Despite poor economic indicators, there was hope that the world’s two premier sporting events would provide a boost to the Brazilian leasing sector, but, as Paul Golden reports, the reality has proved to be very disappointing.

The Brazilian leasing market remains sluggish with lessors criticised for lack of innovation and lawmakers under fire over unhelpful regulatory changes.

According to the International Monetary Fund, Brazil is recovering gradually from the growth slowdown that started in the middle of 2011, but the recovery remains uneven and inflation is stubbornly high.

Output is estimated to be at maximum potential with supply-side constraints (linked to tight labour market conditions and protracted weak investment since 2011) limiting output expansion.

Weakened credibility

The IMF’s view is that excessive fine-tuning of fiscal policy (including through public banks) has weakened the credibility of Brazil’s long-standing fiscal framework, while broader policy uncertainty has weighed on investment.

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Estimates of potential growth have been revised down and the challenges posed by eroding competitiveness and economic imbalances remain. While the economy is expected to continue its recovery during 2014, supported by a pick-up in investment, the near-term outlook envisages continued monetary tightening and broadly unchanged fiscal policy.

Standard & Poor’s describes prospects for the Brazilian economy as subdued due to still weak GDP growth, high interest rates and persistent inflation. The FIFA World Cup and the presidential elections may provide some breathing room for the economy in 2014, but low investments rates, sluggish growth and uncertainties over the government’s ability to maintain a prudent fiscal policy are dampening optimism.

The ratings agency warns that continued slow economic growth, weaker fiscal and external fundamentals and some loss in the credibility of economic policy given ambiguous policy signals could diminish Brazil’s ability to manage an external shock. In addition, delays in implementing policies to boost private investment – especially in infrastructure – could raise the risks of further fiscal slippage and a related increase in the government’s debt burden.

Under that scenario, Brazil’s net general government debt-to-GDP could rise during the next two to three years. Furthermore, the government-owned banks’ substantial lending increase to stimulate domestic demand could further weaken Brazil’s fiscal position and pose asset quality problems for the financial system.

Real GDP growth

The baseline forecast from Standard & Poor’s assumes Brazil’s real GDP will grow 2.1% in 2014, slightly down from 2.3% in 2013. Lending from private banks has slowed as job creation and real wage gains moderated.

The country’s largest private and public banks are expected to face some headwinds in 2014. Last year, persistently higher than average non-performing assets reduced profitability across the industry.

Brazilian public banks have gained substantial market share from private banks since late-2010, undermining the healthy scenario for credit growth which had previously provided a performance boost to all banks with fast-growing balance sheets.

The public banks’ aggressive credit growth strategy has raised some questions about whether the current pace of origination is sustainable and Standard & Poor’s suggests it may be masking lower portfolio quality.

It expects non-performing assets and public banks’ high credit growth to moderate in 2014, while private banks maintain overall prudent credit strategies and focus on improving their asset quality.

Figures from the Association of Brazilian Leasing Companies (ABEL) show that overall lease values fell by almost one-third between September 2012 and September 2013.


Machinery and equipment is the second-largest segment, accounting for more than 42% of total lease values and only just behind motor vehicles which represent just over 45% of leased assets. IT accounts for 4% of the overall market.

The Alta Group Latin American region (Alta LAR) report published in December referred to a stark decline in Brazil’s leasing market in recent years, estimating that the country’s portfolio value fell by 39% in 2012.

According to Rafael Castillo-Triana, chief executive of Alta LAR, lessors in Brazil are victims of their own success.
"For more than 40 years, the leasing industry enjoyed a favourable legal and tax environment, he says.

"As a result, leasing became a tool to provide motor vehicle financing, mainly to consumers. The leasing industry was not motivated to innovate or differentiate its offerings."

Cesar Zarate, general manager Brazil CSI Leasing, says the market has been experiencing shrinkage over the past few years as a result of changes in the regulatory regime.

