This engaging discussion with Andreas Devas, a prominent investment banker in Latin America, covers the critical geopolitical and economic challenges faced by global and local markets and economies. The conversation addresses concerns over global political tensions, especially the US-China dynamic, and anticipates potential impacts of upcoming elections and their influence on the global economy. Devas offers a nuanced view on the economic prospects of China and the US while highlighting the volatile nature of modern financial markets driven by central bank policies.

The conversation then shifts focus to the Brazilian economy, underscoring the country's substantial renewable energy resources and the recent fiscal and economic reforms implemented by the government. Devas elaborates on Brazil's financial services market dynamics, fiscal discipline, and how Brazil is positioned as an attractive destination for foreign direct investment despite challenges like high taxes and regulatory competition.

Main takeaways from the video:

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Key Vocabularies and Common Phrases:

1. protectionism [prəˈtɛkʃənɪzəm] - (noun) - The economic policy of restraining trade between countries through methods such as tariffs on imported goods, restrictive quotas, and various other government regulations. - Synonyms: (insulationism, trade restriction, economic nationalism)

He's worried about the shift of protectionism in the US and in Europe.

2. geopolitical [dʒiˌoʊpəˈlɪtɪkəl] - (adjective) - Relating to politics, especially international relations, as influenced by geographical factors. - Synonyms: (political, international, strategic)

I'm less gloomier than that, I think. Of course we have global geopolitical tensions, a lot of things to worry about.

3. unpredictability [ˌʌnprɪˌdɪktəˈbɪlɪti] - (noun) - The quality of being difficult to predict; lack of predictability. - Synonyms: (uncertainty, variability, inconsistency)

And I don't think it's not necessarily unpredictability

4. arbitrage [ˈɑrbɪˌtrɑʒ] - (noun) - The simultaneous buying and selling of securities, currency, or commodities in different markets to take advantage of differing prices for the same asset. - Synonyms: (exploitation, trading, speculation)

An amazing labor arbitrage, huge investments in infrastructure with fantastic productivity gains.

5. volatility [ˌvɒləˈtɪlɪti] - (noun) - Liability to change rapidly and unpredictably, especially for the worse. - Synonyms: (instability, fluctuation, unpredictability)

I think generally these combinations bring volatility.

6. overcommunicate [ˌoʊvərkəˈmjunɪˌkeɪt] - (verb) - To communicate an excessive amount of information or more than necessary. - Synonyms: (excessive explanation, redundancy, overelaborate)

I think certainly over communicating because when you are a central banker.

7. fiscal credibility [ˈfɪskəl ˌkrɛdəˈbɪlɪti] - (noun) - The trustworthiness or reliability that a government's fiscal policy is sound and sustainable. - Synonyms: (financial trustworthiness, budgetary reliability, economic soundness)

Central bank is doing their job, moving back inflation expectations to the target, which is 3% in the case of Brazil, is fiscal credibility.

8. nominal deaths to gdp ratio [ˈnɒmɪnl dɛθs tu ˈʤiˈdiˈpi] - (noun) - A measure of a country's nominal debt as a percentage of its gross domestic product (GDP). - Synonyms: (debt's share of GDP, fiscal ratio, economic indicator)

Pretty similar number of nominal deaths to gdp, Brazil and US.

9. labor reform [ˈleɪbər rɪˈfɔrm] - (noun) - Changes and improvements in the laws regulating the workforce and employment practices. - Synonyms: (employment regulation, workforce changes, labor legislation)

During President Temer, we did a very important labor reform.

10. neutral [ˈnjuːtrəl] - (adjective) - Not supporting or helping either side in a conflict or disagreement. - Synonyms: (impartial, unbiased, nonaligned)

And that's, I think, what makes Brazil a neutral country at the end of the day.

In Conversation with André Esteves

Andre, let's start with the big picture. Pardon me, wardrobe malfunction. I met yesterday with one of the biggest investors in Brazil, a billionaire with decades of success all over the world. And he told me that the future never seemed more dismal, gloomy. He's worried about tensions between the United States and China. He's worried about the shift of protectionism in the US and in Europe. He's worried Trump will win the US Election and create chaos and geopolitics, and with it, of course, the global economy.

You are arguably the most powerful investment banker in Latin America. What do you see when you look into the future? I'm less gloomier than that, I think. Of course we have global geopolitical tensions, a lot of things to worry about, but generally the world has been handling that and I'm not necessarily bearish on geopolitical issues. When you think about Trump election. Right. I think Trump has been tough but responsible. And sometimes when you have confusion in the saloon, it's not necessarily bad to have someone arriving with unpredictable behavior can bring more predictable behavior of everybody else.

