Brazil Savings Changes Broadly Welcomed Amid Lower Interest Rates --Prospect of lower interest rates reduce politically risky changes to savings accounts in Brazil
--Government kept new rules simple, which should ensure the bill gets approved by Congress
--On Friday, real interest rates, after discounting for inflation, fell to a record low 2.45%
By Luciana Magalhaes and Tom Murphy
Of DOW JONES NEWSWIRES
SAO PAULO (Dow Jones)--The Brazilian government's bet could pay off, as politically risky changes to savings accounts may be assuaged by the prospect of much lower interest rates.
"If we are to have lower interest rates in Brazil, it's OK if savings accounts offer smaller returns," said Jeniffer Dias, a 21-year-old vendor of glasses in a small stand in a Sao Paulo shopping center.
Dias has been investing in savings accounts for two years and wasn't aware of the changes announced late Thursday, which are designed to open the path for the central bank to cut interest rates further, if needed, to help boost economic growth.
"My bank manager didn't call me," said Dias, stating she was happy to know the change would only happen if the central bank lowered the benchmark interest rate, called Selic, to a level below 8.5%. It currently stands at 9%, and there's widespread expectation that it will fall further in coming months.
Denisa Burgue, 74 years old, had a similar reaction. She was a little confused by the new rule for savings accounts, but said it would be "good for Brazil" to have lower rates. She has been investing in savings accounts for 54 years and doesn't plan to stop.
Lower rates were a central plank of President Dilma Rousseff's inaugural speech in January 2011, and slowing global growth as well as benign domestic inflation have presented an opportunity to cement that as one of her main legacies. The Selic seems set to fall below its previous record low of 8.75%, held between 2009 and 2010; on Friday, real interest rates, after discounting for inflation, fell to a record low 2.45%.
"Previous presidents talked about cutting real interest rates, but this is the first president to actually do it," said construction industry executive Sergio Cimatti.
Changes to savings accounts were made to remove the risk of a mass migration from investments in government bonds and fixed-income funds into savings--a possibility if the Selic were to fall below 8.5%.
But the tinkering carries political risks, as savings accounts are popular among working and middle-class Brazilians, precisely because they've been a safe haven in previous, more turbulent, economic times, and political opponents of the president could seek to leverage the changes ahead of municipal elections in October.
Savings accounts are relatively small, but spread among many people. According to the finance ministry, there are 100 million savings accounts in Brazil, with deposits totalling BRL431 billion ($224.5 billion). By international standards, that's quite low, at around 10% of total assets in the financial system.
Under the rules announced Thursday, if the Selic falls below 8.5%, savings accounts will pay 70% of the Selic. The new rules only apply to new savings from Friday; existing savings aren't affected.
Observers said the government kept the new rules simple, which should help avoid any backlash from savers, and ensure the bill gets approved by Congress.
"The government followed the rule of simplicity and that was very positive," said Fabio Nogueira, founder of Brazilian Finance & Real Estate S.A., the country's biggest issuer of real-estate backed securities.
Currently, the government requires that 65% of savings deposits held at banks be allocated for financing home mortgages.
According to Nogueira, the Brazilian market is healthy and ready for the change that will allow the country to have lower interest rates. But it is necessary that investors understand and feel comfortable with the rules, he added. "The change is cultural and investors are essential to confirm this new phase of lower interest rates in Brazil."
Newton Rosa, chief economist at Sul America Investimentos, said the government came up "with a very good solution." The economist now expects Brazil's central bank to cut the Selic as low as 8%.
-By Luciana Magalhaes, Dow Jones Newswires; +5511 3544-7072; luciana.magalhaes@dowjones.com
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