III Capital and financial markets / 85
III
CAPITAL AND FINANCIAL MARKETS
Financial and capital market performance mirrored the scenario of uncertainty that
prevailed in 2001 as a consequence of the successive shocks that pummeled the
Brazilian economy. Basic interest rates rose sharply from their lowest mark since
implementation of the Real Plan, the market value of companies listed on the stock
exchange diminished, the nation’s currency depreciated and concerns intensified at
rising expectations of declining economic activity. However, what is important is
that, despite internal and external adversities, the credibility of the inflation
targeting system was preserved as the soundness of the fundamentals of the
Brazilian economy was resoundingly confirmed.
Basic interest rates and market expectations
The trajectory of the basic interest rate in 2001 accumulated totals quite close to the
results of the previous year. The Selic rate closed at 17.3% per year, compared to
17.4% in 2000, despite sharply contrasting performances in the two years under
consideration. Contrary to what occurred in the previous year, 2001 was marked by
a sharp reversal in the downward tendency noted as of the second quarter. The real
Selic rate accumulated over 12 months, deflated by the IPCA, came to between 8
and 10% and closed the year at 9%, compared to 10.8% in 2000.
Table 3.1 - Interest rate
% p.y.
Rate
Dec 2000
Dec 2001
2000
2001
Diference
a
b
(b-a)
Selic
16.19
19.05
17.43
17.32
- 0.11
DI
16.13
19.05
17.32
17.29
- 0.03
TR
1.20
2.41
2.10
2.29
0.19
TBF
14.85
16.39
16.76
16.78
0.02
TJLP
9.75
10.00
10.75
9.50
- 1.25
Preservation of favorable macroeconomic conditions resulted in a downward
interest rate curve up to mid-March 2001. From that point forward, intense
86 / Boletim do Banco Central do Brasil - Annual Report 2001
Graph 3.1
Interest rates
20
% p.y.
15
10
5
0
Over/Selic
DI
TR
2000
TBF
TJLP
2001
Graph 3.2
Over/Selic rate
20
% p.y.
19
18
17
16
15
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
2000
Sep
Oct
Nov
Dec
Oct
Nov
Dec
2001
Graph 3.3
Over/Selic rate accumulated in 12 months
20
18
% p.y.
16
14
12
10
8
6
Jan
2001
Feb
Mar
Apr
Nominal
May
Jun
Jul
Aug
Sep
Real (IPCA)
volatility in the interest and exchange futures markets reversed this curve. In the
period from March to July 2001, the Selic rate target increased by 3.75 p.p. The
average daily volume negotiated in one day DI futures contracts increased to R$22
billion in March, clearly mirroring the intense uncertainty of the period. The rate
differential between the one day DI futures market and 360 day DI x pre swap
operations came to more than 500 base points.
III Capital and financial markets / 87
Graph 3.4
Swap DI x Pre
30
% p.y.
27
24
21
18
15
1.4.2001
3.16.2001
30 days
5.28.2001
8.6.2001
90 days
10.16.2001
180 days
12.28.2001
360 days
As of the month of September, the measures taken by Banco Central with the
objective of restricting financial system liquidity were viewed as an alternative to
a continued upward spiral in basic interest rates and made it possible to hold the
Selic rate to 19% per year. Once approved by the CMN, these measures resulted in
an increase from 0.33 to 0.50 in the factor used in calculating the PLE of the banks
that operate with net exchange exposure above the exemption percentage. Aside
from this, the exemption percentage was reduced from 20% to 5%. Banco Central
began using the percentage that exceeds the exemption limit as the basis for
calculating the required level of capitalization. In other words, if the institution has
a net exchange exposure limit of 10% of its PR, the factor of 0.50 will be applied
to the 10%. According to the previous rule, the calculation base involved only that
part in excess of the exemption limit. The total exchange exposure limit, nevertheless,
remained unchanged at 60% of PR. These measures generated their effect in
October, reversing the movement leveraged by the September 11 terrorist attacks.
Among the factors that contributed to this movement, one should underscore the
clear dissociation between the Brazil risk and the Argentine risk, the positive trade
balance results and reductions in the nation’s balance of payments borrowing
requirements.