So should I interpret that as you seeing a Trump victory as a positive? No, I'm just saying that you have a genetic view of bringing more unpredictable outcomes. And I don't think it's not necessarily unpredictability. Isn't that necessarily a bad thing? Yes, that's my point. So we have, of course, the US election coming up in 13 days, but there are two polls to this geopolitical tension we're talking about. There's the US on the one side, and the US economy, as you know, continues to do extremely well. Interest rates are coming down, inflation is moderating, the unemployment rate continues to be quite low.

On the other hand, of course, we have China. And the Chinese economic model today looks a lot different than it did just a few years ago. Tell me what you expect from China. I'm. In this case, I'm worried with both sides. Starting with China, I'm worried about the model. What drove these amazing 30 years of Chinese growth was a combination of big migration from rural areas to urban areas and the consequent urbanization of that. An amazing labor arbitrage, huge investments in infrastructure with fantastic productivity gains, and on the top of that, a very vibrant capitalism.

When you look at China today, all of these factors offer some challenge. Right? Labor cost arbitrage is not there anymore, or at least not in the same fashion. Right. A blue-collar worker in China makes more or less the same than a blue-collar working In Brazil or Mexico, no more migration from rural areas and to urban areas and no more consequent urbanization in the same velocity. And the marginal investment in infrastructure doesn't bring the same productivity. And regarding the amazing entrepreneurial environment of the last 30 years, also some shifts, some more prioritization on politics regarding the economy.

And on the top of all of that, you also had the surprising birth rates to the worst. So Chinese population is shrink. If you ask ChatGPT what is the population of China in 2100 it will tell you. 564 million people. It's a big challenge. So we had the package. Maybe it's the beginning of risk shift in the direction of economic priorities we need to see. But I think we have challenge there. But we also have challenge in us. And the challenge in us for me is related to public deficit and the debate about that.

Or in better words, the lack of debate about that in the public campaign. Right. It's a very high deficit with less buyers of U.S. treasuries and we don't see this debate happening. It's in reality, even if you are the owner of the printer, there is a limit to print. So I'm worried about that with the US So if on the one hand you have a very different Chinese economic model in which you lack some confidence and you have a US deficit ballooning out of control and the potential for the bill, if you will, to come due that someday in the not too distant future, what does the combination of those two things mean for the global economy?

And perhaps more relevantly, seeing as we're sitting here in Sao Paulo, the economies of the global South, I think generally these combinations bring volatility. And if you look this year, somehow that's what we are seeing when you look at us, we started the year pricing a 50bps cut in March with seven other cuts in the yield curve. Then March arrived and no cuts and gradually the other cuts disappeared from the yield curve. By midyear we we had a view that no more cuts ever.

Then two months later and we were, our fear was we are very close to a recession and eventually we need an emergency cut. An intermittent Monetary Policy Committee meeting of the Fed and then suddenly, no, it's not close to recession, but we got 50bps cut in September. Meeting one week later, the market was worried about eventually no more cuts this year. So it's an interesting scenario because it's amazing volatility of scenarios and part of that driven by the Fed.

And when you look at the underlying assets, the US economy Much less volatile than that. So it's a, it's an interesting landscape, probably related to what we discussed before. When you say driven by the Fed, are you suggesting that the Fed is either over communicating or miscommunicating? I think certainly over communicating because when you are a central banker and today the information that any central bank has is not that different than the market information.

But if you over communicate, you over guide the markets in the best of your interests and objectives, you lose what is the most important point of observation, which is the market price. That's the most important piece of information. If you are over guiding the markets, you are somehow losing that. And I think we are in a moment of global central banking that we are over communicating, not necessarily miscommunicating, but we are over guiding markets.

I prefer a more quiet central bank and let the market provide us with a very important piece of information, which is the prices. Most of the world's major central banks, including the Fed, are of course cutting interest rates. As inflation subsides. The Banco Central do Brazil is going in the opposite direction. It's raising rates. And usually when a central bank raises rates, the currency appreciates.

But that's not what's happening here in Brazil. In fact, the real keeps getting weaker. What's wrong with this picture? I think markets are more pessimist than the state of the economy in Brazil. Brazil will grow 3.1, 3.2% and very important without any constraint indexed accounts. So current account deficit will be something around one and a half percent. We have international reserves that are quite liquid. The US Treasuries, low external debt.

So it's an interesting balance. There is a lack of confidence about long term fiscal results, which is we need to deliver. And regarding the interest rates hike, we are just in a different moment of the cycle. Brazil is with very tight unemployment, a very low unemployment, which is good for the economy. But maybe we are with inflation expectations slightly ahead of what they should be.

