III Capital and financial markets / 79
III
CAPITAL AND FINANCIAL MARKETS
Basic interest rate and market expectations
With increasing signs of recovery in the American economy and a reduction in
Brazil’s country risk in early 2002, market expectations pointed to an interest rate
reduction. Nevertheless, as the year moved on, growing exchange and interest
market volatility provoked by increased international investor aversion to risk and
by the uncertainties inherent to the electoral process became the major cause of the
interruption in the downward interest rate trajectory in the period.
Graph 3.1
2YHU6HOLFUDWH
24
23
22
% p.y.
21
20
19
18
17
16
15
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
In the first quarter of the year, reflecting the outlook for an interest rate reduction,
the median difference between the rates on DI swap x 360 day pre contracts and the
Selic rate came to 0.9 p.p., and was characterized by the horizontal format of the
interest curve. In that period, the Selic rate dropped by 0.5 p.p. from 19% per year
to 18.5% per year.
The possibility that the impacts of exchange devaluation could be felt beyond 2002
was a factor of fundamental importance in the National Monetary Council’s June
decision to alter the inflation targets defined for 2003 from 3.5% to 4% and for 2004
from 3.25% to 3.75%. Parallel to this, the tolerance interval moved from 2 p.p. to
2.5 p.p. In this scenario, the Selic rate target was reduced in July from 18.5% per
year to 18% per year, based on inflation projections for 2003 that were below the
80 /
Boletim do Banco Central do Brasil - Annual Report 2002
Graph 3.2
<LHOGFXUYH±6ZDS',[3UHVHW
Quarter average
30
% p.y.
27
24
21
18
15
30
60
90
VWTXDUWHU
UGTXDUWHU
120
150
7HUPLQGD\V
180
360
QGTXDUWHU
WKTXDUWHU
inflation target, at the same time in which expectations regarding price behavior
pointed to a declining trajectory in the next eighteen months.
In the second half of the year, exchange and interest market rates were pressured
by increased uncertainties among economic agents. The dollar rate spiraled to close
to R$4/US$1 in September and the difference between the rates of DI swap x 360
day pre contracts and the Selic rate peaked in the third quarter at 8.5 p.p.
Graph 3.3
2YHU6HOLFUDWH[GROODU[VZDSGD\V
4.5
30
4.0
27
3.5
24
3.0
21
2.5
18
15
1.2.2002
Dollar (R$/US$)
Over/Selic rate/swap 360 days
(% p.y.)
33
2.0
3.5.2002
6HOLF
5.6.2002
7.4.2002
9.2.2002
6ZDSGD\V
10.30.2002
12.31.2002
'ROODU
In response to additional exchange pressures on internal prices, Copom raised the
Selic rate target in the final quarter from 18% per year to 25% per year. The end of
the electoral process and the new administration’s stated commitment to monetary
stability and fiscal responsibility aided in attenuating the climate of uncertainty, as
the dollar rate turned downward and the interest curve incline diminished. With the
7 p.p. increase in the Selic rate target in the last quarter, the difference between the
rates on DI swap x 360 day pre contracts and the Selic rate dropped in the final days
of December from 4.2 p.p., thus confirming the drop in market uncertainties.
III Capital and financial markets / 81
7DEOH±,QWHUHVWUDWHV
% p.y.
Rate
Dec 2001
Dec 2002
2001
2002
Difference
(a)
(b)
(b-a)
Selic
19.05
23.03
17.32
19.17
1.85
DI
19.05
22.91
17.29
19.11
1.82
TR
2.41
0.36
2.29
2.77
0.48
TBF
16.39
1.66
16.78
18.22
1.44
TJLP
10.00
10.00
9.5
9.87
0.37
With this, the Selic rate accumulated in 2002 came to 19.2% or 1.9 p.p. more than
in 2001, thus reflecting the first annual growth in interest in the last three years.
