The government’s lack of firm commitment to fiscal balance has a negative impact on the economy as a whole. The most pressing problem is inflation, the result of a lack of confidence across markets. The central bank (BC) would then be forced to raise interest rates, putting a brake on economic growth and job creation. If interest rates remain high for an extended period of time, the effects will be detrimental. Last week, the base interest rate, Selic, was again maintained at 15% per annum. Discounting inflation (approximately 5.2% per annum), real interest rates are close to 10%, a track record that has long guaranteed Brazil a spot on the world’s highest interest rate podium.
Continuing high interest rates causes distortions in financial markets. Bonds issued by governments (public debt) and companies (private debt) guarantee higher returns than any other investment, making them much more attractive to investors than investing capital in stocks. As a result of this bond-oriented movement, stock exchanges were emptied.
- economy: B.C. keeps Selic at 15%, says ‘fairly long’ period of stability is enough to hit inflation target
For the past four years, no new companies have listed on the B3 stock exchange or issued shares to raise funds. On the contrary, people are fleeing the stock market. Many companies take advantage of the opportunity to go private because their stock prices are low relative to their potential to generate dividends. They buy back their shares and leave the stock exchange. Nine people have done so so far this year. There have been 36 in the last four years. This is not necessarily a strategic decision. Some people buy back stocks solely for the economic opportunity.
It may seem paradoxical that the B3 index, Ibovespa, is continuously breaking records as it depletes. However, only outwardly. With fewer shares traded, companies are adopting generous dividend policies, increasing their attractiveness. And the movement of capital into bonds makes stock prices attractive. That’s why so many foreign investors are taking advantage of this moment to buy shares, and Ibo Vespa continues to rise.
- debt: Ministry of Finance predicts public debt will increase by 10.8 percentage points under Lula administration
B3 has a price-to-earnings ratio of 8.8, according to Aline Cardoso, head of economic research at Santander. This means it would take investors just under nine years to recoup the amount they invested in the stock through dividends. According to her, the PL for the past 10 years is 11. The number of companies going out of business is below historical averages. While receiving sooner may benefit investors, it is a sign of a declining market. A low PL is even worse for a company, forcing it to discount to obtain funding. In the strong US stock market, the PL is 22.
There is no denying that the imbalance in public finances that causes high interest rates is suffocating the stock market. This is not only an important source of funding for companies in any self-respecting economy, but above all also the fairest way to allocate resources to the most relevant projects for the future. In addition, listed companies are required by law to adhere to transparency and governance standards that contribute to improved business operations and have indirect impacts on the job market, the environment, and society as a whole. The deterioration in the quality of Brazilian capitalism is another consequence of the government’s failure to fulfill its fiscal responsibilities.
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