Thursday, December 1, 2011
Securitization in Brazil: Opportunities and Limitations
The securitization market in Brazil is best described as small but solid. Although the market remains in its infancy, it has experienced significant growth since 2003 largely due to stabilized macroeconomic conditions and important legislative changes. Brazil's structured finance market is unique especially in the developing world for the broad range of assets that are securitized.
For international investors the market is burdened with limitations. Foreign investment in Brazilian structured products is generally inhibited by the 15 percent withholding tax. Cross-border issuance is very small. For Brazilian investors, structured products are not very attractive at current interest rates. Asset-backed securities are too complex and too expensive to compete with less-risky sovereign or corporate debt. This could change, however, if and when the benchmark Selic rate drops below 8 percent.
Mortgage securitization, the pillar of securitization activity in structured finance markets around the world, is relatively small in Brazil. By law, banks are required to direct 65 percent of their savings accounts to the housing market. This model has stifled growth in mortgage-backed securities. Although Brazil adopted a capital markets-based system of real estate finance in 1997, the country's real estate sector still relies heavily on a savings and loan format.
Brazil's pent-up housing demand means that housing-backed loans, or CRIs, are poised for expansion. In 2008, Latin Finance reported the housing deficit to be approximately 8 million homes. During the first five months of 2010, the housing sector financed 147,000 units, an increase of 50 percent from 2009. According to the Brazilian Association of Real Estate Loans and Savings Companies (Associação Brasileira das Entidades de Crédito Imobiliário e Poupança) or ABECIP, Brazilian banks will face a housing finance deficit of R$100 billion by 2013. This means that additional funding must come from alternative sources, including but not limited to CRIs. Based on ABECIP's estimates as reported by Brazilian newspaper Valor Econômico, CRI, considered an off-balance sheet transaction, will increase in volume over the coming years. Separately, a current trend of extending maturity among CRIs makes mortgage-backed securities increasingly attractive to investors.
Continuous expansion of Brazil's financial sector, including consumer credit markets, means structured finance growth is inevitable. Monetary policy tightening will eventually reverse its course and interest rates will come down. If and when interest rates drop to new lows, investor appetite for securitized products may drive growth in Brazil's securitization market.