In Conversation with André Esteves

This is Andre Esteves. Andrei, let's start with the big picture. Pardon me.

Wardrobe malfunction. I met yesterday with one of the biggest investors in Brazil, a billionaire with decades of success all over the world. And he told me that the future never seemed more dismal.

Gloomy. He's worried about tensions between the United States and China. He's worried about the shift to protectionism in the U.

S. and in Europe. He's worried Trump will win the U.

S. election and create chaos and geopolitics. And with that, of course, the global economy.

You are arguably the most powerful investment banker in Latin America. What do you see when you look into the future? I'm less gloomier than that.

I think, of course, we have global geopolitical tensions. A lot of things to worry about. But generally, the world has been handling that.

And I'm not necessarily bearish on geopolitical issues. When you think about the Trump election. Right, I think Trump has been tough about responsible.

And sometimes when you have confusion in the saloon is not necessarily bad. To have someone arrives in a way of unpredictable behavior can bring more predictable behavior of everybody else. So should I interpret that as you seeing a Trump victory as a positive?

No, I'm just saying that you have a generic view of bringing more unpredictable outcomes. And I don't think it's not necessarily unpredictability. Isn't that necessarily a bad thing?

Yes, that's my point. So we have, of course, the U. S.

election coming up in 13 days. But there are two polls. So this geopolitical tension we're talking about, there's the U.

S. on the one side and the U. S.

economy is, you know, continues to do extremely well. Interest rates are coming down. Inflation is moderating.

The unemployment rate continues to be quite low. On the other hand, of course, we have China and the Chinese economic model today looks a lot different than it did just a few years ago. Tell me what you expect from China.

I'm in this case. I'm worried with both sides, starting with with China. I'm worried about the model.

What drove these amazing 30 years of Chinese growth. But the combination of a big migration from rural areas to urban areas and the consequent urbanization of that. An amazing labor arbitrage.

Huge investments in infrastructure with fantastic productivity gains. And on top of that, a very vibrant capitalism. When you look at China today, all of these factors offer some challenge, right?

Labor costs arbitrage is not there anymore, or at least not in the same fashion. Right. A blue collar worker in China makes more or less the same than a blue collar worker in Brazil or Mexico.

No more migration from rural areas into urban areas and no more consequential mechanization in the same velocity. And the marginal investment in infrastructure doesn't bring the same productivity. And regarding the the amazing to Bernalillo environment of the last 30 years.

Also some shifts, some more prioritization on politics regarding the economy and the on the top of all of that, you also had the surprising birthrates to the worse. So China's population is shrinking. If you ask what is the population of China in 2001 hundred, it will tell you 564 million people, which is a big challenge.

So we have the package, maybe the beginning of this shift in the direction of economic priorities we need to see. But I think we have challenges there, but we also have challenges in the U. S.

And the challenge in the West for me is related to public deficit and the debate about that, or in better words, the lack of debate about that in the public campaign. Right. It's a very high deficit with less buyers of US treasuries, and we don't see this debate happening.

It's the reality is, even if you are the owner of the printer, there is a limit to print. So I'm worried about that with us. So if on the one hand, you have a very different Chinese economic model in which.

You lack some confidence and you have a US deficit ballooning out of control and the potential for the bill, if you will, to come do that someday in the not too distant future. What is the combination of those two things mean for the global economy? And perhaps more relevantly, seeing as we're sitting here in Sao Paulo, the economies of the global South.

I think generally these combinations bring volatility. And if you look this year, somehow that's what we're seeing when you look at us. We started the year pricing a 50 bips cut in March with seven other cuts in the yield curve.

Then March arrived and no cuts and gradually the other cuts disappeared from the yield curve. By the way, we have the view that no more cuts ever then two months later, and that we were our feel was we are very close to a recession and eventually we need that emergency cut. A near-term meeting, a monetary policy committee meeting of the Fed, and then suddenly now is not to close the recession.

But we got the 50 bips cutting September meeting one week later. The market was worried about eventually no more cuts this year. So it's an interesting scenario because it's amazing volatility of scenarios and part of that driven by the Fed.

And when you look at the underlying assets, the US economy, much less volatile than that. So it's a it's an interesting landscape probably related to what we discussed before. When you say driven by the Fed, are you suggesting that the Fed is either over communicating or mis communicating?

I think certainly over communicating, because the when you are a central banker and today the information that any central bank has is not that different than the market information. But if you overcommunicate, you over guide the markets in the best of your interests and objectives, you lose. What is the most important point of observation, which is the market price.

That's the most important piece of information. If you are over guiding the markets, you are somehow losing that. And I think we are in a moment of global central banking that we are over communicating, not necessarily means communicating, but we are over guiding markets.

I prefer a more quiet central bank and that let the market provide us with a very important piece of information, which is the prices of most of the world's major central banks, including the Fed, are, of course, cutting interest rates as inflation subsides. The bangko sentral out of Brazil is going in the opposite direction. It's raising rates and usually when a central bank raises rates, the currency appreciates.