Graph 3.5
Yield curve
27
% p.y.
24
21
18
15
30
60
90
120
150
180
Term in days
1st quarter
2nd quarter
3rd quarter
4th quarter
360
88 / Boletim do Banco Central do Brasil - Annual Report 2001
As a result, the spot interest rate curve shifted downward as the average 360 day rate
closed near 23% per year compared to 26% per year in the third quarter. The rate
differential between the one day DI futures market and 360 day DI x pre swap
operations dropped into the range of 200 base points. Once again, downward
movement in interest futures leveraged the average daily volume of one day DI
futures contracts to a level equivalent to that of the month of March.
Graph 3.6
Swap DI x pre 1 year versus DI future in t interest rates
Month average
30
% p.y.
27
24
21
18
15
Jan
2001
Feb
Mar
Apr
May
Jun
Jul
Swap DI x pre
Aug
Sep
Oct
Nov
Dec
DI one day
Graph 3.7
Traded volume of futures contracts
Daily average
24
21
R$ billion
18
15
12
9
6
3
0
Jan
2001
Feb
Mar
Apr
May
Jun
DI one day
Jul
Aug
Sep
Oct
Nov
Dec
Commercial dollar
Graph 3.8
Traded volume of Swap DI x pre and forward DI
Daily average
4
R$ billion
3
2
1
0
Jan
2001
Feb
Mar
Apr
May
Jun
Swap DI x pre
Jul
Aug
Sep
Forward DI
Oct
Nov
Dec
III Capital and financial markets / 89
Capital market
The positive Brazilian stock market scenario between the end of 2000 and early
2001 reflected the highly positive outlook for the Brazilian economy that prevailed
at that time. However, expectations were reversed as of February with announcement
of strongly negative United States economic indicators. In the first quarter of the
year, the Bovespa Index (Ibovespa) accumulated a drop of 5.4%. In the wake of the
interest rate hike in Brazil, the Ibovespa fluctuated in the range of 14,500 points
without any clearly defined trajectory.
The process of electricity rationing that began in June was an additional source of
uncertainty, particularly in light of the expected negative impact on business
profits. This factor, coupled with the September terrorist attacks in the United
States, forced the Ibovespa into a sharp decline to 10,034 points on September 14,
the lowest level since August 1999. The market value of the companies listed on the
São Paulo Stock Exchange (Bovespa) closed at US$142.8 billion in September,
reflecting a drop of 36.7% in the year provoked by a combination of declining stock
prices and exchange devaluation.
Graph 3.9
20 000
4 000
16 000
3 000
12 000
2 000
8 000
1 000
Jan
2001
Feb
Mar
Apr
May
Ibovespa
Jun
Jul
Aug
Sep
Dow Jones
Oct
Nov
Dec
Nasdaq
Graph 3.10
Market value open capital companies - Bovespa
250
US$ billion
200
150
100
50
0
Jan
2001
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Nasdaq points
Ibovespa/Dow Jones points
Ibovespa x Dow Jones x Nasdaq
90 / Boletim do Banco Central do Brasil - Annual Report 2001
The reduced dollar value of companies was seen as an investment opportunity.
With this, market expectations began improving and interest in Brazilian papers
expanded as demonstrated by growth in the average volume of trading in the final
two months of the year – approximately R$700 million. Despite the recovery that
marked the end of the year, the Ibovespa closed 2001 with negative growth of
11.5%, at a level of just 13,509 points.
Graph 3.11
Traded average volume in Bovespa
800
R$ million
600
400
200
0
Jan
2001
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
The average daily volume of trading at Bovespa came to less than R$500 million
in the third quarter of the year. In general, the levying of the CPMF on the volumes
traded on the exchange is a factor that should be highlighted, since it demonstrates
the need for a review of legislation in such a way as to bring these costs into line
with those of other markets, particularly in light of the rising trend toward
incorporation and association among international exchanges.
Recently, several measures were announced with the objective of stimulating stock
market investments. Integration of Brazilian stock exchanges as of May 2000
resulted in optimization of resources through unification of trading systems and
clearance, liquidation and custody mechanisms at the national level, making it
possible for exchanges to achieve additional scale and, consequently, reduce their
operational costs.
