Roberto Campos Neto, CFA, became governor of the Central Bank of Brazil (BCB) in February 2019. Understandably, his tenure has been defined by the coronavirus pandemic and the bank’s response to the ensuing economic crisis. COVID-19 hit Brazil hard, and Campos Neto sought to leverage every tool the central bank had at its disposal to keep the economy from collapsing. In times like these, he reasoned, “It’s better to err doing too much than doing too little.”
I had the pleasure of interviewing Campos Neto as part of CFA Society New York’s Global Policymakers Series (GPS). Our wide-ranging discussion explored, among other topics, the BCB’s efforts to stabilize the Brazilian economy, the prospects for an inclusive recovery both in Brazil and globally, the growing prominence of environmental, social, and governance (ESG) factors, and the essential role achieving the CFA charter played in Campos Neto’s career.
What follows is an extended excerpt of our conversation. It has been edited and condensed for length and clarity. The full discussion is available below in video format.
Margaret “Marg” Franklin, CFA: Prior to COVID-19, the next global recession had been on people’s mind for some time. And yet, none of us were certain what would trigger it. How much has it surprised you that this recession was caused by a global pandemic and not for some other reason? And what were the factors that were top of mind for you?
Roberto Campos Neto, CFA: First, it was a big surprise. I don’t think anybody saw it. They would have had to have a very good crystal ball.
Before anything, I think it shows our vision of the world — just how fragile we are. And it makes us think differently. And you can see that in the common factors that are leading the recovery. Society wants the recovery to be sustainable and to be inclusive.
Prior to COVID-19, we were talking about this notion that the world was not growing as expected, especially the more developed economies. There are many theories floating around as to what was causing such slow growth, such low inflation. There was a lot of work being done on what we call secular stagnation and the aging of the population, the [role of] new technologies, etc.
One of the things that we were thinking a lot about before COVID was the piling up of debt, which was actually the result of the situation we described. We have this scenario of low rates for longer. So people are taking risks in a different way. And not only are people taking risks, but countries are taking risks. If you look at the size of the balance sheets of the banks, they were growing almost continuously.
One other thing that also was on our minds as a potential trigger was that most of the growth that we saw, especially in emerging markets, in the years prior to COVID, was [driven by] this movement of countries towards being part of a global value chain that induces emerging market countries to specialize, to be more efficient in some frontiers. We were seeing right before COVID that that was being questioned a little bit. Obviously, that has accelerated.
As you think about those conditions and where we are now, do you think we’ve passed the lowest point of this crisis? Or do those conditions create the context for things to take a turn for the worse?
Well, I think we’ve passed the worst point. Of course, that depends on how the pandemic develops. What we’re seeing is the places that had more of a bell curve format of contamination — in which it went very high very fast and then went down very fast — are now beginning to have a second wave, because you don’t have a cure and you don’t have herd immunity.
But one of the interesting effects of the second wave is that it’s affecting younger people much more than older people. And so the result is an increasing number of cases and a very low number of deaths. It has also to do with the behavior of people, especially young people, At some point, they cannot stand to be home anymore and they want to keep on with their lives. And you can see that in Brazil.
When I look at Brazil, our worst month was between the second week of April and the first of May. That was the lowest point. Mobility was very low at that time. We were at the height of people being scared and not willing to do anything. So consumption went down dramatically. Consumption overall fell by 12.5%.
We are now starting to have a recovery. The worst, I think, is passed. We started to see how people reorganized their consumption patterns. People are staying more at home. Consumption is distorted and directed towards different things.
I expect the recovery in Brazil to be stronger than the average emerging market. If you look at industry, services, and consumption, I don’t think there’s any other emerging market that is doing as well as Brazil is.
The risk of getting to a worse situation? I would say probably a second wave with characteristics that are different. Or maybe people who were contaminated have some symptoms that develop later that we don’t know.
But also there is a risk in the exit. Governments have done a lot going into this. And that’s very, very easy when you want to spend more money. It’s not that easy when you want to exit. So there is risk in the exit strategy, not only from the central banks, but also from the fiscal policies that were adopted.
How can the capital markets help support the recovery of the economy in a post-COVID-19 world?
The capital markets are crucial. Capital markets are the most efficient way to allocate resources. They are a way of identifying which sectors should merge, which sectors should go in a different way. And the fact that you have open and free markets with the capacity to extract information from prices, I think that will serve a very important role in the reallocation of resources.
Maybe you can walk us through the BCB’s response? How have you managed the central bank’s balance sheet in response to the crisis?
When I look at what countries have done generally in addressing COVID, you can divide [their measures] into some familiar groups. The first one is monetary policy. And on that front, we lowered rates to 2% which is the lowest ever in Brazil. A lot of people never believed we would get there, including myself.
The second is to make sure you have liquidity and capital for the financial system to go through this crisis with a solid balance sheet. The one thing you don’t want to have in a crisis like this is damage in the financial intermediation function. Because then you are not able to allocate resources and that actually inflates the problem.
