While you are reading this article, Brazil is already going through a major event in its economic history. The country, which has recently curbed hyperinflation, sold most of its old state-owned companies to private enterprises, and got rid of the exacerbating protectionism, is about to take a new qualitative leap in economy. For the first time since the Plano Real, SELIC - the base interest rate - reached one digit. This is the lowest money cost ever in the history of a country where it was once necessary to pay over 400 000% a year to get bank loans or fund the acquisition of industrial equipment. The figures were an abstraction. In fact, credits simply did not exist for Brazilians. This is not equivalent - yet - to levels similar to those in developed economies, where current interest rates are even negative. Nonetheless, the current outlook is something completely new. We have never been so close to joining the group of the modern countries.

Condomínio do Tenda in Belo Horizonte: potential to void the housing deficit

Historical perspective reveals that all anomalies gathered over the decades are being dissipated one by one. High interest rates are the target now. "Today, Brazil is quite different from back in the days of high inflation and unruly national debt", says Guido Mantega, Minister of Finance. "With drop in the interest rates, we will get rid of one of the last economic dysfunctions and move towards normality."

This sentence summarizes the state of mind of almost 50 economists, entrepreneurs, investment bank analysts and government officials that spoke to EXAME during the last four weeks. The general feeling is that reducing interest rates Brazil may promote an unparalleled expansion in the amount of credits available to individuals and companies, unleashing the development of segments that exert an enormous influence on the economy. Changes will be particularly noticeable in four areas - stock market, real estate, infrastructure, and the retail market. Some figures provide an idea of the possibilities that are being opened to Brazil. In the real estate market, the segment that probably has the best prospects, with more than 30 million houses which could be built over the next 20 years - an annual pace five times greater than 2008. "We go to bed and wake up thinking about how to take advantage of drop in the interest rates", says Luis Largman, financial director for the construction company Cyrela. In the infrastructure field, resources for highways, railroads, hydroelectric plants and harbors should reach 90 billion reais by 2012, after having dropped to almost zero during the 90s. Over the next four years, at least other 60 billion dollars should be invested in the stock market - an amount that will be mainly directed at the funds of companies, enabling them to invest. Within three years, with lower interest rates, the available amount of credits should increase in overall economy, providing a boost of almost 1 trillion reais in the offer of funds. Further credit lines should lead to more consumption, which might change the business pattern of retail stores, positively affecting the economy. The consultancy LCA estimates that a 2 point percentage drop in actual interest rates means an additional incentive of up to 1.5 percentage points for the gross domestic product. "With actual interest rates reduced to 5%, as expected, the growing potential of the Brazilian economy raises from 4% to 5.5% a year", says Bráulio Borges, chief economist of LCA.

Appliances plant in Sao Paulo countryside: incentive to investment

During the years of economic instability, Brazilians got used to consecutive economic plans - and the idea that a mere act from the Administration on call would be capable of saving the country. Little by little, the perception that development is built on a daily basis is ripening. Instead of a revolution, there is a slow - and even morose - evolution, in which each government piles up their contribution for a more modern country. Interest rates might be seen as a kind of evolution thermometer. From the beginning of the Plano Real up to the end of 2008, Brazilian economy experienced a 13% actual average interest rate, and was probably a worldwide champion in this matter. That was a period not only of several foreign crises - Mexican, Asian, Russian, or Argentinean - but a period of elimination of an entire economic structure in an unstable country. State-owned banks were closed. Public debt started being addressed. Contracts with monetary correction clauses were rewritten. Tthis cleansing started to produce results approximately two and a half years ago, when the interest rate curve started to slant down towards the current levels.

What is ahead of us? For more optimistic people, a transformation that is comparable to the one Brazil experienced with monetary stability. The new phase of economic incentives, with civilized, steady interest rates, will enhance investments in production expansion. There is also a positive impact in the cost of the trillion-dollar public debt. The consultancy RC, owned by economist Paulo Rabello de Castro, estimates that the government should save 28 billion reais in interest payments. This would make room for an even deeper drop of the interest rate. Brazil would enter a phase in which good news reinforce optimism and result in more good news in the future. "Theoretically, we are able to enter a virtuous cycle", says Ilan Goldfajn, former Central Bank director and chief economist of Itaú BBA, the Itaú Unibanco investment bank.

