Why the Brazilian cenbank’s monetary stance could hurt the infra sector

The Brazilian central bank left its benchmark interest rate unchanged at 10.50% once again, a move that could generate headwinds in the infrastructure sector.

The central bank ended its latest monetary easing cycle in May, which it had begun in August 2023 with the Selic at 13.75%, due to inflation and fiscal concerns. The same worries prompted the bank to signal on Wednesday that it is unlikely to lower the Selic anytime soon.

"The interest rate in Brazil has remained at a very high level, at double digits, for a prolonged period. This directly affects the government's efforts to generate more competition at auctions for infrastructure concessions," João Cortez, a partner at infrastructure consultancy Vallya, told BNamericas.

"In this context it is difficult to structure contracts and projects that have a much higher rate of return than the Selic rate, and high interest rates also penalize existing concession contracts as companies face difficult financing conditions," said Cortez.

In recent months, asset prices in Brazil have headed south due to the depreciation of the Brazilian real versus the US dollar and investor concerns over the country’s deteriorating fiscal situation, which could generate inflationary pressures in the medium term.

The fiscal issue is seen by several economists as the main reason why the central bank is likely to leave the Selic unchanged, at least until the end of the year. 

The administration of President Luiz Inácio Lula da Silva decided recently to reverse part of its strategy to stimulate the economy with public spending and announced budget cuts.

"Investor perception has in fact deteriorated greatly in relation to the government’s fiscal management. As long as the government is unable to reverse this perception there will be impacts on long-term investment decisions," Frederico Araujo Turolla, an infrastructure specialist and partner at consultancy Pezco, told BNamericas.

ECONOMIC FIGURES

The central bank’s latest monetary policy decision came as annual inflation accelerated to 4.45% in mid-July from 4.06% in mid-June, according to statistics bureau IBGE.

The bank’s target for this year is 3%, with a tolerance range of 1.50-4.50%.

The country's improving employment situation could also put pressure on prices as unemployment for the April-June period fell to 6.9% from 8% a year earlier.