What to expect from Roberto Campos Neto as head of Brazil’s Central Bank

. Mar 13, 2019
Roberto Campos Neto

Today, economist Roberto Campos Neto will take over the reins of Brazil’s Central Bank. He will have big shoes to fill, replacing Ilan Goldfajn, a darling of the markets who is credited with taming inflation amid Brazil’s worst recession on record. Mr. Goldfajn oversaw the lowering of the Selic benchmark interest rate to its lowest point in history—and brought credibility back to the bank.

Mr. Campos Neto knows his predecessor set the bar high. He himself has deemed the Central Bank’s moves since 2016—when Mr. Goldfajn took over—as “excellent.” But he also pointed out that, even though much has been done, Brazil still needs to modernize its financial system and the state structure. One key measure would be passing a law to make the monetary authority formally independent from government interference—which hasn’t always been the case.

</span></p> <p><span style="font-weight: 400;">“Bureaucratic costs created by excessive state intervention were diluted in comparison to the high monetary policy rates. Now, with the Selic benchmark rates at its lowest level ever, we have the opportunity to see these imperfections and propose alternatives that improve the efficiency of our markets,” </span><a href=""><span style="font-weight: 400;">Mr. Campos Neto stated</span></a><span style="font-weight: 400;"> during his Senate confirmation hearing.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-14709" src="" alt="selic interest rate brazil" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>Libertarianism begins at home</h2> <p><span style="font-weight: 400;">Mr. Campos Neto&#8217;s reign will focus on two pillars: continuity and a heavy dose of liberalism. The latter he learned from his grandfather, Roberto Campos—one of the most notorious defenders of <a href="">libertarian economics</a> in Brazil. The late Mr. Campos used to say: &#8220;The good the state can do is limited. The evil it can do is infinite.&#8221; In response, critics called him &#8220;Bob Fields,&#8221; an English translation of his name, implying his ideas were </span><a href=""><span style="font-weight: 400;">foreign</span></a><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">The new Central Bank president committed to the ultra-libertarian economic doctrine proposed by Economy Minister Paulo Guedes from the early days of the 2018 presidential campaign. According to some reports, Mr. Campos Neto helped shape proposals regarding capital markets, competition, and credit. During meetings of the transition cabinet, he was part of the circle of economic advisors on President Jair Bolsonaro&#8217;s team.</span></p> <p><span style="font-weight: 400;">&#8220;Aligned with&#8221; doesn’t mean &#8220;subject to,&#8221; however. One of his core beliefs is that the Central Bank must be totally independent of the government, shielding the country&#8217;s monetary policy from the short-term thinking typical of sitting politicians. Such a proposal would have to pass in Congress—which already has its hands full with the </span><a href=""><span style="font-weight: 400;">pension reform bill</span></a><span style="font-weight: 400;">. But even if Mr. Campos Neto defended independence from politicians, he was warmly welcomed by Congress, with the Senate approving his name in a 55-6 floor </span><a href=""><span style="font-weight: 400;">vote</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">For Patricia Pereira, an economist at Mongeral Aegon Investimentos, this denotes a change in the Brazilian political scenario that may even favor an independent Central Bank. “Since 2016 we have a much better economic environment, I believe that reflects on an overwhelming [support for him]. Also, Congress was renewed and Mr. Bolsonaro was elected under a liberal platform. I see this government in a better position to approve its intended agenda, but not yet. The pension reform is definitely the first priority,” says Ms. Pereira.  </span></p> <h2>Challenges ahead of Mr. Campos Neto</h2> <p><span style="font-weight: 400;">While the monetary policy is relatively under control, Brazil’s Central Bank has other problems to deal with—namely </span><a href=""><span style="font-weight: 400;">competition</span></a><span style="font-weight: 400;">, or lack thereof. Brazil has one of the world’s most concentrated financial systems, which leads to </span><a href=""><span style="font-weight: 400;">fewer investment options</span></a><span style="font-weight: 400;"> for clients and higher tariffs. </span></p> <p><span style="font-weight: 400;">The Central Bank has been trying to tackle this and other issues, such as lack of financial knowledge, through its “Agenda BC +” program. Mr. Campos Neto has already pledged to expand the program’s actions, keeping up the work to “modernize the national financial system, guaranteeing it remains liquid, capitalized and well-provisioned.” To senators, he mentioned the importance of democratizing access to capital markets, improving financial system transparency, and praising microcredit and credit cooperatives as a way to increase financial awareness.  </span></p> <p><span style="font-weight: 400;">So far, it looks like he has chosen technological innovation—</span><a href=""><span style="font-weight: 400;">one of his academic interests</span></a><span style="font-weight: 400;">—as a working tool. “New technologies such as blockchain, artificial intelligence, instant payments, and internet banking are completely changing business models and financial services. I intend to work towards preparing the Central Bank for the future,” he said.</span></p> <div id="attachment_14712" style="width: 690px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-14712" loading="lazy" class="size-full wp-image-14712" src="" alt="campos neto ilan" width="680" height="453" srcset=" 680w, 300w, 610w" sizes="(max-width: 680px) 100vw, 680px" /><p id="caption-attachment-14712" class="wp-caption-text">Ilan Goldfajn (L) and Roberto Campos Neto (R)</p></div> <h2>You don&#8217;t change a winning team</h2> <p><span style="font-weight: 400;">Like Mr. Goldfajn, Mr. Campos Neto is a man from the market. Besides undergraduate and masters degrees in economics from the University of California, he has a long career in financial institutions, working as a trader and managing treasury operations. He most recently served as head of Global Treasury for the Americas at Santander.</span></p> <p><span style="font-weight: 400;">While his previous experience reassured investors of his knowledge and experience, some are worried that he might be too sensitive to the market&#8217;s volatility—in other words, people are afraid that he could cave to the pressure from banks in the case of stressful economic events.</span></p> <p><span style="font-weight: 400;">Right away, Mr. Campos Neto decided to shake off those fears, committing himself to maintain the values that shaped Mr. Goldfajn’s tenure: “The job [done by the previous administration] was only possible due to the reinforcement of institutional credibility that was shaken by the negative results reaped in 2015 and part of 2016. This reinforcement was based on transparency, serenity, caution, and perseverance in conducting the monetary policy—values that should be preserved and perfected as possible,” stated Mr. Campos Neto in the Senate. </span></p> <p><span style="font-weight: 400;">The continuity in policies is also provided by the current shape of the Central Bank. Back in 2016, Mr. Goldfajn’s tenure was part of a complete economic overhaul promoted by former president Michel Temer and his finance minister Henrique Meirelles. By that time, they also changed </span><a href=""><span style="font-weight: 400;">four directors at the Central Bank</span></a><span style="font-weight: 400;">, as well as the president, and revamped the team at the ministry. </span></p> <p><span style="font-weight: 400;">On the other hand, Mr. Campos Neto takes charge with only two new additions to the team: Bruno Fernandes, his new Monetary Policy director, and João Manoel Pinho de Mello, Financial System Organization director. </span></p> <p><span style="font-weight: 400;">For Ms. Pereira, the decision to keep things as they are is a correct one, and it is a sign of what to expect from Mr. Campos Neto and the new Central Bank. </span></p> <p><span style="font-weight: 400;">“It is difficult for the new president and directors to change such an efficient job. Why would he present a new discourse? They’re a winning team and they’ve been playing well. I think he was right to bet on continuity.  Besides that, Carlos Viana (Economic Policy director) stayed and he still is really important. Keeping one of the key persons at [the monetary policy committee], it is a strong sign of continuity.”</span></p> <p><span style="font-weight: 400;">One might ask if, under so much continuity, there would be space for something new—after all, the Brazilian economy still has many challenges to face. Even though it doesn’t seem to be Mr. Campos Neto first priority, there are lots of components that may generate challenging situations for monetary policies in the years ahead: the battle for a pension reform and a slowing global economy amid trade disputes, for instance. </span></p> <p><span style="font-weight: 400;">“Leaving a mark should not be Mr. Campos Neto’s goal. Mr. Goldfajn had a huge challenge ahead of him and I think he ended up leaving a mark due to the conditions he faced. The road may seem easier for Mr. Campos Neto, since we have anchored inflation expectations, but markets are dynamic. He has four years ahead of him, he will surely have the opportunity to build a legacy of his own,” says Ms. Pereira.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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