But that's not what's happening here in Brazil. In fact, the rail keeps getting weaker. What's wrong with this picture that I think markets are more pessimistic than the state of the economy in Brazil.

Brazil will grow 3. 1 3. 2% in very important without any constraint index down or so current account deficit will be something around one and a half percent.

We have international reserves that are quite weak and liquid. The US Treasuries Lordstown of that. So it's a it's an interesting balance.

There is a lack of confidence about long term fiscal results, which is we need to deliver. And regarding the the interest rates hike, we are just in a different moment of this cycle. Brazil is with very tight unemployment, a very low unemployment, which is good for the economy, but maybe we are aware of inflation expectations slightly ahead of what they should be.

So the central bank is doing their job goal moving back inflation expectations to the target, which is 3% in the case of Brazil, is fiscal credibility the underlying problem here? It's so we have in a certain way a similar situation then U. S.

rates. We have in this year a pretty similar number of nominal deficit to GDP in Brazil. When you ask the difference that we don't know and we need to be more rigorous than the U.

S. regarding that. So we need to deliver about that.

We need to be disciplined. But the good news about Brazil is that the fiscal deficit or the fiscal topic is being discussed every day in political campaigns during the newspapers, in debates about that. And that's what I like.

The first step to solve a problem is to identify the problem. And what scares me anyway, is that even without the many buyers of long dated Treasuries, you are not discussing the topic. Roberto Campos Neto has been a stalwart of monetary rectitude here in Brazil.

He has conferred enormous credibility to the central bank. Will his successor Gilberto people or be as resistant to political pressures as Mr Campos Neto has? I think we are in an interesting moment of central bank in Brazil or the monetary history in Brazil.

First, about the was the first independent central bank in the constitutional. Independent central bank in Brazil is written about as the first central bank governor that runs an independent central bank. But in reality, for more than 20 years, including in Lula's first two administrations, central bank was operationally independent in practice for the last almost three decades.

That's the logic in Brazil. So I think we'll have a smooth transition and the credibility goes beyond that certain the credibility of what the after, but is from the institution. You think there is enough institutional credibility?

You know, I'll just remind everybody that it was only last week that once again, Donald Trump was talking to our own editor in chief, John Micklethwait, about how he wants to jawbone the Fed in this direction or that direction. Is that a possibility here, too? I think part of the job description of a president or any politician is to make comments about anything.

But I honestly think central banker in under these administration, the Nats of the previous will take that kind of course of action. Then they don't have any doubt about that. Let me ask you about the government of President Lula.

Where is it getting things most right economically? Oh, I think, Minister, about the finance minister is doing a good job indentifying the necessity of us creating a fiscal framework that brings stability. Remember, Brazil was upgraded by two rating agencies and most recently by Moody's, and we are one step to investment grade.

We need to continue to deliver. And it's normal to have doubts. And we have a best of.

Not necessarily fiscal discipline. So we need to deliver better results for the future. And I think, Minister, that is absolutely aware of that.

Where is this government getting things most wrong? I think it's it's still early on that. But I think honestly the government is is doing a good job in creating the fiscal framework.

And what I think we should do is I prefer that the government cites more fiscal policy in order of keep less faith in monetary policy. That's one thing. On the macroeconomic level, we are in a tight labor market and we created in Brazil a fantastic net of social support, which is an achievement for Brazilian society.

But when you have zero unemployment, more or less where we are, it's time for us to release some of these policies that made a good job in the last 20 years in order to push people back to the formal labour market. So I would like to see these two moves and I think it will be very healthy. I'd like to ask you about the local financial services market.

Your firm, BTG Pactual, is a giant in the wealth management business. As you know. Asset management has been transformed in the United States and Europe over the past 15 years.

Fees have collapsed. You can buy an index fund for just a few basis points, but here in Brazil, as I understand things, those funds are still pretty expensive. That index funds, mutual funds, you still pay maybe even a couple of hundred basis points to own an equity mutual fund in excess of 100 basis points to own a fixed income mutual fund.

Why are they so high? Not vintage funds. They're very cheap and perform very well.

And I encourage all of you to invest. But that is not the case across the industry, though. What is going to trigger the collapse?

The compression in fees, in wealth management and asset management that we've seen elsewhere in developed markets? No, it's it's happening in Brazil also. Right.

You have a lot of democratization in terms of asset management and wealth management in Brazil, which is fantastic for the society. The concept of independent financial advisor advisors, distribution ads. There is a lot of competition in the Brazilian markets, new fintechs, new companies, big companies that became public companies, the digital banks that are very successful.

I see a pretty vibrant financial sector here in Brazil and competition will be there. Regulation is very advanced. Said that you have big things in Brazil that you don't have anywhere.

You move money in Brazil much easier than in U. S. and much cheaper than in the U.

S. . So I think the financial infrastructure here is quite competitive.

Another phenomenon here is the recent flight movement, let's say, of investor capital out of hedge funds and into tax free asset management products. And there's some concern in your industry about maybe the government eliminating some of those tax advantages if that were to happen. And perhaps you can tell us if you think it's going to happen.

