My name is Rafael Furlanet. I've worked in the financial market for 20 years, which led me to participate in almost all the IPOs and 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. I was born in the interior of Espírito Santo, in a small town called São Gabriel da Palha. 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. I'm very bold when talking to people and asking interesting questions. I have the WhatsApp of many important people.
I had the opportunity to go to Silicon Valley. Sam Altman, the founder of ChatGPT, was there. He received us and had lunch with us. There's a very cool photo here with Amin Nasser, the CEO 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 house after the event, would you like to come?' 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. The credibility and reach of CNN make it a perfect match.
You just saw a bit of my story. I'm very happy to be here on CNN for this debut program. My schedule is a bit like what you saw. Every day I leave home and talk to a great business leader, a political leader, or a great investor, and sometimes all three in the same day. So here, it's the news from someone who lives the news before it comes out, so you can always stay one step ahead. Every week I'll bring an interesting topic and an interesting person for news that impacts your business and your wallet.
And my first guest on this debut worked for over 20 years in the financial market and contributed 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 and 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, managing the Central Bank, which involved a lot: the pandemic, the implementation of Pix, and 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 terms of the presidents are not coincident with the executive term. So, 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, meeting other central bankers, participating in IMF and G20 meetings. You learn a lot. I never imagined I could learn so much. People used to say I was a trader, just looking at a screen with prices going up and down. I always say you have no idea how your mind opens up when you don't have to stare at a screen all day. That was a spectacular thing. When you arrive in an environment surrounded by very good people, your first thought is, how can I contribute to this debate? I remember the first BIS meeting, I sat down, looked to my side, and Mario Draghi was there. I thought, what can I say here so I don't sound 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.
Let's explain to the audience: Mario Draghi was the president of the European Central Bank, who was later replaced. Then Christine Lagarde joined, who also participated in the meetings.
Yes, I remember looking at Draghi, at the Bank of Japan, and at Jens Weidmann from the Bundesbank at the time. I thought, what can I say here? 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, whenever there was a meeting of central bank governors and there was a lot of market movement, remember we went through the pandemic, I was the person who brought that market angle. I'd say, 'Look, I'm seeing this, I think this is dangerous, I think this market will happen like this.' So I started to carve out a space based on 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 market 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 are 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, and you spent six years in Brasília with your family here while you were commuting 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, specifically Bruno who moved with his family, had a better quality of life than I did, having to be 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 was no longer worth making the move. But in retrospect, I would have done it differently, because the shuttle or the Brasília round trip flight becomes tiring after 4 or 5 years.
Roberto, you are Roberto Campos Neto. Who was Roberto Campos Neto for our audience? Your grandfather. And your grandfather has a quote where he says he suffered many attacks and injustices at the time. Things weren't as polarized, it was the Cold War, but time made his critics respect him. Did that inspire you?
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. That's why he says that eventually, time tells the story. He had a vision of microscience, nanotechnology, technology, and informatics. 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 greatly, his 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 write articles with strong opinions. But I learned a lot from him; it was a great school. I had the pleasure of being with him for many years at the end, and he was giving lectures. So I would go to his lectures from time to time, and it was a great learning experience for me.
So from a young age, you followed your grandfather and were inspired by him.
Yes, he wanted us to be doctors, believe it or not. He wanted to be a doctor but couldn't because he didn't have the resources, so he ended up going to seminary. So he had this wish for one of his grandsons to be a doctor. And to his disappointment, 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 later. He always wanted to be a doctor, he had this fascination with medicine, but he couldn't. He entered the seminary, then became a diplomat, and 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 world's greatest central bankers. And I wanted to ask you a question. The whole world is in debt, the United States is in debt, Europe is in debt, and you have the problem of democracies making tough adjustments to public accounts. The politician has to be re-elected, so he promises things that generate expenses. It'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: the difficulty of making tough adjustments.
Exactly. Where will this lead? Because if public debt increases, people lose confidence in the currency.
Exactly. 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 theme, we have a double problem: a greater risk of a global debt crisis, and 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.
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 just kept going.
Exactly. We not only didn't cut the 18% but continued spending about half of it. So global debt rose a lot. As global debt rose and many countries have this division of discretionary and non-discretionary spending, what happened was that you started to compress what the government used for investment. When I compared the various countries that tried to balance their fiscal accounts post-pandemic, 97% of the measures were revenue increases, not spending cuts. But then there's another problem, because it's not just the revenue increase, it's how you do it. For example, because governments were very concerned with post-pandemic employment, almost 90% of the revenue measures were taxes on capital. In economics, you can tax labor or capital. So, a large part of what was done to balance with revenue increases was taxing capital.
So, taxing dividends, taxing capital, taxing capital stock, taxing wealth.
So what happens? You disincentivize entrepreneurship in the end.
What happens? Someone in a productive sector will use less capital because it's more expensive and more labor. When you do this, productivity tends to fall. So, if you add that the pandemic cost was paid this way, and also that we have a post-pandemic that generated changes in the labor market and the population is aging, the result is that we have difficulty having positive productivity. And as the world is aging, we need to be 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 fix debt, you either cut spending, increase growth, or both together, which is the best in the world.
First point: increasing the tax burden on capital doesn't increase productivity, it decreases it. As I said, this isn't a problem exclusive to Brazil. We're talking about the whole world following 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 have a minister of technology who is doing a vertical integration of all programs using technology. I was recently in Mexico, and they have a minister doing a very good job in this area. So, we have an opportunity through technology.
I want to get into that point in a bit, about AI and productivity. I want to ask your opinion on that. Now let's get back here. Very high interest rates all over the world, debts that don't fall. Why are interest rates in Brazil one of the highest in the world, in real terms? 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, of around 8.5%, compared to emerging markets which are 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 those who buy the debt to perceive 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 great difficulty living with much lower interest rates. And again, Brazil has shown several positive variables, especially on the social side, but we now need to address this theme of debt stability. And again, it's not just a Brazilian problem. Remember that Brazil has a primary deficit of 8.5%, but much of the world has a primary deficit between 5% and 6%. So it's a global problem, not just Brazil's, but we are a little worse off because our tax burden is higher, at 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 will probably start to shrink the tax base. If we start to tax too much, the relationship begins to invert. And we have a problem with many social programs that were very well designed and had a 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 keeps doing well, it will be very difficult for the US to cut interest rates as the market expects. And if the US doesn't cut many rates, 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 that, obviously, the US is a base for all global rates, but that 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 expectation. 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 outlook for 2027, regardless of who wins the presidency, will 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 then he started to drink a little, 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. I think everyone took a little of that drink during the pandemic.
The whole world liked it.
The whole world, the whole world liked it. The whole world is more polarized, the whole world has difficulty approving spending cuts in its 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 theme. 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 will 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 united, speaking the same language, having a communication policy of what it will 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. There are many things we can do in Brazil to improve. So again, Brazil has some positive data and indices to show higher structural growth, the social part has improved a lot, unemployment is relatively controlled. Now, we need to address this fiscal theme, regardless of who wins the election. I think we will need to do that.
