SUPPLIER AND TECHNOFIN®

Monetary Policy and Financial System credit operations in Brazil

I - Monetary aggregates

Viewed in terms of average daily balances, the January monetary base totalled R$96.7 billion, for a reduction of 1.7% in the month and expansion of 12.4% in 12 months. Among the components, the balance of currency issued decreased 4.6% in the month, reflecting lesser demand for manual currency in the period. At the same time, banking reserves expanded 5.3%, primarily as a result of the behaviour of demand deposits in December.

With respect to the sources of monetary issues, using monthly flows as reference, the National Treasury operating account generated expansion of R$9.9 billion. In much the same way, external operations produced an expansionary impact of R$5.5 billion, primarily as a consequence of net Central Bank purchases of exchange on the interbank exchange market. Mention should also be made of the release of R$2.8 billion referring to other operations with the financial system, basically involving adjustments in operations with derivatives, R$1.8 billion, and additional reserve requirements on deposits, in the amount of R$553 million.

Operations with federal public securities in the month, including Central Bank operations carried out with the objective of adjusting money market liquidity, registered contraction of R$26.6 billion, based on net sales of R$33.6 billion on the secondary market and net redemptions of National Treasury securities, totalling R$7 billion.

Viewed in terms of average daily balances, the money supply (M1) totalled R$137.9 billion in January, reflecting a reduction of 3.2% in the month and growth of 10.9% over 12 months. The balances of currency held by the public and demand deposits dropped 4.4% and 2.4% in the month. Viewed over the last 12 months, these components expanded 11.2% and 10.7%, respectively.

The expanded money supply concept (M2), which incorporates investment deposits, savings deposits and securities issued by financial institutions into M1, turned in a reduction of 2% in January, reflecting a seasonal decrease of 10.2% in the M1 stock. In the month, the stock of private securities expanded 1.1%, with net redemptions of R$2.8 billion in time deposits. In much the same way, savings deposits expanded 0.2%, with net withdrawals of R$1.9 billion.

The M3 concept, which is composed of M2 plus investment fund quotas and the federal public securities used as backing for the net financing position in repo operations between the financial system and the nonfinancial sector, expanded 1.4%, basically as a result of a 4.8% increase in fund quotas. In the period under consideration, net inflows into investment funds came to R$13.1 billion. The M4 concept, which includes public securities held by nonfinancial entities plus M3, expanded 1.4% in the month, totalling R$1.3 trillion, with an increase of 1.9% in the balance of federal securities.

II - Financial system credit operations

In January, financial system credit operations totalled R$608.9 billion, registering growth of 0.3% in the month and 20.2% over 12 months. As a result, the ratio of total loans to GDP closed at 31%, as against 31.2% in December and 27.2% in January 2005. The rather small growth in loans during the month was caused basically by the seasonal characteristics of the period, particularly the levelling off of activities in the merchant trade sector. At the same time, household demand for resources was impacted by an additional need for credit for purposes of covering added expenditures, mainly involving taxes and educational outlays concentrated in the early months of the year.

The stock of credits granted by private national banks accounted for 41% of the financial system total, with a total amount of R$249.7 billion in January, corresponding to growth of 0.8% in the month. Here, the most important operations were those contracted with individual borrowers. Financing granted by public sector institutions represented 36.7% of total credits, with an overall volume of R$223.7 billion, with growth of 0.2% in the month. These figures reveal increased demand in the sectors of housing and the merchant trade sector, as well as personal credits. The loan portfolios of foreign banks declined 0.2% in the month, closing with a balance of R$135.4 billion.

Financing based on nonearmarked resources accounted for 66.7% of total financial system operations, with an overall amount of R$406 billion, indicating expansion of 0.5% in the month and 24.8% over 12 months. This performance was generated by monthly expansion of 2.2% in operations granted to individual borrowers, with a balance of R$194.7 billion, while credits contracted with corporate entities decreased 1.1% in January, ending with R$211.3 billion.

The share of total credits corresponding to operations with earmarked resources remained stable in January, closing at R$202.9 billion. This result was generated by a 0.8% drop in financing granted by the BNDES, with a balance of R$122.5 billion, while operations targeted to the housing and rural segments rose 2.6% and a 0.7% in the period, totalling R$28.9 billion and R$45.5 billion, respectively.