So central bank is doing their job, moving back inflation expectations to the target, which is 3% in the case of Brazil, is fiscal credibility. The underlying problem here we have in a certain way a similar situation than us, right? We have this year a pretty similar number of nominal deaths to GDP, Brazil and US. The difference that we don't own a printer and we need to be more rigorous than the US regarding that. So we need to deliver about that. We need to be disciplined.

But the good news about Brazil is that the fiscal deficit or the fiscal topic is being discussed every day in political campaigns during the newspapers in debates about that. And that's what I like. The first step to solve a problem is to identify the problem. And what scares me in the US that even without many buyers of long dated treasurers, you are not discussing the topic.

Roberto Campos Neto has been a stalwart of monetary rectitude here in Brazil. He has conferred enormous credibility to the central bank. Will his successor, Gilberto Gallipolo, be as resistant to political pressures as Mr. Campos Neto has? I think we are in an interesting moment of central bank in Brazil or the monetary history in Brazil. First, Roberto was the first independent central bank.

The independent constitutional independent central bank in Brazil is recent. Roberto is the first central bank governor that runs an independent central bank. But in reality, for more than 20 years, including Lula's first two administrations, central bank was operationally independent in practice for the last almost three decades. That's the logic in Brazil. So I think we have a smooth transition.

And the credibility goes beyond certain the credibility of Roberto, but is from the institution you think there is enough institutional credibility? You know, I'll just remind everybody that it was only last week that once again Donald Trump was talking to our own editor in chief, John Micklethwait, about how he wants to jawbone the Fed in this direction or that direction. Is that a possibility here too? I think part of the job description of a president or any politician is to make comments about the scene.

But honestly, I think central bank under this administration, the next or the previous will take technical actions and I don't have any doubt about that. Let me ask you about the government of President Lula. Where is it getting things most right economically? I think Minister Ab, the finance Minister, is doing a good job identifying the necessity of us creating a fiscal framework that brings stability. Remember, Brazil was upgraded by two rate agencies and most recently by Moody's.

And we are one step to investment grade. We need to continue to deliver and it's normal to have doubts. And we have a past of not necessarily fiscal discipline. So we need to deliver better results for the future. And I think Minister Adaj is absolutely aware of that. Where is this government getting things most wrong? I think it's still early on that, but I think honestly the government is doing a good job in creating the fiscal framework.

And what I think we should do is I prefer that government tightens more fiscal policy in order of keep less tight and monetary policy. That's one thing. On the microeconomic level, we are in a tight labor market and we created in Brazil a fantastic net of social Support, which is an achievement for Brazilian society.

But when you have zero unemployment, more or less where we are, it's time for us to release some of these policies that made a good job in the last 20 years in order to push people back to the formal labor market. So I would like to see these two moves and I think it will be very healthy.

I'd like to ask you about the local financial services market. Your firm, BTG Pactual is a giant in the wealth management business. As you know, asset management has been transformed in the United States and Europe over the past 15 years. Fees have collapsed. You can buy an index fund for just a few basis points, but here in Brazil, as I understand things, those funds are still pretty expensive. Not index funds, mutual funds.

You still pay maybe even a couple hundred basis points to own an equity mutual fund in excess of 100 basis points to own a fixed income mutual fund. Why are the fees so high? Not BTG funds. They're very cheap and perform very well. And I encourage all of you to invest on that. That is not the case across the industry though. What is going to trigger the collapse? The compression in fees in wealth management and asset management that we've seen elsewhere in developed markets? No, it's happening in Brazil also.

Right. You had a lot of democratization in terms of asset management and wealth management in Brazil, which is fantastic for the society. The concept of independent financial advisors, advisors, distribution network. There is a lot of competition in the Brazilian markets. New fintechs, new companies, big companies that became public companies, digital banks that are very successful. I see a pretty vibrant financial sector here in Brazil and competition will be there.

Regulation is very advanced. You have peaks in Brazil that you don't have anywhere. You move money in Brazil much easier than in US and much cheaper than in us So I think the financial infrastructure here is quite competitive.

Another phenomenon here is the recent flight movement, let's say, of investor capital out of hedge funds and into tax-free asset management products. And there's some concern in your industry about maybe the government eliminating some of those tax advantages. If that were to happen, and perhaps you can tell us if you think it's going to happen, would that spur yet another dramatic reallocation of investor capital here and with what consequences?

I don't see this happening because I think the big move in terms of keeping these tax incentivized products under control already happened correctly. Right? There was. It's a product of tax reform. Right? It's similar, not that different from munis in US or, or REITs in US so it's a similar constitution. The framework, the legal framework of Brazilian financial markets in US Markets are not that differently here.

