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Fiscal fragility challenges long-term asset management, says Amaury Bier Added in 12/8/2020
The imbalance in Brazilian fiscal policy compromises the stability of the current low interest level and imposes additional challenges to asset management in the long term, assesses Amaury Bier, CEO of Gávea Investimentos and former Executive and Economic Policy Secretary of the Ministry of Finance. "In the long interest curve there is an expressive risk premium embedded, which has to do with the size and dynamics of the public debt," said the executive during a panel aimed at investors at the ABVCAP Experience.

According to Bier, the scenario of low nominal and real interest rates in Brazil should remain for "some time", but in the future it depends on the health of public accounts. "There is a political and technical challenge. Technically, we know what to do. But politically it is difficult to implement," he argues.
Despite the apparent willingness of Economics Minister Paulo Guedes to attack the problem, significant payroll and social security costs still weigh against the government, pressing gross debt to a level close to 100% - an unprecedented dimension to a developing country like Brazil.

As a symptom and consequence of this situation, the country faces a state of "growth anemia", classifies the former chief economist of the Ministry of Planning. "There is a difficulty in growing at higher rates, in face of challenges such as low investment rate and quality of education, and disconnection from global supply chains.

Portfolio readjustment

In response to the interest rate scenario in the minimum historical, fiscal fragility and poor growth, managers and investors are forced to readjust their portfolios. Despite the macroeconomic uncertainties, César Pereira, executive manager at BNDES' Assistance and Social Security Foundation (Fapes), highlights the high allocation of investments in public bonds and other assets. "It is a necessity for every investor to seek greater diversification and risk", he said about the current scenario. "We see many opportunities in Brazil in all segments", he reinforces, mentioning areas such as fund funds, infrastructure, forestry, among others.

For Bruno Maueler, investment manager at Fundação Copel, the movement to rebalance portfolios is "fundamental and natural" and "must deepen in the coming years". Among its effects, he cites the revision of return expectations and the importance of increasing efficiency. "It is necessary to diversify, to collect alternative risk premiums, to invest in illiquid assets, and to have more flexibility in the use of tools such as derivatives (...) The regulation has to move towards greater flexibility", he adds.

Opportunities and challenges

Among the promising alternative opportunities in the region, Renato Weiss, director of Lexington Partners in Latin America, cites pension funds from countries such as Chile, with advanced legislation and almost half of the investment portfolio of international origin. "The managers are of the highest quality”, he says. In Brazil, he considers, despite the "anemic" growth, there are strategic assets in the private equity segment, with experienced houses and companies in search of capital.

Among the risks are the economic restrictions imposed by the covid-19 pandemic, especially on public managers, reinforces João Carlos Figueiredo, director-president of Iprejun (Social Security Institute of the City of Jundiaí). "We operate in a market very averse to investment risk at this time. (...) The current crisis brings us a greater difficulty. In some places there are no resources to make contributions".

The panel was organized by ABVCAP's executive committee of investors, coordinated by Patrícia Freitas. Created in 2013, the group has 40 national and international investors, including foundations, family offices, agencies, development banks and funds of funds.


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