BNDES disbursements in January totalled R$2.5 billion, representing a reduction of 34.4% compared to the same period of 2005. Basically, this growth reflected a decline of 69.2% in operations with the industrial sector, primarily as a result of the performance of the segment of other transportation equipment. In much the same way, releases to the crop/livestock sector dropped 20% in 12 months, closing at R$399 million. Moving in the opposite direction, disbursements to the sectors of commerce and services expanded 20.9% in the same period, closing with a volume of R$1.4 billion. Here, the highlights were the segments of land transportation and commerce and vehicle repair.

January consultations with the BNDES totalled R$6.7 billion, indicating an upturn of 71.9% compared to the same month of the previous year. This growth was generated by 109% expansion in requests submitted by the industrial segment, registering a balance of R$5.2 billion, led mainly by growth in the automotive and aircraft segments. Requests from the trade sector, including services, totalled R$1.3 billion, for growth of 29.4% in the same period of time. Above all else, this reflected increased demand in the area of energy and electricity.

II.1 - Sectoral distribution

The stock of credits targeted to the private sector came to R$588.4 billion in January, with growth of 0.4% in the month. In this case, the highlights were operations with individual persons, which totalled R$192.5 billion, with growth of 2.1%, and with the housing sector, R$29.8 billion, growth of 2.4%.

Moving in the opposite direction, loans granted to business activities dropped in January, mostly as a result of seasonal factors, but also due to some extent to exchange appreciation in debts referenced to foreign currency. In this way, downward movement of 1.6% was registered in operations with the industrial sector, balance of R$136.8 billion, 0.5% in the portfolio of other services, with R$98.7 billion, and 0.4% under credits to the trade sector, with a total of R$64.2 billion.

The public sector debt remained at a level just below that of the previous month, closing January at R$20.5 billion. The impact of exchange variations on contracts with the energy sector resulted in a drop of 2.7% in credits targeted to the federal level, with a total of R$4.4 billion, while loans to states and municipalities expanded 0.2% in the month, closing with a total of R$1.6 billion.

II.2 - Operations with nonearmarked resources - Interest rate referenced credits

Credits targeted to corporate entities in January totalled R$183.4 billion, corresponding to a reduction of 1.1% compared to December. In operations referenced to foreign currency, which registered a balance of R$47.2 billion, the falloff was even more significant, 1.8% in the month, due fundamentally to exchange appreciation in the period. In much the same way, the daily average of contracting operations dropped 18.4% in the month, partly as a result of direct contracting of funding abroad by large-scale companies, due to the highly favourable international liquidity situation.

Parallel to these results, the stock of loans to corporate entities based on internal resources registered a monthly reduction of 0.8%, closing at R$136.2 billion, with a falloff of 8.2% in the daily average value of these operations. This performance was determined by the modalities of invoice discounting, vendor and working capital operations, which reflected the seasonal downturn in the pace of business in the early months of the year.

The balance of credit operations targeted to individual persons added up to R$160.2 billion in January, for growth of 3.2% in the month. For the most part, this expansion reflected increased household demand for purposes of paying taxes and other outlays characteristic of that time of the year. In this context, the best performances occurred under special overdraft check portfolios and personal credit operations, with monthly growth of 11.4% and 2.4%, respectively. At this point, one should highlight the evolution of payroll loans, which represented 45.8% of the overall volume of personal credits in January, registering growth of 2.3% in the balance and 23.7% in the amount granted.

The average rate of interest in reference credit operations moved upward by 0.2 p.p. in January, closing at 46.1% per year. This result was generated by increases in interest on personal loans and corporate credits negotiated at preset rates. In a context of a more flexible monetary policy, the behaviour of lending rates resulted in monthly growth of 0.8 p.p. in the banking spread, which closed at 29.6 p.p.

The average cost of personal loans rose 0.4 p.p., closing at 59.7% per year. This growth reflected increased participation of higher cost operations, such as those involving special overdraft checks and personal credits, both of which have rates considerably higher than those of payroll loans.

In operations with corporate entities, average costs dropped 0.4 p.p., closing at 31.3% per year. The result was generated by a falloff in the rates on contracts referenced to foreign currency, as well as in those charged on floating rate operations. In the opposite sense, preset interest rates turned upward.

Defaults in the interest rate reference credit portfolio, including only arrears of more than 90 days, registered an increase of 0.3 p.p., closing at 4.5%. This increase resulted from rises of 0.6 p.p. and 0.1 p.p. in arrears in the segments of corporate entities and individual persons, which closed at respective levels of 2.6% and 6.8%.

Central Bank of Brazil http://www.bcb.gov.br/?TXCREDMES

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