I like the last change in regulation and I think they were correct. Produced by Brazilian sec, Central bank of Brazil. And I don't see big capital dislocations. I think it's. We are going the right direction there.

Brazil, as we have established in several conversations today, is a giant in renewable energy. Some 93% of all power on the grid is green. In theory, this should be. This country should be a magnet, right, for multinationals that want to build carbon free supply chains and want to set up green factories. You would know because of the firm that you run are more companies actually looking at Brazil now either to set up businesses or.

Or maybe to buy businesses here? Yes, yes. And I think that you can have some tectonic movements around that. And especially regarding the energy matrix that Brazil has, as you said, we have depends on how you measure. 85 to 90% of the matrix is renewables, which means that we are a renewable. The largest renewable energy matrix in the G20 and especially with low subsidies. Right. Because doing renewables in UK it's possible, but quite expensive. In Brazil it's not.

And I think Brazil could be a global hub for data centers. For example, as you know, you cannot build data centers in Virginia anymore, you cannot build. Or in UK you take two years to link your data center to the grid. In Brazil you have huge investment in transmission lines and renewable energy, fully available, not expensive.

And Brazil could be a very important hub for global data centers that will be needed globally. When you say tectonic, one of the opportunities. One of the opportunities. So when you say tectonic, what is it going to take to bring about that kind of a tectonic shift? Foreign companies find it difficult to operate in Brazil.

What does Brazil need to do to make it more attractive, more easier, if you will, for foreign companies to operate here? Yeah, it's partially right, partially wrong. Because if you look the last 20 years, FDI of Brazil has been one of the top five globally in the world. Right. And we receive, well, American companies, European companies, Mid Eastern companies, US company and Chinese companies.

So it's a good hub for fdi. And it has been like that through different cycles, different governments, different global perspectives. But of course we could do more. And we are not ideal, far from ideal. I think we should have less taxes, simpler regimes and easier way of doing business.

We can improve in all of these fields. Part of that we are trying to do, we are in the middle of a tax reform in Brazil, not approved yet, as always, not ideal, but much better than the system that we have today. And it's a step. We need other 19 steps to be ideal.

But even so, we have been attractive for that. Do you see those kinds of reforms, not the tax reform that's being discussed in Congress now, But the other 19 steps, as you say, being taken under this administration? Or are you going to have to wait for the next government?

I think we have been doing reforms through administrations, right? If you look, during President Temer, we did a very important labor reform. During President Bolsonaro, we did a very important Social Security reform. And now under President Lula, we are doing a very important tax reform. And that's sometimes we don't notice. We complain, we demand, we try to do better, but we reach at the reasonable level of institutionalization, which means that you do what is needed.

It doesn't matter who ideologically is in power. So I think we will complete the tax reform and we will continue to do especially microeconomic reforms. So if you look also on this side, a lot has happened in Brazil, from the dependent central bank to a lot of privatizations, concessions that are going on now under this government, under the previous government, and certainly under the next government.

If you look in the last three years, we privatized the three out of the six largest state-owned companies, right? It's Sabespi, two months ago, the largest water and sewage company in Brazil. Last year, Copel, the largest state-owned energy company. And two years ago, Electrobras, which is the third largest state-owned company.

So, and honestly well received by the society. I have a question for you, Andrea, about a theme that has run throughout this conference. Last night, right here, in fact, in this room, Alezio Mercadante, the president of Brazil's National Development bank, described a, quote, unquote, difficult geopolitical scenario for countries in the global south like Brazil. Tell us what you think.

How should Brazil position itself in this environment? Between where we started off, the conversation between the US on the one hand and China on the other, where does Brazil belong?

I think we should do what we have been doing, right? Sometimes we go a little bit more one side, a little bit more the other side. But if you look back, we have very good relationships to us here. We have our dear ambassador that we talk frequently. We have very good relationship with Europe, with Middle east, with China.

Especially if you are a Chinese infrastructure company, an European industrial company, or a US service company, you are treated equally in Brazil. All of them will follow the same rules, will obey the same law. And that's, I think, what makes Brazil a neutral country at the end of the day.

So culturally, we are open. Doesn't matter if you came from Middle East, China or us. You'll be treated equally. So we'll provide service. You need to pay taxes. You get BTG advice and do good business in Brazil. And nobody cares if you are making money.

You pay your dividends and it will be welcome. And that's what makes Brazil eventually a winner in this big geopolitical dislocation of divisive world. Andre, I'd like to thank you very much. Yeah. Thank you. Ladies and gentlemen, please join me in thanking Andreas Estevez. Thank you.

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