvious health repercussions and that concerns the country’s poorest.

Maria Silvia Bastos knows the problem well. She headed up the body tasked with co-ordinating projects for the 2016 Brazil Olympics, which attracted serious international concern — as well as embarrassment — over the condition of the country’s waters. The famous Guanabara Bay, one of Rio’s natural attractions and water sports settings, was not immune. Untreated waste contaminated its waters with scientists warning about the presence of dangerous pathogens. When Ms Bastos subsequently moved to lead the country’s national development bank, BNDES, the issue stayed with her. “In my opening speech [at BNDES], I said that the main priority of the bank [should be] to start a concession programme on sanitation,” recalls Ms Bastos, now president and CEO of Goldman Sachs in Brazil. 

She rejoiced when, in early July, voting remotely, Congress approved a sanitation reform meant to attract private investment to the water and sewage sector, and which the government hopes will attract much as 700m reais ($125.41m) to help provide universal access to sanitation services by 2033. 

The gravity of the pandemic, reflects Ms Bastos, has only amplified the need for these types of reforms, meant to lift the lives of Brazil’s most vulnerable — as well as its economic prospects. As of October 17, 153,675 people had died in Brazil as a result of Covid-19, according to government data. 

Changing behaviour

The pandemic, Ms Bastos says, is changing Brazilians: “We have really started to get into a new [state of mind] — this thing is here to stay.” 

Maria Silvia Bastos

Maria Silvia Bastos

While many supported the general reopening of economic activities in Rio de Janeiro, which has been one of the worst-hit centres, and images of packed beaches flouting social distancing began to surface, Ms Bastos believes that Brazilians have began to internalise new behaviours: “It amazes me to go into the streets in Rio and see something like 90% of the people wearing masks.” While to some, this may seem optimistic, others believe that the pandemic is reinforcing the need to modify not only behaviours, but laws.

UBS’s country head, Sylvia Brasil Coutinho, expects other important reforms to see the light of day next year, from the much discussed tax reform to changes to simplify and reduce the cost of the public administration, which would result in savings of about $57m. After a dire six months, although still daunting, Brazil’s prospects are improving.

Brazil's infection rate seems to have peaked, for now, and has been declining since July. Of the total 5,224,362 cases, 435,372 are still active, growing at a biweekly average of 4560 new cases per day from a population of more than 200 million. As a comparison, in the UK, where a second wave is spreading across the country, the weekly average on the same day was 16,171 new daily cases, out of a population nearly a third of Brazil's. 

Optimistic future

The country looks a bit more hopeful in economic terms, too. While in June, the International Monetary Fund (IMF) predicted a 9.1% GDP contraction for the year, its revised October figure was an improved 5.8% contraction, which would be followed by a 2.8% recovery in 2021. Logically, this should be the time to focus on longer-term policy changes.

Mario Mesquita, chief economist at Itaú Unibanco, says that “according to [our internal economic] indicator, we are back to where we were before Covid”, noting that the indicator value at October 8 was the same as the average of the first half of March. More optimistically than the IMF, Itaú expects the economy to contract by 4.5% in 2020 — a rate, Mr Mesquita points out, that confirms his June prediction — and to grow by a more buoyant 3.5% next year. Other banks share similar outlooks.

According to [Itaú Unibanco's internal economic] indicator, we are back to where we were before Covid

The reasons behind this rebound, says Mr Mesquita, is a combination of factors which offer insights for future policy decisions. For example, after Rio’s administration began dismantling emergency facilities in June, the bank’s analysis points to evidence that suggests it may be advisable to hold on to emergency health facilities for a while longer. “Some of these facilities are being discontinued [across the country, but] I’m not sure it is wise to dial back to what we had before Covid,” says Mr Mesquita. “We have learned that it is good to have this sort of [health] buffer. [We’ve built it], it would be good to keep it operational for a while longer.”

In a September research note, Itaú noted how, unsurprisingly, municipalities that have been receiving more emergency funds in relation to their local GDP, and where fatality rates were lower, are recovering at a faster pace. However, consumer spending in areas receiving less aid, and where death rates are lower, still outpaces that in areas with greater emergency aid but also greater loss of life. In general, consumer spending in municipalities with lower fatality is close to pre-pandemic levels, as measured by credit card transactions for both goods and services. According to Itaú, there is a clear correlation between keeping the pandemic under control and economic activity, irrespective of how much emergency aid the government pumps into the economy. This has implications for spending on public health and, potentially, for the reduction in transfers to households.

Shaky ground

Mr Mesquita agrees with others that “this disease raises many questions about public policy”.

At the onset of the pandemic, there was major concern over Covid’s social impact — most obviously in terms of unemployment — whether affecting factory and office workers, or street vendors with no formal job contracts. Data released in February showed that 38 million Brazilians worked informally, with total employment ranging from 27.3% in the southern state of Santa Catarina, to 62.4% in the northern state of Pará.

“But [these concerns] didn’t translate into [a worsening of] social indicators because of fiscal transfers — which created a huge, ongoing debate about the need to beef up Bolsa Familia [the welfare programme launched by former leftist president Luis Inácio Lula da Silva] — and creating a new income transfer scheme,” says Mr Mesquita.