So monetary policy first. Second, liquidity plus capital. Then you have the direct transfers, a fiscal program mostly done outside the central banks, but that some countries also do through the central banks. You have taxes in which you either exempt taxes or you delay tax payment. And finally you have credit programs. So you have five things: monetary policy, liquidity and capital, direct transfer taxes, and credit lines.
What the central bank did is concentrate on liquidity plus capital. We already had a lower rate. We were able to lower it a bit more. But we wanted to concentrate on credit growth and making sure that the channel of credit was working properly. So we were the first central bank that released reserve requirements. That was in the beginning of March. We were actually criticized at the time because some people thought that COVID would never get to Brazil.
We started to see big companies withdrawing standby lines from banks, so the banks’ liquidity was drying up very fast. We immediately saw that we needed to act. Regardless of what happens, it’s better to err doing too much than doing too little.
Altogether liquidity was 70% of GDP. So we injected 70% of GDP liquidity into the balance sheets of the banks. The release of capital was another 70%. So I think Brazil’s was the biggest program out there. We also had the biggest credit growth in emerging markets, around 26% for companies.
When you look today, the difference between the countries that are recovering more and those that are recovering less, one thing that explains that is credit growth. And you can look in Europe and compare, for example, Germany with Italy, and you can do that in Asia too. And you’ll probably conclude that credit growth is very important in a moment like that. People need to have confidence and people need to have access to credit to go through this period. Because it’s basically an induced coma. Everything shuts down for health reasons.
When we combine all the “medicine” that the central bank administered, there were more than 14, divided into three groups. The first part of these measures was making sure that we have liquidity and capital in the system. The second was that the liquidity and capital were directed to where they needed to go. So we had programs that could only go to small and medium companies. We had programs that went to states.
Third, we had measures to stabilize financial markets. Because we understood that if you had disruption in financial markets, it would contaminate off-balance sheet, it would contaminate on-balance sheet, and it would contaminate credit. So we had measures, for example, to stabilize the venture markets.
Then at some point during the crisis, we were afraid that that wouldn’t be enough. So we went to Congress and we asked about the possibility of doing more, to buy credit directly, either public or private credit. We were granted that. We haven’t used it, but it’s in the toolbox in case it’s needed. We don’t think it’s going to be. We’re seeing the recovery. But it was important for us to make sure that we had everything that we needed.
Can you describe some of the behaviors exhibited by Brazilian consumers through this crisis? Have they done what lots of people have done around the world and curb their spending?
When you look at the total mass of wages and consumption, the difference is what’s saved. We actually increased the total wages, but had a drop in consumption of 12.5%. So we know that we had an increase in savings.
When you look at increasing savings, you can divide that into parts. There are proportional savings: In other words, you’re saving because you don’t know what’s going to happen. You lost your job, you just want to make sure that you have more money, etc. Or it could be what we call circumstantial savings: You are not able to travel, you are not able to go to the movies, and things like that. So you didn’t spend because you couldn’t spend on things you could no longer do.
It’s important to understand what kind of savings it is and what we have is very difficult to estimate. I think it’s a bit of both. It is important in our case to look at the direct transfer program that we did. We did it in a very different way than most countries. Most countries displayed, more or less, 60-40, in terms of the percentage [given to] people and companies. We had 92% people and only 8% companies.
And more than that, it was tilted towards the very low end. So for example, if you look at people who made between zero and 500 reals in Brazil . . . they made much more [in real terms after the transfer program] than they did before the COVID crisis. So, because it was tilted to the lower parts, the economy now has a higher marginal propensity to consume. That becomes consumption very fast, the money goes back into the system very fast. That’s the good part. The bad part is that the headwinds also are stronger once this ends. So you need the savings that was accumulated to start working because we cannot give 600 reals to people every month. We don’t have the fiscal space for that.
We paid 65 million people. We digitalized 42 million people in this process. So there will be gains in competitiveness. We did it in a way that created more consumption but also we have more intense headwinds. And you need the savings that was accumulated to compensate for that.
I want to pick up on the theme of savings. We’ve also seen significant outflows from the emerging markets. How has Brazil fared?
I don’t think we have fared very well on that. We had more outflows than the average emerging market country. And when they did normalize starting in late July, we saw less money coming in.
When we analyze the outflow and the inflow, we reach a divide because it’s a very complex story. Part of the outflow was sitting in fixed income. And because we had lower rates, some foreign investors lost interest. They could do better taking more risk in their own country. Also when you increase risk, you differentiate more between the good risk and the bad risk. So you tend to go back to taking more safe bets when you have more uncertainty and the money tends to flow back into developed countries and into more liquid and known instruments. We saw that too.
Brazil saw an outflow of $30 billion. But when you look at the appetite for risk, you have a group of countries in which the appetite for risk is almost the same as developed markets. They have come back almost entirely. And you have another group of emerging market countries where that has not happened. And the single thing that differentiates these two groups the most is the fiscal performance. When you look at the group of countries that are doing better in terms of inflows, they had a better fiscal situation to start and they’re ending up in a much better fiscal situation. So because fiscal represents the level of debt that represents risk and people differentiate more risk in times of crisis, the money is flowing to those that have a better fiscal situation.
