My name is Rafael Furlanet. I've worked in the financial market for 20 years, which led me to participate in almost all IPOs or capital increases from 2018 to 2022. If you just look at spreadsheets, you won't understand what's going on in people's heads. The best way to understand others is by asking questions.
I was born in the interior of Espírito Santo, in a small town called São Gabriel da Palha, in the northwest of the state. I studied at FGV and then went to work at Bradesco Investment Bank, which was a bridge to being invited to XP, where I still do a lot of business today. I'm very bold when it comes to talking to people and asking interesting questions. I have the WhatsApp numbers of many important people.
I had the opportunity to go to Silicon Valley. Sam Altman, the founder of ChatGPT, hosted us and had lunch with us. There's a very cool photo here with Amin Nasser, the president of Saudi Aramco, the world's largest oil company. There's also a photo of me with Boris Johnson. He also came to speak at one of our events. I said, 'Boris, there's going to be a dinner at my place after the event. Would you like to go?' He said, 'I'll go.' There's a photo with Oprah. For me, she's the best interviewer in the world.
I wanted to bring a bit of what I do in my daily life to the screen to impact more people's lives. And television, with the credibility and reach that CNN has, is a perfect match.
You just saw a little bit of my story. I'm very happy to be here on CNN for this debut program. My agenda is a bit of what you saw. Every day I leave home and talk to some great business leader, a political leader, a great investor, and sometimes I talk to all three in the same day. So here is the news from someone who lives the news before it comes out, so you can always stay one step ahead, no fluff. Every week I'll bring an interesting topic, an interesting person, for news that impacts your business and your wallet.
And my first guest here on the debut worked for over 20 years in the financial market and gave his contribution to Brazil as president of the Central Bank for 6 years during a very difficult time. He faced COVID at the helm of the Central Bank, implemented major changes in the Brazilian economy like Pix, which revolutionized the life of any Brazilian. His name is Roberto Campos Neto, former president of the Central Bank. Roberto, welcome to Hot Markets.
Thank you very much for having me on the debut program. I thank CNN and everyone watching. 6 years in Brasília, a term at the Central Bank that dealt with many things: the pandemic, the implementation of Pix, the reform of the financial system.
What was it like to spend six years in Brasília?
Well, actually, I had planned for four. The last two were because of the autonomy theme, and I thought it was important to stay until the end to ensure that the presidents' terms don't coincide with the executive term. So, I think it was a very good experience. As we were talking earlier, there's an international part of the experience that is spectacular: the BIS meetings, getting to know other central bankers, participating in IMF meetings, G20 meetings. You learn a lot. I think I never imagined I could learn so much. We used to say I was a trader, just looking at a screen with prices going up and down. And I always say that you have no idea how your mind opens up when you don't have to stare at a screen all day. So that was a thing that was, and really is, spectacular.
When you arrive in an environment where you're surrounded by very good people, the first moment you think, 'Well, how can I contribute to this debate?' I remember the first BIS meeting, I sat down, I looked to the side, and there was Draghi. I still caught a piece of Draghi's term.
Let's explain to the public: Mario Draghi, president of the European Central Bank, who was later replaced.
Then Lagarde came in, who also participated in the meetings. But I remember looking at Draghi, looking at the Fed and at Jens Weidmann, who was at the Bundesbank at the time. And I thought, 'What can I say here so I don't seem too unintelligent?' Because you were in an environment with people you, as a trader, used to listen to and analyze, and now you were sitting at the table with them.
But that was the hook, because many people had a much more solid macroeconomic background than I did, but they didn't have a market background. So, every time there was a meeting of central bank governors and we had a lot of market movement—remember, we went through the pandemic and all—I was the person who brought that market angle. I'd say, 'Look, I'm watching this, I think this is dangerous, I think this market is going to happen like this, like that.' So I started gaining space a bit because of my market background, because it was a part where I could contribute. There were many people with a macroeconomics background, but not so much with a market background.
So this fact of you giving a bit of timing to the other central bankers, the things you saw, was your differentiator for sitting at the table with those great figures?
Well, you sit at the table because you're part of the board, but I think you participate, and the BIS is an organization where the more you participate, the more you're invited to participate. So my angle was always that of markets.
Now, before we get into the topic of Central Bank autonomy, I wanted to ask a more personal question. You're a father, you have two children, six years in Brasília, family here and you going back and forth. What was that period like for your family?
Well, in retrospect, I think it was a mistake not to have moved the family to Brasília.
To have taken everyone there.
Yes, I think the directors, more specifically Bruno who moved with his family, had a better quality of life than I did, having to stay on the shuttle, on the plane, going back and forth almost every week. But then a moment came when I was almost at the end, and it wasn't worth making the move anymore. But in retrospect, I would have done it differently, because the shuttle or the Brasília round trip flight after 4 or 5 years becomes tiring.
Roberto, you are Roberto Campos Neto. Who was Roberto Campos Neto for our audience? Your grandfather. And your grandfather has a quote where he said he suffered many attacks and injustices at the time. Things weren't as polarized, we were in the Cold War, but time made his critics respect him. Did that inspire you a bit?