"The large banks, which are the dominant players in this market, had significant amounts of transactions concentrated on car and truck leases to individuals. Due to changes in regulations, those leases have been replaced by simple car loans, so the market size has dropped significantly."

According to ABEL, the value of this market fell from R$112.3bn (€36.2bn) in December 2009 to R$27.9bn as of December 2013.
"The main impact of this reduction has been on leases to individuals, but leasing to business has also declined over this period," says Zarate.

When asked about the most significant recent legislative developments in the leasing market, he refers to a 2013 decision from the Supreme Court that was favourable to leasing companies since it clarified the place where the ISS (services tax) has to be collected.

Municipalities across the country were claiming that this tax should be collected in the place where the lessee is located, instead of the place where the lessor is located, which is the current practice.

Although the decision was favourable to the leasing industry, there is now a proposal to approve a law allowing municipalities tocharge the tax, so a degree of uncertainty remains over the issue since every municipality could charge a different tax rate if
this proposal is followed up and passed into law.

In 2013 the Supreme Court also decided that the guaranteed residual value (VRG) should not be returned to the lessee, except when the proceeds from the sale of the asset are higher than the VRG. With this decision the Court concluded a lengthy discussion in the leasing market.

Let the games begin

The 2014 FIFA World Cup and the Rio de Janeiro Olympic Games in 2016 were expected to boost lease activity.

The Brazilian government had claimed that the World Cup alone would generate $28bn (€20.4bn) of public and private investment in urban developments, ports, airports, stadiums, tourist infrastructure and services.

Zarate says the announcement of the World Cup and the Olympics taking place in Brazil raised a lot of expectations regarding the potential for new investments associated with the events.

"However, many of these expectations were never met. Investments were mostly made to build new stadiums in the cities that will host the games and develop a few airports.

The limited number of projects implemented were mostly financed through the BNDES (Brazilian Development Bank) and other government sources."

This has caused a great deal of frustration among the public as evidenced in the much-publicised civil unrest on the streets of several of the country’s cities during the summer of 2013.

"People feel that too much money was spent on preparations for the World Cup, instead of putting money into other areas that need urgent investment such as health, transportation and education, Zarate adds.

"Also, the leasing market did not present an increase in its activity as showed by ABEL statistics.

"Actual investments in telecommunications, transportation and tourism were low and although there are still a couple of years until the Olympic Games, it does not seem that the situation will be different than for the World Cup."

Zarate admits that it is hard to say whether the leasing market will grow this year compared to 2013.

"In this time of high market volatility and uncertainty it’s difficult to expect optimistic results for 2014. The economy grew by 2.3% in 2013 and estimates for 2014 show 1.7% growth. Interest rates are going up due to the government’s concerns over high inflation and in October there will be presidential elections, which historically delay investments in infrastructure."

Market share

Market share remains heavily skewed in favour of bank-owned lessors, which were responsible for around 83% of the market at the end of last year. Although this share has been decreasing in recent years as a result of the above mentioned changes, banks continue to be the dominant players in the market and their portfolios are fully concentrated on capital leases.

Captive companies have around 15% of the market, again with a high concentration in capital leases. Independents work niche markets, mainly with fair market value leases.

Zarate says the government has not taken any direct or indirect action to support the lease finance industry, adding that the sector does not seem to be on its agenda. Similarly, he refers to a lack of effort to reduce the burden of regulation on leasing companies. "Although many regulatory changes are necessary and desirable, there are no signals that allow us to think about changes happening soon."

The shrinkage of the leasing market has impacted practically all segments and has also distorted the analysis for many segments, he concludes.

"I would say that motor vehicles is the segment suffering the highest negative impact, while markets such as machinery and aircraft seem to be doing slightly better than the overall market. I am not optimistic about the lease market in general due to the economic uncertainties.

However, considering the size of the Brazilian economy, there is still a lot of space to grow for companies that work in specialised sub-markets and/or niches and are able to provide their customers with an asset management solution, instead of simple financing."