Despite this, the real Selic rate accumulated in the year and deflated by the IPCA
closed at 5.9%, the lowest level since 1990.
Graph 3.4
,QWHUHVWUDWHVDFFXPXODWHGLQWKH\HDU
20
% p.y.
15
10
5
0
Over/Selic
DI
TR
TBF
TJLP
Graph 3.5
2YHU6HOLFUDWHDFFXPXODWHGLQPRQWKV
35
30
% p.y.
25
20
15
10
5
Dec Mar
1998 1999
Jun
Sep
Dec
Mar
2000
1RPLQDO
Jun
Sep
Dec
Mar
2001
Jun
Sep
Dec
5HDO,3&$
Mar
2002
Jun
Sep
Dec
82 /
Boletim do Banco Central do Brasil - Annual Report 2002
Capital market
In 2002, aside from the macroeconomic uncertainties that affected the financial
market as a whole, the capital market was impacted by accounting scandals
uncovered in the balance sheets of major American and European companies. The
São Paulo Stock Exchange Index (Ibovespa) registered negative growth of 16.6%
in the year and closed December at 11,268 points. In the same period, the Dow
Jones Industrial Average (DJIA) dropped by 17.7% and the National Association
of Securities Dealers Automated Quotations (Nasdaq) fell by 32.8%.
Graph 3.6
,ERYHVSD['RZ-RQHV[1DVGDT
Index Dec/2001 =100
130
110
90
70
50
Jan
2002
Feb
Mar
Apr
,ERYHVSD
May
Jun
Jul
Aug
'RZ-RQHV
Sep
Oct
Nov
Dec
1DVGDT
In the month of February, the Ibovespa reached 14,033 points, the peak of the
upward trajectory that had begun in October 2001. For the most part, the factors that
contributed to this performance were interest rate reductions, end of the period of
electricity rationing and the outlook for approval of a measure that would exempt
stock market operations from the Provisional Contribution on Financial Operations
or Transmission of Values and Credits and Rights of a Financial Nature (CPMF).
In the following months, exchange depreciation, changes in annual inflation
projections and a sharper interest rate curve generated greater investor aversion to
risk. Aside from the internal reports elaborated by large scale international
financial institutions suggesting that their clients reduce investment exposure in
Brazil, risk agencies also lowered the ranking of Brazilian papers and questioned
the process of long-term debt evolution. In the second half of the year, the looming
possibility of war between the United States and Iraq became an added risk factor.
The potential impact of such an event on petroleum prices led investors to further
curtail their exposure in emerging markets.
In this framework, international stock markets registered sharp losses in the period
extending from April to September. American exchanges turned in losses of 27%
III Capital and financial markets / 83
in the Dow Jones and 36.5% in the Nasdaq. Following the worldwide trend, the
Ibovespa registered a reduction of 34.9%.
Once the electoral process had drawn to a close and the new government had
committed itself to monetary stability and fiscal responsibility, the market took on
more optimistic airs as of the second half of October. With this, the Brazilian stock
market turned upward and expanded by 30.7% in the final quarter.
At the end of the year, the nominal market value of the companies listed on Bovespa
remained relatively stable at R$438.3 billion, with growth of 1.9%. Among the
most important companies, one should highlight the Companhia Vale do Rio Doce
(CVRD), with a market value increase of 92% in the period. However, when
evaluated in terms of market value expressed in dollars, the result was a loss of
33%.
Graph 3.7
0DUNHWYDOXH
Open capital companies – Bovespa
250
US$ billion
200
150
100
50
0
Jan
2002
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
In nominal terms, the average daily financial volume declined over the course of the
year and clearly reflected both economic uncertainties and stock market losses.
Average trading in 2002 closed at R$558.1 million or 8.7% less than in 2001.