AS ANYTHING ELSE IN LIFE, this good moment should be enjoyed - or not. "We still need to untangle some issues, otherwise inflation could come back", says Goldfajn. One of the most important issues is related to savings accounts, which have an average 8% interest. As savings accounts are not subject to administrative fees or income taxes, they are already much more attractive than some investment funds. The government has announced there will be changes- still not determined - in savings account rules, in an attempt to prevent fund resources - with increasingly lower earnings - to migrate to savings accounts. Furthermore, the government needs to improve spending and reduce taxes. "The current interest rates are the result of long-term efforts to control inflation and public debt" says Armínio Fraga, former Chairman of the Brazilian Central Bank and partner of Gávea Investimentos. "There is no assurance that they will always remain low. Lax controls might jeopardize everything." That is the reason why a reduction to really civilized standards of interest rates - say, 3% in real terms - still depends on a series of changes, such as the tax reform and the social security reform, shrinking the size of the State and eliminating legal and regulatory uncertainties. While it does not take place, Brazilians should at least take advantage of the results provided by the SELIC reduction. Caixa Econômica Federal (the Brazilian Federal Savings Bank) and Banco do Brasil have reduced taxes, increased credit limits and extended the real estate fund term. Private banks followed the trend. In the case of car purchase loans, banks are offering 80-month fund terms, back to pre-crisis standards. Pension funds are readdressing their goals in view of new conditions in which they can no longer have high earnings and riskless government securities. "With the end of substantial interest gains, companies, banks and the government will have to seek more productivity", says Maílson da Nóbrega, former Brazilian Minister of Finance. "We will have to balance the drop in the interest rate with an increase in operations output, and that demands a new mentality", says Aldemir Bendini, Chairman of Banco do Brasil.

(1) SELIC annual average (2) West route (3) It does not include investments in petroleum and gas
(4) Estimate considers that the actual interest rate remains at 5% per year Sources: CCR and BNDES

This is the anticipation of executives from the real estate business, probably the most affected by the drop in the interest rate, as it is a segment that fully relies on funding. It is also the economic segment for which there is a growing demand due to the shortage of credit. Even with the economic growth over the last two years, housing credits reached only 3% of the GDP last year- almost nothing in comparison to the 11% index of the GDP of the Netherlands or even the 13% index of the Chilean GDP. Economists from Fundaçao Getulio Vargas estimate that with base interest rates gradually dropping to 7.5% in nominal terms by 2017, and considering a GDP increase at 4% a year, the country might have 37 million new houses by 2030. This would void the housing deficit estimated at almost 8 million units, and follow the population growth. According to FGV studies, the bulk of production is required to supply classes C, D, and E: 56% of new housing projects are directed at families with monthly incomes ranging from 2,000 to 4,000 and 37% are directed at families with incomes up to 2,000 reais.

Based on this type of assumption and considering the opportunity granted by the government with its new plan, Minha Casa, Minha Vida (My House, My Life), construction companies have established strategies for the low-income population. Last year, Gafisa acquired Tenda, a housing development building company. Recently, Cyrela launched a branch called Living, to handle this issue. At Rossi, the number of new apartments up to 130 000 reais should represent half of total properties this year. In 2008, the ratio was 29%, and two years ago it was just 13%. "The effects of the drop of the interest rates are already being felt. We are watching very closely to see if they will be gradual or may be expedited" says Cássio Audi, Rossi's finance director. The lower SELIC has another positive outcome, which is an increase in the demand for commercial buildings. As annual earnings from the rental of commercial buildings range from 9% to 15%, they are considered to be a good investment, fueling the plans of construction companies. "There has been a great number of companies interested in building commercial towers, close to malls", says Carlos Medeiros, chief executive of BRMalls, the largest construction company of this segment in the country.

Rodoanel: the returns on infrastructure projects are more appealing than monetary investment

IN OTHER SECTORS, where high interest rates have always hindered investments, the effects of the SELIC drop are very meaningful. The most obvious is the stock market. "It is not necessary to resort to a futurologist to see the advantages. Just take a look at what happened between 2006 and 2008 when SELIC dropped from 19.75% to 11.25% a year", says Pedro Martins, Bank of America-Merrill Lynch strategist for Latin America. At that time, Bovespa´s business volume trebled and companies actually started accessing the debt market in Brazil. Over the last few weeks, there have been manifold estimates - "a Brave New World", according a paper sent to Itaú Corretora's clients in early June. Most banks forecast that, by the end of 2009, the base interest rate will be around 9% - some also estimate that it will reach 8.75% by the end of next year. In this context, investment funds and pension funds should more than double investments in the stock market, bringing in 160 billion dollars until 2013. This amount does not take into account investments from foreign companies or what 500.000 new individual investors might invest. The number of individual investors will double in the stock market. "We are getting ready to provide for this wave of investors", says Álvaro Bandeira, chief economist at Ágora, stockbrokers with over 90 000 individual investors.

All this appetite should boost the stock market, whether regarding debt (debentures) or secured bonds (securities). "Instead of going abroad to obtain cheaper money and longer-term loans, the companies started to get loans in Brazil", says economist Carlos Antonio Rocca, executive of Centro de Estudos de Mercado de Capitais. This was already happening in 2008, when Brazilian companies launched almost 70 billion reais in securities in the country - and just 10 billion reais abroad. The telephony operator Oi was one of the companies that opted for the domestic offer. In April, the company made its largest debenture issuance in the Brazil: it obtained 2.6 billion reais by selling securities coupled to the interest rate variation to pay for the acquisition of Brasil Telecom and invest in the expansion of services. Currently, these securities are yielding 12% a year. "Considering SELIC's reduction forecast, earnings should be reduced, coming close to 9.5% a year, which is what we pay in the foreign market. But, in Brazil, we are paying in reais and not in dollars", says Tarso Rebello, treasury director of Oi. According to him, two years ago, the company would have to offer a 15% return to obtain results like these.

