Resurrecting the markets

In the 1960s and 1970s, Brazil made a great effort to create a capital market, understanding clearly that without mobilizing savings and stimulating medium- and long-term investments, it would be hard for the country to accelerate its economic development. The government created a capital markets laws, corporate law and the Comissão de Valores Mobiliários as the regulatory agency.

This was an important advance, given the need to give greater protection to minority investors who had been been hurt severely with the 1971 stock market crash. The CVM as an independent agency would take over functions that the central bank had previously exercised.

One of the CVM’s first measures was to propose that pension funds, which were emerging as important institutional investors, should channel their resources to investing in equities, thus creating a an institutional base for the market.

Although the capital markets showed considerable vitality throughout the 1980s and 1990s, they have suffered an enormous reverse in recent years. We imagined that with the stability achieved with the Real Plan in 1994 investors would direct a substantial part of their savings through the capital markets to long-term investments. Unfortunately it was not possible to note significant changes in investment habits.

Years of very high inflation created an investment culture that preferred government debt and short maturities. Although maturities were recently beginning to grow longer, the average maturity of government securities still did not reach two years. On the other hand, the state, as the country’s principal borrower, offered tempting rates of return on its paper and so made it extremely difficult for stocks to compete.

The emerging market crises had a heavy impact on the local stock market, which also suffered from the volatility in US equities and the collapse last year of the Nasdaq. So we should not be surprised at the fall in trading volumes in the São Paulo stock market and the transfer of liquidity to the main New York markets through the ADR mechanism.

In spite of the efforts of some government authorities, progress has occurred at a rate that is totally incompatible with the market’s need for growth. Reform of corporate law, for example, has been under discussion for four years and is still in Congress.

We are living through an unusual situation. The state has relinquished its role as investor (which it exercised with great efficiency during the 1960s) and privatized a large part of its state-owned enterprises. But it does not have sufficient resources to function as the great reactivator of the economy. Brazilian business leaders should occupy the space left open by the state but do not have access to a capital market which enables companies to raise medium- and long-term financing.

So we are totally dependent on inflows of foreign capital, subject to all the vicissitudes and moods of international investors.

Brazil cannot meet the challenge of growth without revitalizing its capital markets, using policies that stimulate savings and motivating investors to invest in equities.

Last, but not the least, Brazil needs lower interest rates that are compatible with fair competition for capital, and so allow savers to choose to invest in equities.

Roberto Teixeira da Costa set up the CVM, and was the agency’s first president. He later became chairman of Brasilpar, an investment company. He is now on the boards of Banco Itaú and several premier Brazilian companies.