Ilan Goldfajn

When Ilan Goldfajn says goodbye to the president’s chair of Brazil’s Central Bank in the coming days, he will leave his successor, Roberto Campos Neto, a far better inheritance than the one he received. Under his leadership, the bank was able to control inflation and implement the lowest-ever benchmark tax rates, helping the country recover from its worst recession on record. Furthermore, he managed to rescue the credibility of the Bacen (Central Bank), which economists are considering the most important legacy of all.

Looking back, in June 2016, it all seemed very unlikely. Brazil was in the eye of a storm of soaring inflation and rampant unemployment. The political crisis prompted by scandals and the drained economy reached its peak, with Brazilian president Dilma Rousseff targeted by an impeachment process and Michel Temer acting as her stand-in.

For the Central Bank, things weren’t much better. The agency was accused of being influenced by the government during Alexandre Tombini’s tenure, maintaining interest rates lower when they should have risen to control rampant inflation.

It’s no wonder that Mr. Goldfajn’s first moves were toward supporting Bacen’s independence and keeping it focused on its mission: protecting the currency’s purchasing power. Speaking to Congress, he already argued that “it was necessary to rebuild the macroeconomic tripod [primary surplus, inflation targeting, and a floating exchange rate] as soon as possible,” while supporting the institutionalized independence of the Bacen.


selic benchmark interest rate brazil


A man from the market

To face the arduous task of rebuilding financial agents’ trust in the Central Bank, Mr. Goldfajn first used his reputation and experience as a market professional. Though he served as Economic Policy Director for Bacen between 2000 and 2003 and has an extensive academic résumé, he was actually more famous for being the chief-economist at Itaú Unibanco, the largest private bank in the country.

Politically, his position at Itaú—which he gave up on to lead Bacen—sparked outcry. As a senior member of the bank, he was also a partner, which influential politicians believed might generate a conflict of interest. “A representative from the biggest bank in the country is being appointed to lead the agency which oversees the entire financial system”, said opposition senator Lindbergh Farias at that time.

On the other hand, as highlighted by Antonio Carlos Porto Gonçalves, an economy professor at Fundação Getúlio Vargas, “to understand the market, one has to be in the market.” Mr. Goldfajn’s past experience earned him the market’s vote of confidence, and he used this to implement changes to reassure trust in the institution.

“For daily business, his biggest accomplishment is how the communication evolved to anchor market expectations. We had so much noise and volatility under Mr. Tombini. Mr. Goldfajn introduced important improvements during his tenure. The monetary policy decision statement was more organized, as well as the minutes. If he had any problems, they were due to market conditions, not because he did a bad job,” notes Camila Abdelmalack, an economist at CM Capital Markets.

Mr. Gonçalves believes that the highlight of his term was reducing government interference. “His biggest legacy was recovering the bank’s credibility. The previous administration failed because it obeyed the Executive branch. Mr. Goldfajn was way better on that front.”

Nobody is perfect, though. In an interview in May 2018, Mr. Goldfajn inadvertently signaled that the Monetary Policy Committee (Copom) could reduce the Selic benchmark rate to 6.25 percent, which didn’t happen. Market agents, fearful of another period of misguidance, didn’t like it and the reaction was felt in foreign exchange rates.

The Bacen’s merit in this slip was its fast response. “I don’t think he meant it, but the incident did cast a shadow. However, Bacen fixed it very soon. I believe his management has a lot more rights than wrongs, and this is how it should be remembered,” says Cleber Alessie, foreign exchange trader at brokerage H.Commcor.


selic benchmark interest rate brazil


A bumpy road

Everything turned out well in the end, but that doesn’t mean there weren’t lots of storms along the way. Besides the terrible macroeconomic situation, financial markets have their own dynamics and are affected by events and expectations that do not necessarily hit the “real economy.”

Foreign exchange rates tend to feel it the hardest. During Mr. Goldfajn’s tenure, he faced the bombastic JBS plea deal which placed then-President Michel Temer in the middle of a corruption scandal—known in the Brazilian market as “Joesley Day,” after the main JBS informer Joesley Batista. There were also speculative international attacks which hit emergent markets’ currencies, the truckers’ strike and the most hard-fought presidential election in decades; the latter brought the BRL to its lowest level on record against the USD.

“He was very successful when Brazil was hit by speculative attacks. Every time there were signs of reduced liquidity, the Central Bank intervened with extra currency swaps and line auctions. Sometimes he coordinated actions with the National Treasury. He was very vigilant and proactive. The only moments when he did not interfere was because he did not see signs of speculative attacks,” says Mr. Alessie.

Part of his security to take action came from the nearly USD 380 billion in international currency reserves Brazil has saved over the years. Looking at 2018, when the greenback got stronger globally, the Brazilian Real indeed ended the year at a loss, but the situation wasn’t nearly as bad as in other emerging markets such as Turkey or Argentina — with the South American country being bailed out by the International Monetary Fund.  


brazil international reserves in us dollars


According to Mr. Alessie, Mr. Goldfajn’s resilience in not giving up on these resources during the most difficult times is also worthy of merit. “He did not sell currency reserves when many people supported that. The Central Bank was firm using currency swaps and line auctions. I believe that this proactivity and vigilance are a legacy to be carried on.”

Agenda BC+

Mr. Goldfajn acted to modernize the Brazilian financial system and improve the work of the Central Bank. His plan is called “Agenda BC+” and has four major pillars: more financial citizenship, modern legislation, financial system efficiency, and cheaper credit.  In a recent presentation, Mr. Goldfajn stated that 41 of the 68 proposed actions have been concluded, and the remaining initiatives are in progress. Among some of the achievements were: regulating credit fintechs, increasing competition in the credit card market, creating financial education platforms, transferability of salary accounts, regulating electronic invoices and simplifying bank reserve requirements.

But although these were achievements, they are far from solving Brazil’s financial system issues. According to Mr. Gonçalves, “he did try to make some micro reforms on the financial sector, but they were timid. You still have only four or five major banks, fintechs are just getting started. The judiciary branch is still very benevolent with indebted people, which increases bank spread. (…) And I felt that Mr. Goldfajn did not conduct a strong campaign in Congress to change it. He is too discreet for that.”

Indeed, measures that need congressional approval—the most important ones—are stalled. Notably, the bill guaranteeing the institutional autonomy of the Central Bank has not progressed, even though the cause was supported by the former government. The idea is to prevent political influence, giving it budget and decision-making freedom guaranteed by law and electing the bank’s president and directors in a different year than the presidential election.

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MoneyFeb 24, 2019

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BY Natália Tomé Scalzaretto

Natália Tomé Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.