Improvement in protection mechanisms for minority stockholders was included in
the new corporate legislation in order to create additional incentives for small scale
investors to join the market. Thus, the new Corporate Law determines that the
maximum quantity of preferred shares issued will be 50% of capital. Law 6,404
permitted issue of up to 2/3 of capital in the form of preferred shares, thus making
it possible to obtain stock control of companies through ownership of just 16.67%
of capital. However, this new ratio will only be obligatory for new companies that
open their capital as of the entry into force of the new Corporate Law.
III Capital and financial markets / 91
Aside from this, the controlling stockholder must make a public offer of acquisition
of the totality of outstanding shares at a minimum price equivalent to the value of
net worth stated on the most recently approved balance sheet in order to cancel the
registration of an open stock corporation that possesses securities on the market or
that are traded through exchanges or over-the-counter, as well as to take measures
with the purposes of increasing the controlling stockholder’s share by an effective
or potential margin of 10% or to the point that such participation comes to an
overall level of 80% of the capital stock.
It also ensures those holding preferred shares representing at least 10% of the
capital stock of the right to elect one member of the Council of Administration, and
the right to reimbursement of the value of the shares when a decision is taken to
create or increase the number of preferred shares, alter preferences or advantages
and reduce the obligatory dividend, when such measures are approved in the
framework of decisions involving mergers, split-ups or acquisitions.
In the case of preferred shares, it sets a priority dividend of at least 3% of the equity
value of the share or a priority in capital reimbursement, with or without a premium.
In the latter case, it guaranties a minimum dividend 10% greater than that of
common shares, while ensuring that those holding the preferred shares in question
will be entitled to sell their stock participation under the same conditions defined
for voting shares when stock control of a company is transferred.
Bovespa acted swiftly to anticipate and broaden these legal changes and inaugurated
what it termed the New Market, which is a separate listing involving the trading of
shares issued by companies that voluntarily commit themselves to adopting practices
of corporate governance and transparency that go beyond the demands of legislation.
These rules expand the rights of stockholders, improve the quality of the information
normally provided by companies and, by demanding that conflicts be resolved
through the offices of an Arbitration Chamber, have given investors the security of
a more flexible and specialized alternative that what is now available through the
courts.
Viewed in global terms, the New Market is divided into three stages. In the first –
known as Level 1 – companies are required to commit themselves to rigid rules on
transparency. In the second stage, Level 2, adherence to policies of corporate
governance, as well as transparency, is required. In the final stage, which corresponds
to the New Market in its fullest sense, companies are obligated to comply with the
requirements of Level 2, at the same time in which those companies that desire to
participate at this level are required to issue only common shares with voting rights.
It is precisely for this reason that this is the segment considered most propitious for
negotiating the shares of new companies or of those that resolve to open their
capital.
92 / Boletim do Banco Central do Brasil - Annual Report 2001
The major securities negotiated on the capital market can be divided into two
groups: those originating in third party loans, represented here by debentures and
promissory notes, and those originating in the sale of part of a company’s capital
or, in other words, stocks. Contrary to what occurs in the second group, debentures
and promissory notes are callable securities and, for this reason, are issued in
limited numbers. Business financing through issues of stocks, debentures and
promissory notes on the capital market in 2001 increased by 22.7% over the
previous year’s results and totaled R$21.8 billion. This was due exclusively to
debenture issues since use of the other types of securities declined in the period. For
the most part, these operations were a result of long-term borrowing needs on the
internal market generated by increased costs and higher external financing risks.
Debenture issues at the CVM totaled R$15.2 billion, of which 61.8% were
referenced in DI, 28% to the IGP-M, 8.6% to the TJLP and 1.6% to others.