The new economic dynamics might help revive investments in infrastructure. During the 1990s and the early 2000s, investments were kept very low in the segment. Only over the last six years they went up again, albeit timidly. That is because investors are always comparing different capital investment returns. If there is a safe investment, such as Government issued bonds, many projects are simply forgotten in a drawer. For instance, this is what took place in infrastructure investment funds, which were created in 2006. According to estimates by Abdid, an association of companies of the same segment,  the six largest funds of this kind have already 3.4 billion reais, but only half of it was effectively invested in projects. With an average return ranging from 7% to 10% per year, projects such as highways, railroads and harbors did not comply with the earnings expected by the investors, ranging from 12% to 14% per year. The high returns requirements aimed at offsetting regulatory risks, in addition to exceeding the SELIC.

Currently, the same profitability anticipation becomes competitive. Logistics, power and urban works are now singled out as those which might grant investors better earnings than the SELIC. According to professor of Logistics Paulo Resende, from Fundaçao Dom Cabral, highway concessionaires will be the first ones to succeed. This is the case of CCR, one of the earliest ones to join the market. In 1995, the company won the concession of Nova Dutra, a highway connecting Rio de Janeiro to Sao Paulo. Considering the conditions of the concession, the highway did not grant returns above interest rate, which was at 55% per year at the time. It took CCR ten years to make the investment profitable. The prospects for new concessions are much more appealing. Last year, the company won the bid to operate the Rodoanel's west route in Sao Paulo and estimates annual returns at 11.25%. "When I go for a concession, I bet on the country's stability. This is the reason why the reduction of interest rates and inflation is like heaven on earth for us", says Renato Valle, CCR's CEO.

Retail businesses are still far from deeply experiencing the impact of the drop in the interest rate. Generally speaking, they are only waiting for sales to increase. However, the change that could fuel consumption - the reduction of end consumer sales taxes - is still difficult to envisage. "Incentives will come little by little, inasmuch as the consumer realizes the meaning of lower interest rates and push for them", says Fábio Pina, chief-economist for Federaçao do Comércio de Sao Paulo. "The drop in the Interest rate for end-consumers is an internal struggle that will take time, maybe over a decade." Calculations made by Fecomércio indicate that individuals and companies paid 130 billion last year just on spread. If spread is reduced by 25%, 30 billion will be available for consumers.

For the time being, large retail companies are assessing how to maintain profits in a low-interest scenario. One of the solutions is related to moving inventories more quickly. Another one is related to a more accurate financial organization. There is no consensus as to the best way of doing this. On the one hand, retailers could launch their own bank. Lojas Renner announced in November their plans to open their own bank. Results obtained by Carrefour indicate that this strategy could make sense. Profits from the Carrefour bank - created to centralize company's financial services - rose from 66 million reais in 2007 to 157 million last year. In the same period, Carrefour started offering Visa credit cards and five different types of insurance. On the other hand, many Brazilian retailers have joint interests with banks. This is the case of Casas Bahia, linked to Bradesco, and Magazine Luiza, linked to Itaú Unibanco. The last company to apply this solution was C&A, which has recently sold Ibi bank to Bradesco. According to José Dutra Vieira Sobrinho, professor at the Business Management and Economy College of the University of Sao Paulo, the business model will not make much difference for the consumer. He believes that the competition increase and the cultural changes in Brazilian purchasing habits are more important for consumers, who are mostly resigned to paying any installment they can accommodate. "In general, consumers accept retail interest rates of up to 60% per year, and the companies are not pressed to reduce rates", says Vieira Sobrinho. "Car loans have smaller interest rates because the segment is competitive and its consumers are demanding."

It is clear that, in order to become stable at levels deemed regular - with interest rates ranging from 2% to 4% per year, such as in Mexico and Chile - Brazil will have to get rid of the trash left behind by high inflation period, and carry out measures to reduce spreads. "I think it is difficult for us to have interest rates similar to Mexico, when our taxes are equivalent to 36% of the GDP, while in Mexico they represent 25% of the GDP", says economist Samuel Pessoa, from Fundaçao Getulio Vargas. "However, if we outlast the crisis with an average interest 1.5 percent point lower than previous one, we may help boost investments." Therefore, there is a quality change in the situation to be faced. "We are facing good issues now", says Gustavo Franco, former Chairman of the Brazilian Central Bank and partner of Rio Bravo Investimentos. "However, these problems make the country face the need for a more objective agenda in terms of the course of action. Clearly, it does not exist today." The task is not simple. This is probably something for a whole generation. After all, it could raise Brazil to the group of developed countries. This opportunity is something we cannot afford to lose.