Graph 3.8
7UDGHGDYHUDJHGDLO\YROXPHLQ%RYHVSD
800
R$ million
600
400
200
0
Jan
2002
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
84 /
Boletim do Banco Central do Brasil - Annual Report 2002
In 2002, the number of companies that voluntarily adhered to the segments of new
market trading, which gives added value to questions of corporate governance and
investor relations, increased to 29, compared to 19 in 2001, with 24 at Level 1, 3
at Level 2 and 2 at what is termed the New Market level. In December, these
companies accounted for 21.3% of market capitalization and 20.7% of the volume
of trading at the São Paulo Stock Exchange (Bovespa).
Financing of capital market companies based on primary issues of stocks, debentures
and promissory notes came to R$19.6 billion or 10.2% less than in 2001.
Graph 3.9
3ULPDU\PDUNHW±,VVXHV
16
R$ billion
12
8
4
0
Stocks
Debentures
Commercial papers
Among the various funding modalities, the most important were debentures. In this
case, however, the volume of registered issues declined by 3.5%, while stock issues
7DEOH±3ULPDU\LVVXHVRIFRPSDQLHV
Issues - CVM (R$ million)
Period
Stocks
Debentures
Commercial papers
2002
Total
2001
2002
2001
2002
2001
2001
2002
Jan
0
351
Feb
500
0
254
100
633
7
887
459
450
1 790
267
44
1 217
1 834
Mar
401
0
3 736
0
475
0
4 611
0
Apr
0
0
320
0
742
1 160
1 062
1 160
May
0
0
69
2 380
1 365
100
1 434
2 480
Jun
9
0
941
450
97
106
1 047
556
Jul
0
0
2 800
0
552
2
3 352
2
315
597
0
750
44
0
359
1 347
Sep
0
96
324
1 245
260
400
584
1 741
Oct
0
0
370
775
295
2 010
665
2 785
Nov
0
6
642
500
460
40
1 102
546
Dec
129
0
5 256
6 646
77
7
5 462
6 653
1 354
1 051
15 162
14 636
5 267
3 876
21 782
19 562
Aug
Total
III Capital and financial markets / 85
fell by 22.4% and those involving promissory notes fell by 26.4%. Inflows of
resources through debenture operations was concentrated in the final two months
of the year, as the market showed the first signs of a turnaround. International credit
restrictions were one of the factors that generated increased issues at the end of the
year, as Brazilian companies expanded their demand for internal market resources.
A breakdown of the companies that sought financing through debenture operations
shows that the most important were those operating in the area of leasing, with 36%
of the issues registered, followed by steel, with 14%, participation and administration,
with 13%, petroleum prospecting and refining, with 10%, and electricity, 10%.
Financial investments
The balance of financial investments, encompassing savings accounts, investment
funds and time deposits, came to a December 2002 volume of R$621.4 billion, for
growth of 11.5% in the year. FIF registered overall worth of R$321.4 billion in
December, for growth of R$0.8 billion in comparison to the end of the previous
year. This performance reflects migration of resources into other investment
modalities. CVM’s decision – Instruction 365, dated 5.29.2002 – that public
securities be registered according to market prices and not on the basis of the
Graph 3.10
)LQDQFLDOLQYHVWPHQWV±%DODQFHV
7LPHGHSRVLWV
144
320
138
132
R$ billion
300
280
126
120
260
114
240
108
Jan
2002
Mar
May
Jul
Sep
Nov
Jan
2002
Mar
6DYLQJV
141
137
R$ billion
R$ billion
),)
340
133
129
125
121
117
Jan
2002
Mar
May
Jul
Sep
Nov
May
Jul
Sep
Nov
86 /
Boletim do Banco Central do Brasil - Annual Report 2002
paper’s curve, which incorporates earnings up to maturity, provoked a process of
adjusting the value of the quotas of these funds. In this process, those most heavily
impacted were DI fixed income funds, since their portfolios have a larger volume
of long-term public securities.