Table 3.2 - Primary issues of companies
Issues - CVM (R$ million)
Period
Stocks
Debentures
2000
2001
Commercial papers
2000
2001
2000
2001
Total
2000
2001
Jan
0
0
35
254
529
633
564
887
Feb
468
500
1 007
450
165
267
1 640
1 217
Mar
0
401
200
3 736
586
475
786
4 611
Apr
0
0
280
320
100
742
380
1 062
May
0
0
1 525
69
1 393
1 365
2 918
1 434
Jun
33
9
10
941
599
97
642
1 047
440
0
2 465
2 800
1 921
552
4 825
3 352
Aug
0
315
162
0
590
44
752
359
Sep
0
0
202
324
60
260
262
584
Oct
191
0
1 033
370
5
295
1 228
665
Nov
0
0
100
642
560
460
660
1 102
278
129
1 729
5 256
1 083
77
3 091
5 462
1 410
1 354
8 748
15 162
7 591
5 267
17 749
21 782
Jul
Dec
Total
Graph 3.12
Primary issues
16
R$ billion
12
8
4
0
Stock
Source: CVM
Debenture
2000
Commercial paper
2001
III Capital and financial markets / 93
Financial investments
The overall balance of financial investments, which encompass financial investment
funds (FIF), savings accounts, CDB (excluding those in the FIF portfolios), stock
funds and extramarket funds came to R$557.5 billion at the end of 2001, for growth
of 13.1% in the year. FIF registered net worth of R$320.6 billion, for growth of
18.1% in relation to 2000. This performance was below the level of previous years
due to the migration of resources into CDB and to direct investments in federal
public securities with exchange indexing clauses. FIF accumulated nominal
profitability of 17.1% in 2001, registering the second best performance among
financial investments.
The final balance of financial investments in 2001 was R$556.1 billion, for growth
of 13.1% in the year. The overall balance of the financial investments, encompassing
FIF, savings accounts, bank deposit certificates (excluding the CDB in the FIF
portfolios), stock funds and extramarket funds, totaled R$557.5 billion, with
growth of 13.4% in the year.
Graph 3.13
Investment funds - Net worth
Stock funds
320
28
R$ billion
30
300
280
260
26
24
22
240
20
Jan
2001
Mar
May
Jul
Sep
Nov
Jan
2001
Mar
Extramarket
20
16
R$ billion
R$ billion
FIF
340
12
8
4
0
Jan
2001
Mar
May
Jul
Sep
Nov
May
Jul
Sep
Nov
94 / Boletim do Banco Central do Brasil - Annual Report 2001
Stock funds managed to maintain a relatively stable volume of resources, as net
worth increased by 2.2% to R$24.9 billion at the end of December. Profitability in
the year came to 4.3% and was influenced by negative performances in the months
of March and September (-5.9% and -7%, respectively) as a result of the strong
volatility prevalent on the stock market at the time. Among the different types of
stock funds, Mutual Privatization Funds, which are based on Employment
Compensation Fund (FMP-FGTS) resources, closed the year with assets of R$2.4
billion for growth of 0.5%. As of August 2001, investors in these funds were able
to opt to invest in Free Portfolio Mutual Privatization Funds (FMP-FGTS-CL) or
return to the FGTS, without losing the discount of 20% obtained in relation to the
price of the overall stock issue. The FMP-FGTS-CL registered total net worth of
R$8.3 million in December 2001.
The extramarket funds, which invest the available resources of entities belonging
to the indirect administration and foundations subject to federal government
supervision, came to a net worth level of R$12.3 billion in 2001, with growth of
18.6% in the year. It should be noted that, as of the month of August, the CMN
released the BNDES from the obligation of investing available cash resources in
this fund. With this decision, the month closed with a net negative inflow of R$3.5
billion, as part of these resources migrated into FIF.
As of the month of April, Foreign Capital Fixed Income Funds were abolished
according to the terms of Resolution 2,689, dated 1.26.2000. This instrument had
the objective of making it possible for nonresidents of the country to gain direct and
simplified access to Brazilian financial and capital markets.
In the month of March, a new CPMF rate was introduced. This contribution is
levied on the initial investments of all of these operational modalities, with the sole
exception of savings accounts provided that the funds be maintained in such
accounts for periods of more than three months. The new rate also impacted
investments in CDB due to the specified term of this type of operation and,
indirectly, stock funds, since it corresponds to a tax on stock acquisitions and,
consequently, produced a dampening effect on stock market trading.
