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By Renan Rego, partner and CIO of G5 Partners.<\/em><\/p>\n Few financial instruments have contributed as much to the wealth accumulation of Brazilians as investments linked to the CDI (Interbank Deposit Certificate).<\/p>\n 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.<\/p>\n In an economy marked by high inflation, fiscal crises, and exchange rate instability, this was the right remedy. It protected Brazilians’ savings when the country needed it most.<\/p>\n The problem is that remedies also have side effects. When used for too long, some stop treating the disease and become dependent.<\/p>\n In extreme cases, they become part of the problem itself.<\/p>\n And this happened with the CDI (Interbank Deposit Certificate).<\/p>\n What was once a protection mechanism has become the main opportunity cost of Brazilian capital. Today, practically every investment decision begins with the same question: is it worth giving up the CDI?<\/p>\n When the answer is negative, it means missing out on financing for companies, infrastructure, innovation, stocks, and long-term projects.<\/p>\n The investor acts rationally, but the aggregate result is an economy that invests less, grows less, and remains excessively dependent on high interest rates.<\/p>\n This logic also contaminates state financing. The greater the investor’s preference for post-fixed securities, the greater the difficulty for the Treasury in issuing long-term pre-fixed or inflation-indexed debt.<\/p>\n At different times, more than 40% of Brazilian public debt has been indexed to the Selic rate. In a scenario of continuously expanding public spending and increasing risk of fiscal dominance, the problem worsens: each increase in the Selic rate immediately raises the cost of public debt, worsens the perception of fiscal risk, and reinforces the demand for post-fixed income securities.<\/p>\n The cure ends up feeding the disease itself. What was once a consequence of fiscal fragility has become one of the factors that help perpetuate it.<\/p>\n But perhaps this is not even the main consequence. There is a more silent\u2014and possibly more dangerous\u2014effect.<\/p>\n For decades, Brazilians have become accustomed to believing that preserving wealth meant investing in CDI (Interbank Deposit Certificate).<\/p>\n This strategy worked while the reference was only the Brazilian currency and while the country reaped the benefits of the reforms initiated with the Real Plan and deepened in the following decades.<\/p>\n However, wealth doesn’t just buy goods in Brazil. It’s important that it buys purchasing power globally. And that’s precisely where the greatest vulnerability lies.<\/p>\n Brazil continues to be one of the countries with the highest concentration of financial wealth in its own currency.<\/p>\n While the CDI (Brazilian interbank deposit rate) rises daily, this concentration conveys a sense of security.<\/p>\n However, a significant deterioration in fiscal confidence is enough for a sharp currency devaluation to destroy, in a few months, a significant portion of the purchasing power accumulated over years of high interest rates.<\/p>\n In a more extreme scenario, an inflationary spiral resulting from the loss of fiscal credibility can erode even the assets protected by CDI-indexed assets.<\/p>\n In other words, it is possible to make money in CDI for a decade and lose real wealth in a few months.<\/p>\n History shows that this risk is far from theoretical. The massive devaluation of the real in 1999, the speculative attack on the pound sterling in 1992, the successive currency crises in Turkey, the recurring 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.<\/p>\n In Argentina, for example, an investor who ended 2001 with the equivalent of US$1 million in pesos and kept their assets invested at the local basic interest rate would have ended 2002 with approximately 1.39 million pesos.<\/p>\n However, after currency devaluation, this asset would represent only about US$415,000\u2014a loss of approximately 59% of international purchasing power in just one year, despite the interest received.<\/p>\n Carrying the same exercise to 2026, the asset would be equivalent to approximately US$282,000 (this without considering that the assets originally in dollars could have remained invested in assets denominated in hard currency throughout this period).<\/p>\n This is perhaps the true curse of the CDI (Brazilian interbank deposit rate). It was so efficient in protecting assets in local currency that it convinced Brazilian investors that they did not need to diversify their risks across different asset classes, countries, and currencies.<\/p>\n In doing so, it created a false sense of security.<\/p>\n If Brazil fails to address its fiscal imbalances and reduce its dependence on indexation, the biggest risk for investors will no longer be market volatility.<\/p>\n It will be discovering, too late, that their accumulated wealth in reais buys less and less in the rest of the world\u2014and, in an extreme scenario, even within Brazil itself.<\/p>\n The CDI (Brazilian interbank deposit rate) saved the patient when he was in the ICU, but no patient survives living forever on intensive care medications.<\/p>\n Building wealth doesn’t mean beating the CDI every month. It means preserving and expanding purchasing power for decades.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-11589","insight","type-insight","status-publish","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/g5partners.com\/en\/wp-json\/wp\/v2\/insight\/11589","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/g5partners.com\/en\/wp-json\/wp\/v2\/insight"}],"about":[{"href":"https:\/\/g5partners.com\/en\/wp-json\/wp\/v2\/types\/insight"}],"wp:attachment":[{"href":"https:\/\/g5partners.com\/en\/wp-json\/wp\/v2\/media?parent=11589"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}