That’s why we here in Brazil are screaming out so much about fiscal sustainability and the importance of giving a good fiscal message to investors. Investors are demanding that the recovery process be more sustainable and more inclusive. So you have this ESG phenomenon that’s happening. You have all of the green initiatives. Money wants to flow to places where the policies [match] what the investors wish the recovery to be.
It’s interesting you bring that up about ESG. Earlier in the year, coming out of Davos, the whole world was focused on the “E,” specifically carbon. When we hit COVID, there was a lot of questions around whether ESG would continue to be really important. You’ve hit on that, that the recovery should be more inclusive and sustainable. What can Brazil do on the fiscal front to support these kinds of programs?
This crisis is accelerating movements that were already on course. When you look at the recovery in many countries, there are common factors: You’re going to see probably industry growing very fast. It’s already happening. It’s a v-shape in almost every country. Consumption is also recovering in a v-shape in almost every country. Services, not so much.
But what’s not recovering is employment. Why? Because you have a recovery that is induced by technology. That displaces part of labor temporarily, obviously. But because this is the lower part of labor, it doesn’t impact consumption quite as much. So you have growth through consumption, through industry, through innovation, but you have more unemployment. And the result of more unemployment is more government programs and the result of that is more government debt.
This cycle [has] been happening for quite some time now. The only thing the crisis did is it accelerated that movement a lot. All the governments, all the central banks that I talk to, they were facing the same problem. Their countries were asking, What do we need to do for the people who are displaced from the labor force? For those who have time, technology eventually will find jobs for them again.
So everybody’s talking negative tax programs, or basic income, or supporting families, or supporting families through education — things like that. I am a liberal economist, so I tend to think that the best policy is jobs. I think just giving money to people, you need to, especially in times like these. But you need to generate growth and generate jobs. That’s what will make this sustainable. So it’s very important to focus on the program to bring these people back into the labor force. Today in Brazil, we have 25 million people basically who have no source of income other than the government.
So I think it’s understanding that and training people to understand that the best recovery is through growth. And the best way to grow is through private growth, not through public growth.
So you’ve talked about the “S” in ESG — social. On the E side, with regards to sustainability, we’ve seen Brazilian business leaders sign letters pushing to reduce deforestation in that country, as well as and combined with government backing the issuance of green bonds. What role do you believe finance can play in fighting climate change and how important for Brazil are stable policies to attract foreign investment?
I think the central bank in Brazil has actually led the way towards green finance. It’s not new. It’s something that has been happening for a while now. I’ve been pressuring the government to tell people that it’s important to be coherent with what this word “society” demands in terms of being sustainable.
What the central bank can do, we need to raise awareness. . . . We created a bureau for green finance. We are integrating green finance into the way we supervise and the way we regulate. We entered the [Network of Central Banks and Supervisors for Greening the Financial System] NGFS with the task of creating a network of information. Today, part of the problem is you don’t have all the information. There’s a lot of greenwashing going on and we don’t want that to happen.
One thing that is very important that we haven’t addressed yet that I think is the next step: I am a markets guy, so being a markets guy, when I started learning about all this green stuff, one thing that was never right is, How come I don’t have a way to price the externality? People who have a lot of money would be willing to pay a lot for others to produce things in a better way. The people who are producing things in the wrong way would be willing to accept that money to improve the process. But we don’t have a channel to link them.
The channel to link that is to create pricing. Pricing is a very good thing. The price is what tells you what the demand and the supply are and how you reach equilibrium. So being able to price carbon is very important. Something that I think we collectively have not yet achieved is a way to price carbon so that the money can flow and finance ways that people can produce the same with less use of carbon.
That’s something that we are talking about a lot in Brazil, How can we produce a market for private carbon? How can you price that.? It’s something that I talk to other central bankers about because we won’t be able to control this at the speed that we need if we’re not able to price this right.
We at CFA Institute totally concur with you. We just launched our “Climate Change Analysis in the Investment Process” report. We wholeheartedly support carbon pricing and also transparency and metrics that people can understand and, of course, incorporate into financial analysis. . . .
I’d like to end on one note, and it’s self-interested. As the CEO of CFA Institute, I couldn’t possibly let this one go. As a CFA charterholder, what would you say to others who are pursuing the designation? What does the CFA charter mean for you?
So the one thing that I love about the CFA exam is that you get your books and you study. You do it at your own pace, your own way. I was not very disciplined when I studied things that people wanted me to study if it wasn’t the way I wanted to study.
I was one of the first CFA charterholders in Brazil, by the way. That’s what I was told. And at that time, I suggested everybody in the bank that I worked at take the CFA exam in the very beginning. I think it’s a very good way to develop knowledge without having to go to classes and enroll in a program and have to move around.
I like those self-learning experiences. I think we are going more and more towards that, especially now with all the digitalization that we are seeing. So I think it’s a great thing. My brother also worked for CFA Institute. Everybody should go through the experience because you can do it in your own time and that’s very important, especially if you’re working.
We’re glad the Campos brothers are part of our family. I think Brazil is extraordinarily lucky to have you in this role at this particular time. Thank you for a fascinating conversation.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.