The balance of savings accounts reached a level of R$118.7 billion in December
2001, with growth of 6.2% in the year. The less attractive profitability of this type
of operation (8.6% in the year) explains the very limited inflow. The loss of
resources was somewhat attenuated in the month of December, which registered a
net inflow of R$1.6 billion, a phenomenon that is characteristic of the month as
workers across the country receive their Christmas bonuses.
In January 2001, Resolution 2,809, which had been issued on 12.22.2000, introduced
the mechanism of automatic alteration of the “b” factor, the component used in
III Capital and financial markets / 95
Graph 3.14
Time and savings deposits
Time deposits
Savings deposits
110
120
105
118
116
R$ billion
R$ billion
100
95
114
90
112
85
110
80
108
Jan
2001
Mar
May
Jul
Sep
Nov
Jan
2001
Mar
May
Jul
Sep
Nov
calculating the Reference Rate (TR) reduction factor. This mechanism has the
objective of achieving gradual convergence of the profitability levels of financial
investments to the extent that the Selic target is lowered, thus minimizing transfers
of resources among the various modalities of financial investments exclusively as
a result of arbitrage. Furthermore, the fixed 6% rate of interest per year for savings
accounts which is specified in legislation acts, in practical terms, as a profitability
floor for the other financial investments.
As shown in Table 3.3, Selic rate bands were utilized, with their respective
parameters. The gradual convergence can be noted throughout the first quarter of
the year when the Selic target moved below the 16% per year mark, with the “b”
parameter being altered automatically to 0.44.
Table 3.3 - Factor "b" of the reduction factor of the Reference Rate (TR)
Target for the Selic rate
Factor "b"
Formula for the reduction factor
of the TR
Higher than 16
0.48
1.005 + 0.48TBF
Equal or less than 16
0.44
1.005 + 0.44TBF
Equal or less than 15
0.40
1.005 + 0.4TBF
Equal or less than 14
0.36
1.005 + 0.36TBF
Equal or less than 13
0.32
1.005 + 0.32TBF
Equal or less than 12
0.28
1.005 + 0.28TBF
Equal or less than 11
0.24
1.005 + 0.24TBF
Equal or less than 10
0.20
1.005 + 0.2TBF
The balance of time deposits expanded by 19.7% in the year and totaled R$107.6
billion in December 2001. Accumulated earnings reached 17.7% in the year. The
attractiveness of this type of investment in 2001 was due mostly to the flexibility
permitted for adjusting to the new interest rate levels coupled with the release of
96 / Boletim do Banco Central do Brasil - Annual Report 2001
CDB referenced to floating rates from the demand of minimum terms, as of August
1999. With these factors, the modalities of CDB referenced to DI and postset CDB
became the most attractive investment modalities, in detriment to preset CDB and,
taken together, came to represent a full 70% of the total balance of these assets.
Table 3.4 - Nominal income of financial investment - 2001
% p.m.
% p.y.
Itemization
Jan
Feb
Mar
Apr May Jun
Jul
Aug
Sep Oct Nov Dec
2000 2001
FIF
1.43 1.04 1.20 1.27 1.69 1.01
1.82 1.85 1.63 1.35 0.84 0.74
17.26 17.07
Extramarket
1.40 1.39 1.39 1.24 1.43 1.34
1.26 1.35 1.17 1.24 1.17 1.15
16.69 16.51
Stock funds
10.62 - 3.46 - 5.86 5.39 0.85 - 1.67 - 2.14 - 2.12 - 6.99 2.59 4.88 3.56
Savings
0.72 0.73 0.73 0.63 0.75 0.72
0.66 0.70 0.60 0.63 0.62 0.60
CDB
1.22 0.99 1.28 1.28 1.38 1.30
1.67 1.65 1.34 1.57 1.37 1.38
Graph 3.15
Nominal income of major financial investments - 2001
20
16
%
12
8
4
0
-4
-8
-12
FIF
Stock Funds
Savings
Interbank
Certificate of
Deposit
Gold
US Dolar
Commercial
Ibovespa
3.36
4.31
8.39
8.59
17.05 17.72