Would that spur yet another dramatic reallocation of investor capital here and with what consequences? I don't see this happening because I think the big move in terms of keeping these tax incentivized products under control had to happen correctly. Right?

There was it's a product of tax reform, right? It's a much simpler it's not that different from Muni as in U. S.

or or it's in U. S. So it's a similar constitution.

The framework, the legal framework of Brazilian financial markets and U. S. markets are not that differently here.

I like the last changes in regulation and I think they were correct. Produced by Brazilian FCC Central Bank of Brazil. And I don't see big capital dislocations.

I think that we are going in the right direction there. Brazil, as we have established in several conversations today, is a giant in renewable energy. Some 93% of all power on the grid is green.

In theory, this should be this country should be a magnet for multinationals that want to build carbon free supply chains and want to set up green factories. You would know because of the firm that you run, are more companies actually looking at Brazil now, either to set up businesses or maybe to buy businesses here? Yes.

Yes. And I think that you can have some tectonic movements around that. And especially regarding the energy matrix that Brazil has, as I said, we have.

Depends on how you measure 85 to 90% of the matrix is renewables, which means that we are a renewable the largest renewable energy matrix in the G20, especially with low subsidies, right? Because doing renewables in UK it's possible, but quite expensive in Brazil is not. And I think Brazil could be a global hub for data percentage.

For example, as you know, you cannot build up a fantasy virgin anymore. You cannot build a new chaotic. It would take three two years to link your data center to the grid.

In Brazil, you have huge investment in transmission lines and renewable energy fully available, not expensive. And Brazil could be a very important hub for global data centers that will be needed globally. When you say that one of the opportunities, one of the opportunities, so when you say tectonic, what is it going to take to bring about that kind of a tectonic shift?

Foreign companies find it difficult to operate in Brazil. What does Brazil need to do to make it more attractive, more easier, if you will, for foreign companies to operate here? Yeah, it's partially right, partially wrong, because if you look at the last 20 years, FDI of Brazil has been one of the top five globally in the world.

Right. And the and we received well, American companies, European companies, Mideastern companies, US company and the Chinese. So it's a it's a good hub for FDI and and has been like that through different cycles, different governments, different global perspectives.

But of course, we could do more and we are not ideal, far from ideal. I think we should have less taxes, simpler regimes, and and the easier way of doing business. We can improve in all of this fields Part of that we are trying to do.

We are in the middle of a tax reform in Brazil. Not approved yet as those not ideal, but much better than the system that we have today. And it's a step we need.

Are there in 19 steps to be ideal. But even so, we have been attracted for that. Do you see those kinds of reforms, not the tax reform that's being discussed in Congress now, but the other 19 steps, as you say, being taken under this administration?

Or are you going to have to wait for the next government? I think we have been doing reforms through administrations, right. If you look during President Damietta, we did a very important labor reform during President Bolsonaro.

We did a very important Social Security reform. And now under President Lula, we are doing very important tax reform. And that's sometimes we don't notice.

We complain, we demand we try to do better, but we reach at the reasonable level of institutionalization, which means that you do what is needed, doesn't matter who ideologically is in power. So I think we will complete the tax reform and we will continue to do especially microeconomic reforms. So if you look also on this side, a lot has happened in Brazil from the independent central bank to a lot of privatisations, concessions that are going on now under this government, under the previous government, and certainly under the next government.

If you look in the last three years, we privatized the three and three out of the six largest state owned companies. Right. That's Sabesp two months ago, the largest water and sewage company in Brazil Last year, the largest state owned the energy company and is a go left on price, which is the the third largest state owned that company.

So and honestly well received by the society. I have a question for you, Andre, about a theme that has run throughout this conference last night right here. In fact, in this room, a lot of Americas answer the president of Brazil's National Development Bank described a quote unquote, difficult geopolitical scenario for countries in the global South like Brazil.

Tell us what you think. How should Brazil position itself? In this environment between where we started off the conversation between the US on the one hand and China on the other, where does Brazil belong?

I think we should do what we have been doing right. Sometimes we go a little bit more one side, a little bit more, the other side. But if you look back, we have very good relationships.

The U. S. here we have our dear ambassador that we talk frequently.

We have very good relationships with Europe, with Middle East, with China, and especially if you are a Chinese infrastructure company, an European industrial company, or a U. S. service company, you are treated equally in Brazil.

All of them follow the same rules. We will be the same law. And that's, I think, what makes Brazil a neutral country at the end of the day.

So culturally, we are open. Doesn't matter if you came from Middle East, China or U. S.

, you'll be treated equally. So we will provide services you need to pay taxes, you get BTG advice and a good business in Brazil and nobody cares. If you are making money, you pay your dividends and it will be a welcome.

And that's what makes Brazil eventually a winner in this big geopolitical dislocation of divided world. Andre, I'd like to thank you very much. Yeah, thanks.

Ladies and gentlemen, please join me in thanking Andre Theron. Thank you.