Problems with Brazil's Financial System

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Observations of Risk:
While systemic risk has been in a decline since the peak of the 2008 Financial Crisis, like all financial systems, the Brazilian Financial System is at risk from both internal and external factors. These factors coupled with developmental issues have created a higher risk environment for Brazil’s financial system in the most recent years. Standard & Poor’s recently awarded Brazil a credit risk of four, on their one to ten scale. A Standard & Poor’s Banking Industry Country Risk Assessment (BICRA) of four is comparative to countries such as Mexico, Italy, Taiwan, Peru, and South Africa. The four is an average between the awarded economic risk of five and industry risk of three. Standard & Poor indicated that their belief is that Brazil is ‘high risk’ in economic resilience, ‘low risk’ when it come to economic imbalances, and ‘high risk’ in regards to credit risk in the economy. According to a recently published Wall Street Journal article, Standard & Poor’s is in consensus with the International Monetary Fund in believing that enduring external shocks will challenge fiscal performance. While it is a positive sign that professional opinion indicates that Brazil is a low risk in regards to economic imbalances, it is of great concern that Brazil is high risk in terms of their economic reliance and in regards to their credit risk within the economy. While Brazil is an emerging market with a diversified and intricate economic structure and high domestic demand that is attracting global investors and satisfying many capitalistic ventures domestically, Brazil is still a “low-income” nation. They have political and monetary leaders in place that have been determined to further the growth of this emerging market for nearly twenty years, by lowering inflation, improving foreign investment, and maintaining growth; yet, they consistently underperform the gross domestic products (GDPs) of other similar emerging markets. This is in part because of a reluctance to invest domestically. This sentiment of a “need to invest” causes an inherent spending risk of its own, as this pressured spending may challenge fiscal performance. What has kept them safe from external events during their expansionary phase has been their balance as a net creditor externally and direct foreign investment. Credit risk within the economy is a major risk in Brazil. While private sector leverage has doubled over the last ten years, it is still too low at only about forty-seven percent (47%) of the nation’s GDP. New legal framework has made loans more readily available for the average household and has brought balance to the sheets in the private sector; however, the short maturities have created a burden on the average household. The average Brazilian family debt has reached a high forty-two point seven percent (42.7%) of disposable income. While banks portfolios maintain a healthy balance of corporate and retail loans, the short terms are a persistent problem. Lending and underwriting standards are observed to be quite conservative in Brazil. Unlike the market standards that caused the housing bubble of 2008 in the United States and the ensuing financial crises, all mortgage lending is prime in Brazil with lender and obligor assets backing the loan. With that said, due to cultural differences, mortgages account for only thirteen percent (13%) of all loans in Brazil. Mortgage availability and property investment has been restricted due to the government elimination of a minimum return on savings deposits of six percent (6%). This allowed the banks to move away from interest rate linked mortgage rates and mortgage rates therefore fell. If regular investment utilizing mortgages is to return, there must be a change in the long-term funding. The maximum loan-to-value percentage is seventy percent (70%) and the average loan does not exceed sixty percent (60%). Where Brazil does lack in credit standards is in regards to their...
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