Markets grow bearish on Brazil, but Central Bank discards stability risks

Central Bank discards stability risks
Construction site in São Paulo. Photo: Alf Ribeiro/Shutterstock

Analysts surveyed by the Brazilian Central Bank have lowered their country GDP forecasts for this year and the next, to 5.01 and 1.5 percent, respectively. Meanwhile, they extended their streak of increasing inflation expectations for the 28th week in a row, projecting year-end consumer prices to rise 8.69 percent in 12 months (up from 8.59 percent).

Twelve-month inflation topped the 10-percent mark for the first time since 2016, well above the government’s 5.25-percent target. In September, the IPCA consumer price index rose 1.16 percent, the biggest increase for the month since the Brazilian Real was introduced as the national currency in 1994. 

In a six-month report released on Monday, the Central Bank believes that the stability of the country’s financial system is not at “relevant risk.”

“The bank considers that there is no relevant risk for financial stability. In H1 2021, the national financial system maintained high provisions, expected credit losses reduced, the capitalization of the banking system improved, and liquidity remained comfortable,” says the Financial Stability Report.

The assessment points out that the country, in an economic recovery in the first six months of the year, allowed the return of banks’ profitability to the pre-pandemic level, and that the main reason for the positive result was the lower volume of expenses on provisions.

“Default under control and the materialization of lower-than-expected losses suggest that there will be no significant change in expenses with short-term provisions. The improvement in the capital base and the results of the stress tests continue to demonstrate the solidity and resilience of the banking system,” says the Central Bank.

The report also shows that in the first half of this year there was an improvement in the economic-financial situation of publicly traded companies, allowing large companies to return to the capital market.

Smaller companies, on the other hand, boosted bank credit, which, according to the Central Bank, is in line with economic fundamentals and occurs in practically all sectors. “The percentage of problematic assets in the credit portfolio, which represents materialized credit risk, decreased slightly in the first half of 2021, mainly due to portfolio growth and renegotiations,” the bank wrote.