Published: June 01, 2010
The growth of cross-border funds in and out of Brazil is a first in the country's history.
Busy, busy, busy Brazil - downtown Sao Paulo is a honey-pot full of bees. Luxury cars, traffic jams, designer outlets, packed business restaurants, the heat is on, there is a flurry of IPOs on the BOVESPA stock exchange, business is everywhere… One can feel the growth and the country’s booming economic power right down in the streets and the cafes. The financial sector is no exception. Brazilian companies go international and international companies go Brazilian. The growth of cross-border funds in and out of Brazil is a first in the country’s history. Political stability and strict fiscal policy governance is paying off. Brazil attracts a wealth of investors sometimes disappointed by China, Russia or India. However, bureaucracy has not disappeared and the country is developing a strong market-driven economy alongside an important public sector.
This article will provide an insight to treasury and cash management in Brazil and the latest trends in the market. But first we need to look at one important topic: taxes. Taxes are key in Brazil as in other countries in the region, but taxes are a true Brazilian specificity and as such, tax has to be one of the key drivers of any financial decision that any CFO or treasurer makes in Brazil.
The Brazilian tax system is relatively complex. First because there are three levels of tax collection: federal, state and municipal. Second because while tax rates and their applications seem to be relatively well defined in the books, they are full of exceptions and rulings, depending for example on your industrial sector or on the financial situation of your company. The recommendation is therefore to appoint first a reliable tax adviser. It is also interesting to note that indirect taxes represent on average 40% to 50% of a company’s operational revenues, so it is far from being a benign item on your balance sheet.
As to taxes on financial items the most important is the IOF (Imposto sobre Operacoes Financeiras), which is a tax of 0.38% applicable to most if not all financial transactions. Unlike in Argentina or Colombia for example there are no debit/credit taxes but the IOF virtually replaces this as it touches nearly every movement of funds except bank account debits and credits (borrowings, placements, dividend pay outs, foreign exchange, banking operations, recapitalisation etc.) Foreign exchange and derivative transactions have additional taxes.
Another important point is transfer pricing. Brazil has its own ruling in that respect and does not abide by the OECD rules. Therefore tax consultation is essential in order to avoid any requalification.
Brazil continues to be at the forefront in terms of cash management and electronic settlement of transactions. It is a highly automated environment providing the right tools for enhancing working capital. Some people say that this is a legacy of the hyperinflation days when a day of float meant more than today. Banks are providing state of the art cash management processing platforms accommodating the needs of corporates wanting to stay manual or others which favour outsourcing.
On the payments side the country has an RGTS for mass payment (called STR and CI-SITRAF) and another clearing house (CIO-SILOC) for payments of less than R$5000 (due to be reduced to R$3000 soon). The latter clearing house also clears the Boletos (a collection instrument taking the form of a very specific electronic invoice and widely used in Brazil). The RGTS payment system is called DOCs and it settles same-day value. The other is called TEDs and settles on D+1. For cheques there is a specific clearing house called COMPE which clears cheques on a national basis. Cheques are settled D+1 as well as Boletos. We will see later in this article how the Boleto market is also changing with new innovative features.
SwiftNet is not especially well developed other than for some cross-border payments, and while Swift opened an office in Sao Paulo in 2007, the development of this platform is relatively slow as the banks have their own proprietary systems and also manage the cumbersome foreign exchange authorisation process. Brazilian banks such as Bradesco are important users. In 2009 Brazil was not even among the top 25 countries of Swift users, with only 21 banks and 92 institutions members. Swift even registered a drop of 10% in the volume of exchanged messages.
Liquidity management remains one of the key issues and is among the most difficult things to manage in Brazil. Corporates are only allowed to have accounts in R$ which limits the room to manoeuvre especially for multinationals. However given the internationalisation of Brazilian companies in the last ten years the financial authorities have relaxed that strict rule a little. In specific cases corporates can open offshore USD accounts under the supervision and control of the central bank, Banco Central do Brasil. This concession was only available to a number of industrial sectors until recently, when the authorisation was extended to exporting companies. With such offshore accounts companies can settle their USD payments and collections without the burden of having to convert funds in B$ and pay related FX commissions and taxes. Pressure has never been so strong on the central bank to relax foreign exchange controls and companies may soon be allowed to hold foreign currency accounts in the country.
Brazil continues to be at the forefront of cash management and electronic settlement of transactions.
For domestic funds, ZBA is commonly used in Brazil among subsidiaries of the same legal entity and banks are providing automatic transfers of end-of-day balances. Pooling among different legal entities would be IOF taxed at 0.38%, making the proposition unattractive. Corporates with large volumes are setting their own investment fund (FIDC) where they actually manage to concentrate flows using non taxable trade instruments to net their financial position. Given the burden of managing this type of structure it only make sense for large companies with yearly volumes exceeding B$100 m.