Look, everything he did inspired me a bit. I think he had a vision far ahead of his time, and it's always difficult when you see far ahead, because you're usually misunderstood. And that's why he says that eventually, time tells the story. He had a vision of microscience, nanotechnology, technology, informatics. At the time, there was even a fight over the informatics law, and he had a vision that Brazil needed to insert itself more into this world of technology. So he saw many things ahead. That's something I admired a lot, that he had the ability to look ahead. And I think he was a politician who wasn't very political, because he came from a diplomatic career. We used to joke that he was a diplomat who wasn't very diplomatic, because he had strong opinions. He would go to Congress and also write articles with strong opinions. But I learned a lot from him, it was a great school. I had the pleasure of being able to spend many years with him at the end, and for a while he was giving lectures. So from time to time I went to his lectures, so it was a great learning experience for me.
So since you were young, you followed your grandfather and in that way you were inspired by him.
Yes, he wanted us to be doctors, believe it or not. He wanted to be a doctor and couldn't because he didn't have the resources, so he ended up going to seminary. So he had this wish that one of his grandsons would be a doctor. And to his dismay, my younger brother, the one right after Rafael, started studying medicine and then dropped out. In the end, I do have a younger brother who is a doctor.
Who fulfilled your grandfather's wish.
Fulfilled my grandfather's wish, but much, much later. But he always wanted to be a doctor, he had this fascination with medicine, ended up not succeeding, entered the seminary, then became a diplomat, and then studied economics in Washington. So it was a career that changed, he became an economist later on.
Roberto, you've seen the world, you sat there in Basel with the greatest central bankers in the world. And I wanted to ask you a question. The whole world is very indebted, the United States is indebted, Europe is very indebted. And you have a problem with democracies making tough adjustments to public accounts, because the politician has to be re-elected, he's going to promise things that generate expenses. That's normal.
Democracy is the best system humanity has, we have to live with it. But we see this problem, not just in Brazil, but all over the world: a difficulty in making tough adjustments.
Exactly. Where is this going to lead? Because if public debt increases, people start losing confidence in the currency.
Yes. Look, my first point, I've been hammering on this for a long time. If you look at my past interviews, I remember once I did an interview at the IMF meeting in Marrakech, where my main point was that the world is super indebted and if we don't do something collectively regarding the debt issue, we have a double problem: a greater risk of a global debt crisis. And also the way we were solving the debt problem puts us in a vicious cycle. Why? Because when we look at the pandemic, the world spent about 20% of GDP during the pandemic.
20% of global GDP was spent during the pandemic.
Global GDP, 18%. But when the pandemic passed, we didn't cut all the spending. We should have not only returned to previous spending levels but also made some savings to pay for the pandemic.
People liked spending and let's keep going.
Exactly. We not only didn't stop spending the 18% and didn't make savings, but we continued spending about 50% of that. So global debt rose a lot. As global debt rose a lot and many countries have this division of discretionary and non-discretionary spending, what happened was you started to compress what the government used for investment. When I did a comparison of the various countries that tried to minimally balance their fiscal accounts post-pandemic, 97% of the measures were revenue-increasing measures, not spending cuts. But then there's another problem, Furlanet, because it's not just the revenue increase, it's how you do the revenue increase. For example, because governments were very concerned with the post-pandemic period, with employment, almost 90% of the revenue-increasing measures were done through taxation on capital. In economics, you can tax labor or tax capital. So, a large part of what was done in the attempt to balance with increased revenue was to tax capital.
So, tax dividends, tax capital, tax capital stock, tax wealth. So, what happens? It disincentivizes entrepreneurship in the end.
Yes. What happens? Someone in a productive sector will use less capital units because it's more expensive and more labor units. When you do that, productivity tends to fall. So, if you add that the cost of the pandemic was paid for in this way, and you add that we have a post-pandemic that generated changes in the labor market and that the population is aging, the result is that we have difficulty having positive productivity. And as the world is aging, we need to become more productive to pay the bill.
Productivity is a big problem in Brazil. The productivity of Brazilians hasn't increased for years, except for agribusiness, which still grows due to production improvements, agricultural techniques, etc.
And that's a very interesting debate. How do we improve Brazil's productivity? Because to correct debt, you agree with me, either you cut spending, you increase growth, or both together, which is the best in the world.
First point: increasing the tax burden on capital a lot doesn't increase productivity, it decreases it, because as I said, and this is not an exclusive problem for Brazil, the whole world has followed this path. We need more investment in education, we need to generate processes with more technology, productive processes. Even in government, we can offer government services in a much more efficient, cheaper way, with more technology. Some countries in the world have a minister of technology who is doing a vertical integration of all programs using technology. I was recently in Mexico, Mexico has a minister who is doing a very good job in this regard. So, we have an opportunity through technology. I want to get into this point in a bit, because then I'll get into AI and productivity. I want to ask your opinion on that. Now let's get back here. High interest rates all over the world, debts that don't fall.