The pandemic has further exposed not only the precariousness of Brazil’s sanitation system and, to a certain extent its health system, but also that of its job market and the reach of the welfare system.

Mario Mesquita

Mario Mesquita

While mapping out emergency aid, the government, which began disbursing funds in April, realised that as many as 38 million people — about 18% of the population — had fallen through the social safety net and were not registered for unemployment or to receive benefits. Some 10 million of them, it was found, were living in extreme poverty, on less than $2 a day.

The government’s overall Covid response reached wider parts of the population, as well as businesses in need. With the help of the financial sector, it is expected to equal about 10% of GDP this year.

About 67 million low-income Brazilians have been receiving monthly payments of 600 reais ($108), with single mothers receiving double that amount. The funds helped support the economy as well as living conditions. The rise in food prices is indicative, with inflation for food products at about 15% year on year, notes Ms Brasil Coutinho. Partially, this is explained by growing external demand for agricultural products, driven by China’s early recovery. But, she says, the rise was also due to larger internal demand. “It boosted sales of construction materials too, as people [could make necessary repairs] to their homes,” she adds. “People are healthier and [live in better conditions] now.” 

Crippling debt

Although this is an important achievement, many note that the government’s actions came at a price and this has reopened the painful debate over Brazil’s fiscal prudence. To be sustainable, government support must be carefully funded.

The country’s deficit is set to reach about 13% of GDP this year, says Ms Brasil Coutinho. “And, most importantly, the debt-to-GDP ratio will probably grow by around 18 percentage points to 94%,” she says. “This is one of the highest government debt-to-GDP ratios among emerging markets.” Others expect the ratio to be even higher at 98%. 

Proposals to rationalise Brazil’s existing welfare programmes to incorporate the emergency aid into one scheme, with Renda Cidadā (citizen income in Portuguese) being a programme that might theoretically help. But in September markets jittered at the announcement over concerns about Brazil’s new-found fiscal rigour. Finance minister Paulo Guedes, who so far has inspired investors’ confidence, insists that public spending won’t spiral. “Brazil is getting back on track and is a serious country that respects fiscal limits,” he insisted at a September press conference.

But the emergency aid programme, specifically looking at its effects on Brazilians outside of the financial system, brought about faster changes for banks too. They, in turn, can help accelerate the creation of a more inclusive economy.

Building better banking

Many receiving emergency aid did not have a bank account, notes Ana Botín, executive chair of Santander, which owns Brazil’s fifth largest bank by assets. The bank, along with the country’s other top lenders (state-owned Banco do Brasil and Caixa Economic Federal, and private sector Itaú Unibanco and Bradesco), offered 60-day extensions on debt maturity for individuals and small businesses. The fact that these people are now included in the system, even without a bank account, allows for the collection of data that can help create a credit profile.

“[The aid programme] is not just great for the country,” says Ms Botín. “It is also interesting for us as the financial sector because it [can lead to the] bankarisation of a lot of people.” It is a boost for established banks, as well as for new providers.

Brazilians could access funds though Caixa Tem, the Caixa Economica Federal app, which created new opportunities for fintechs that, as in the case of Nubank and PicPay, began offering advances on expected payments so that new customers could purchase goods through their own channels.

I think that we have a big transformation coming to Brazil over the next two years

The pandemic intensified the need for faster, cheaper payments. As a result, Brazil's central bank brought forward the launch of an instant payment system, PIX, that it created to increase the digitisation of the financial system and bring services to wider parts of the population. Digital transfers and payments will be able to be made without the need of a bank account. This, along with Brazil’s open banking regulation, is set to drive costs down for customers, further helping financial inclusion. 

With open banking, financial institutions will be obliged to share customer’s data with other parties should the customer wish so. This would lead to increased competition to better serve individual needs and reduce costs for consumers. In Brazil, credit card transactions, for example, have typically been 20 times those of the EU. “With open banking, you [the customer] own your account and if you need something, you can make it public and get any other bank to ‘auction’ to provide you with a loan, for instance,” says Ms Bastos.

“This is going to be very effective in terms of spreads and maturities [for customers],” she adds. “I think that we have a big transformation coming to Brazil over the next two years.” The regulation is set to begin to roll out from November; banks have been getting ready, and continue to do so.

Anecdotally, Fitch’s head of South America and the Carribean, Claudio Gallina, has heard Brazilian banks planning to hire teams of IT specialists to deal with the new initiatives. Unfortunately, the new hires will not match the staff cuts that he believes are inevitable and which others have confirmed will come next year.

Digital products are important not only to better serve customers, says Santander’s Ms Botín, but also to keep costs down for banks. Extending financial services to more Brazilians is a long-term goal, she says. It is also a big opportunity for a country that, in spite of mishandlings during this crisis, has seen what is within reach and what it can achieve in an emergency. About a quarter of Brazilians are unbanked, notes Ms Botín. “This is the growth story.”

There is hope that momentum towards creating healthier cities, better living conditions for the vulnerable and better access to financial services will continue to build.

 

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Read more about:  Americas , Americas , Brazil
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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