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On the placement side things are also difficult and tax is also an issue. Any placement of less than 30 days is IOF taxed (on a reducing scale). So what is there to help me with my short-term treasury placement? In fact given the situation and the pressure from corporates, the banks have developed a number of short-term products which can provide some decent interest payments and sometimes avoid IOF payment. Each bank has its own brand for such products. A well-known product is the Agricultural Letter of Credit (LCA), basically notes issued by banks on pools of agriculture sector debentures. These papers can be bought short-term and are IOF exempt. Net net on short-term placements of less than one week a corporate should be able to make 25% to 30% of CBI (the interbanking rate which is generally comparable to SELIC) managing its liquidity dynamically. For term deposits exceeding 30 days you will be able to obtain some form of interest, but not to the level of the interbanking or 9.5% SELIC rate. This situation puts another limit on working capital improvement programmes. Yes, you can collect faster, but then what do you do with the cash if you don’t have to spend it? Given the difficulty of managing short-term cash, most of the multinationals usually try to avoid keeping deposits in BRL and work hard on their cash forecast to keep balances close to zero, but that is not easy.
On USD offshore accounts (when permitted) banks offer overnight cash sweeps on those offshore deposits.
Banks, both international and local, are surfing the wave. Competition is fierce in every segment including treasury and cash management. Everyone wants to capture part of the country’s growth which is forecasted to reach close to 5% in 2010. At the same time ‘bancarisation’ is still low at around 40%, so the prospect for banks is truly attractive.
The local wholesale market is dominated by three large domestic banks: Itau, Banco do Brasil and Bradesco. Foreign banks are also taking their fair share but their smaller network and little retail activity limits their capabilities in some areas such as payroll or tax payments. They are HSBC, Santander and Citi. BBVA, stronger in the region, does not have a branch presence and has teamed up with Bradesco to serve its large customers.
DDA, the slow death of Boletos…
There is quite a revolution taking place in Brazil. The traditional ‘physical’ bank Boleto, which has been the pillar of commercial payments in Brazil, is being challenged by a new exchange platform called DDA - Débito Direto Autorizad. On 19 October 2009, this new direct settlement platform initiated its first payments. What the DDA does is to allow customers to visualise and pay their Boletos without having to hold a physical Boleto paper, signalling the dematerialisation of Boletos. It is estimated that the number of Boletos issued per year is around 2 billion with an average value of B$1000 each, so the challenge is huge. The DDA option is purely at the discretion of the client and cannot be decided by the supplier or by the bank. The client just has to register as a member of this electronic clearing platform. It obviously allows corporates to settle Boletos more rapidly and get financing up-front as payments are confirmed earlier.
This system will also represent substantial savings for the banks with less back-office paper work to manage Boletos. The DDA is available across the country. It is likely that paper Boletos will slowly disappear over the next three to four years. After only a year DDA accounts for 10% of the overall Boletos volume, but should be around 50% in the next two years. Banks will propose all channels available for this new payment system, via internet or mobile phone for example.
Brazilian banks are looking offshore…
This is a new trend. Only one Brazilian bank, Itau, has developed a regional and global strategy so far, with a growing presence in the region primarily serving large Brazilian export companies in their acquisitions and development in Latin America. Itau has developed a presence in Argentina, Chile, Uruguay and Paraguay by acquisitions of local banks or of foreign banks (Bank Boston). Itau could have Mexico in its sights as the next step on the strategic list. Some other Brazilian banks are also making regional moves, including the very recent acquisition of Banco Patagonia in Argentina by Banco do Brasil in April 2010 and the capital increases of Bradesco in the Mexican credit card company (IBI) in May 2010.
The country is going plastic…
Plastic is the new phenomenon. Not only is Brazil one of the most sophisticated countries in the world in terms of moving funds electronically, but it is set to become one of the largest users of credit cards, which is a major change in the landscape. Cards are to fill the gap for a number of Brazilians who don’t have bank accounts (about 50% as previously mentioned). The banks are very aware of this opportunity and have put in place a variety of marketing campaigns selling the card concept, from promotions with department stores, to agreements with corporates to handle payrolls.
At the same time the central bank and government have just ordered the end of the monopoly on credit cards. While the three main cards issuers had exclusive distribution agreements with some banks i.e., MasterCard with Redcard, Visa with Visanet (now Cielo) and American Express with Bradesco, this cartel will not exist any more by law. The end of this oligopoly will mean more competition and a better price for the end-user and for corporates which are heavy users of credit cards such as Walmart or Carrefour. In the coming years different payment cards and credits cards will increasingly become the most common instrument for individuals to pay, collect and manage their cash.
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