OPINION. CDI alone is not enough

Few financial instruments have contributed as much to the formation of Brazilians' wealth as investments tied to the CDI. For decades, they offered a rare combination of liquidity, low risk, and positive real interest rates, a consequence of one of the highest nominal interest rates in the world. In an economy marked by high inflation, fiscal crises, and exchange rate instability, this was the right medicine.

It protected Brazilians' savings when the country needed it most. The problem is that medicines also have side effects. When used for too long, some stop treating the disease and start creating dependence. In extreme cases, they become part of the problem itself. And this happened with the CDI. What was once a protection mechanism turned into the main opportunity cost of Brazilian capital.

Today, practically every investment decision starts with the same question: is it worth giving up the CDI? When the answer is negative, companies, infrastructure, innovation, stocks, and long-term projects are not financed. The investor acts rationally, but the aggregated result is an economy that invests less, grows less, and remains excessively dependent on high interest rates.

This logic also contaminates the state's financing. The greater the investor's preference for post-fixed securities, the greater the difficulty of the Treasury in issuing pre-fixed or inflation-indexed debt in the long term. At different times, more than 40% of Brazilian public debt was indexed to the Selic. In a scenario of continuous expansion of public spending and growing risk of fiscal dominance, the problem worsens: every increase in the Selic immediately increases the cost of public debt, worsens the perception of fiscal risk, and reinforces demand for post-fixed securities.

The medicine starts to feed the disease itself. What was once a consequence of fiscal fragility has become one of the factors that help perpetuate it. But perhaps this is not the main consequence. There is a more silent – and possibly more dangerous – effect. For decades, Brazilians have become accustomed to believing that preserving wealth meant investing in CDI.

This strategy worked as long as the reference was only to the Brazilian currency and as long as the country reaped the benefits of the reforms initiated with the Real Plan and deepened in the following decades. However, wealth does not only buy goods in Brazil. It is essential that it buys global purchasing power. And it is precisely there that the greatest vulnerability lies.

Brazil continues to be one of the countries with the highest concentration of financial wealth in its own currency. While the CDI rises daily, this concentration transmits a sense of security. But all it takes is a significant deterioration in fiscal confidence for a strong exchange rate depreciation to destroy, in a few months, a significant part of the purchasing power accumulated over years of high interest rates.

In a more extreme scenario, an inflationary spiral resulting from the loss of fiscal credibility can erode even the wealth protected by assets indexed to the CDI. In other words, it is possible to make money in CDI during a decade and lose real wealth in a few months. History shows that this risk is far from theoretical. The maxi-devaluation of the real in 1999, the speculative attack on the British pound in 1992, the successive currency crises in Turkey, the recurrent collapses in Argentina, and, in its most extreme form, the destruction of the Venezuelan currency demonstrate that no investor should confuse nominal profitability with wealth preservation.

In Argentina, for example, an investor who ended 2001 with the equivalent of $1 million in pesos and kept their resources applied at the local basic interest rate would have closed 2002 with approximately 1.39 million pesos. However, after the exchange rate depreciation, this wealth would represent only about $415,000 – a loss of approximately 59% of international purchasing power in just one year, despite the interest received.

Taking the same exercise until 2026, the wealth would be equivalent to approximately $282,000 (this without considering that the resources originally in dollars could have remained invested in strong currency assets throughout this period). This may be the true curse of the CDI. It was so efficient in protecting local currency wealth that it convinced the Brazilian investor that they did not need to diversify their risks across different asset classes, countries, and currencies.

By doing so, it created a false sense of security. If Brazil does not face its fiscal imbalances and does not reduce its dependence on indexing, the investor's greatest risk will no longer be market volatility. It will be discovering, too late, that their wealth accumulated in reals buys less and less in the rest of the world – and, in an extreme scenario, even within Brazil itself.

The CDI saved the patient when they were in the ICU, but no patient survives living forever on intensive care medication. Building wealth does not mean beating the CDI every month. It means preserving and expanding purchasing power over decades. Renan Rego is a partner and CIO at G5 Partners.