In order to reduce the volatility observed in the value of investment fund quotas
and, in this way, curtail redemptions of these investments, CVM issued Instruction
375, dated 8.14.2002. This instrument allowed financial investment funds, funds
involving investments in the quotas of financial investment funds and investment
funds abroad to utilize the interest curve in the accounting of papers with maturities
of up to 365 days, acquired as of issue of the instruction, and those already in
portfolio provided that they be maintained up to maturity and that the fund’s
financial capacity be corroborated.
In the case of the investment fund industry, Banco Central adopted a measure
involving repurchase of long-term securities and placement of other short-term
papers. This policy was seen to be necessary in order to generate greater demand
for shorter-term papers for investment fund portfolios.
The effects of these measures were perceived as of October, when redemption
volumes became gradually smaller. Here, it is important to highlight growth in the
profitability of investment funds over the last four months of the year. Basically,
this performance was impacted by those funds in which portfolios are backed by
federal public securities indexed in inflation indices and by funds indexed to
exchange. Though the worth of these funds remained stable, it should be stressed
that investment funds registered nominal revenues of 21.4% in the year, clearly
greater than the 16.7% mark of the same period of 2001. Consequently, these funds
became the most profitable financial investment available in 2002.
The net worth of stock funds, which includes funds based on investments in stocks
and securities (FITVM) and mutual privatization funds (FMP), evolved by R$7.3
billion in the year. With the strong volatility present on the stock market, these
funds turned in moderate yields of 8.5%, which was higher than in 2001 but below
the levels of other investments in 2002. This segment registered its highest
profitability in the months of February and October, with 6.5% and 13.6%,
respectively.
Extramarket funds, which exclusively invest the resources of entities belonging to
the indirect federal administration, and the Federal government’s funds were
marked by stability over the course of 2002, as their overall worth increased by
R$0.8 billion, closing the year at R$11.6 billion, with profitability of 18.7%,
compared to 16.5% in 2001.
III Capital and financial markets / 87
Savings accounts registered strong growth in resources over the year, as a result of
the process of migration of funds out of financial investments. At the end of 2002,
the volume of these investments came to R$139.6 billion, as their assets increased
by R$20.9 billion. The profitability of savings accounts with maturity on the first
day of the month, which is the day with the highest concentration of investments,
closed at 9.1%.
In much the same way, time deposits received funding from financial investment
funds, despite the high compulsory reserve rates applicable to these operations,
coupled with institution of additional reserve requirements. The balance of time
deposits came to R$137.6 billion in December 2002, with an increase of R$30
billion in the balance as compared to 2001. The profitability of Bank Deposit
Certificates (CDB) came to 19.1%, or quite close to the 19.2% change in the Selic
rate.
7DEOH±1RPLQDOLQFRPHRIILQDQFLDOLQYHVWPHQW±
%
Itemization
Jan
Feb Mar
FIF
1.78 0.96 1.08
Extramarket
1.47
Stock funds
Apr
May Jun
Jul
1.5 0.79 1.49 1.73
Aug Sep
1.2 3.13
Oct
Nov Dec
2001 2002
1.93 1.96 1.99
16.69 21.37
1.2 1.32 1.46 1.39 1.31 1.51 1.41 1.35
1.6 1.51
1.7
-2.62 6.54 0.65 -0.36 0.28 -5.41 -5.04 2.68 -5.77
13.6 1.04
4.2
4.31
8.45
8.59
9.14
Savings
0.76 0.62 0.68 0.74 0.71 0.66 0.77 0.75
0.7
0.78 0.77 0.86
CDB
1.49 1.21 1.32 1.45 1.38 1.33 1.54 1.45 1.37
1.68 1.58 1.78
Graph 3.11
%
1RPLQDOLQFRPHRIPDMRUILQDQFLDOLQYHVWPHQWV±
90
80
70
60
50
40
30
20
10
0
-10
-20
FIF
Stock funds
Savings
Interbank
Certificate of
Deposit
Gold
US dollar
commercial
Ibovespa
16.51 18.65
17.71 19.07