Why are interest rates in Brazil the highest, one of the highest in the world, the real interest rate is one of the highest in the world? And how can we create conditions for interest rates in Brazil to fall, given the global difficulty in cutting costs?
Well, that's a topic we could spend three programs discussing, but we have to talk about it in 5 minutes. But briefly, I think Brazil has good news on several fronts, but we have a fiscal theme that, again, is not just Brazilian, it's a global theme. Brazil today has a nominal deficit, if we look at the last three years, that's hovering around 8.5%, compared to an emerging world that's between 5% and 6%. We spend very little on investment, 80 billion in investment on a budget of 2.4 trillion. So, Brazil has a fiscal problem with a debt that is basically set to grow over time. You can't see a short-term convergence. And for us to have lower interest rates, we need to have a perception from those who buy the debt that at some point the debt will converge. It doesn't need to be an immediate convergence, but there needs to be better visibility that we have a debt convergence process. So I think if we don't have a positive fiscal shock, we will have a lot of difficulty living with much lower interest rates. And again, Brazil showed several, had several, let's say, variables that were better, especially on the social side, but we now need to address this issue of debt stability. And again, it's not just a Brazilian problem. Remember that Brazil has a primary deficit of 8.5%, but a large part of the world has a primary deficit between 5% and 6%. That is, it's a global problem that is not just Brazil's, but we are a little worse off because our tax burden is higher, it's 34% of GDP compared to 22% on average in Latin America. So we have less room to increase revenue. We have a revenue curve that now we're starting to see a likely shrinking of the tax base. If we start to charge much more tax, you have a relationship that starts to invert. And we have a problem that we have many social programs that were very well designed and had a very noble objective and did improve social indicators, but we need a reorganization of spending in Brazil.
Now, picking up on the US Federal Reserve, if US debt remains high and the US economy continues to do well, it will be very difficult for the US to cut rates as the market is expecting. And if the US doesn't cut rates much, it's very difficult for the Brazilian Central Bank to make a big rate cut, because the US is the mother of all interest rates. How are you looking at the US yield curve and how does that impact interest rates in Brazil?
Well, Mexico has a great dependence on the US and we will probably see Mexico's rates go to something below 7%.
Nominal. So, in fact, even being very dependent on the US or even with the US still having higher rates, it's possible to live with a much lower interest rate. The problem in Brazil is obviously that the US is a base for all global interest rates, but it doesn't mean we can't live with lower rates. Now, the US has a nominal deficit of 6%, which is quite high for the US, but the interest component embedded in that is between 2.5% and 3%, while in Brazil it's 8%. So there's a theme where interest rates themselves feed the debt expectations. So if you don't have a fiscal shock capable of lowering long-term rates, which allows you to start a more robust rate-cutting cycle, you can't get out of this cycle.
Roberto, back to Brazil, the fiscal picture for 2027, regardless of who wins the presidency, is going to be very difficult.
Yes. Brazil, as you gave an example, like the rest of the world, after the pandemic, was like that guy who didn't drink, had found Jesus in some way, was taking care of himself, and he started to drink a little and liked it, and public spending didn't decrease.
How do we adjust this scenario in 2027, in your opinion?
I think first, it's not just a Brazilian phenomenon, as we said. I think everyone drank a little of that beverage during the pandemic. The whole world liked it, the whole world is more polarized, the whole world has difficulty approving spending cuts in their respective parliaments. So, I think it's a bit of a global problem. In Brazil's case, regardless of the president, we will need to address this issue. And several measures will need to be taken. Some measures that need to be taken are not very popular. I think it's very difficult to correct the debt trajectory only with popular measures. It's a game of credibility. So, the more people believe you're going to take a positive fiscal measure, the less you need to do, because the more people believe, the more it reflects in prices. The more it reflects in prices, the faster it moves, so the less the pain. So, the more credibility, the faster you can make the adjustment with less pain. Credibility means the government is all united, speaking the same language, having a communication policy of what it's going to do, which is very efficient. At the Central Bank, we learn that it's not just about monetary policy, it's about communicating monetary policy. So, communication is key. So, there are many things we can do in Brazil to improve. So, again, Brazil has some data, some positive indices to show higher structural growth, the social part has improved a lot, unemployment is relatively controlled. Now, we need to address this fiscal issue, regardless of who wins the election. I think we will need to do that.
Speaking of credibility, your name circulates in Brasília as a possible name for an eventual government change. Is there any chance of you returning to Brasília?
Look, that's been circulating for so long and I've denied it so many times that I think it has no more effect. But since I was at the Central Bank it circulated, it circulated for a while with Tarcísio, it continues to circulate. I just accepted a challenge at Nubank. I've been there for 8 months. I really like the bank. We are doing spectacular things. We are entering the United States now, which is a wonderful project. It's a bank that has generated a lot of financial inclusion. If you think about it, Brazil brought about 45 million people into the banking system and 32 million were through Nubank. So it has a project of financial inclusion, people who were on the margins of the financial system. So Nubank has a very good model because it can be profitable and inclusive at the same time, and it's one of the few banks in Latin America that can do that. So I'm very excited about the project.
