Business Opportunities in Brazil

8/4/2019 Business Opportunities in Brazil

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Business Opportunities in Brazil

Winning in Emerging MarketsOctober 26, 2009Claudio L. S. Haddad


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Macro stability really matters

Process began in 1994 with the Real Plan Reached maturity with privatizations, fiscal responsibility (LRF) and the adoption of flexible

exchange rates and inflation targeting (1999)

Policies were maintained and enhanced, with operational independence of the Central

Bank, with full presidential support, in Lulas government Together with a favorable international situation until last year, the results have been:

Inflation: low and within the band set by the Central Bank

Positive and consistent GDP growth, accelerating in 2007-08

A reduction in Net Public Debt in relation to GDP Strong trade surpluses and high volumes of capital inflows

Accumulation of dollar reserves by the Central Bank

Investment grade status more capital inflows, virtuous cycle


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Sound and consistent policy pays off

Source:CentralBankofBrazil


Source:CentralBankofBrazil Source:IBGE

GDP real growth

4.3%

1.3%

2.7%

1.1%

5.7%

3.2%

4.0%

5.7%

5.1%

0%

1%

2%

3%

4%

5%

6%

2000 2001 2002 2003 2004 2005 2006 2007 2008


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Financial system loans - %GDP


September 2008 to August 2009

1999 to 2009

Even in the crisis, thanks to the soundness of theprivate financial system, Central Bank polic ies and

the official banks, loans held on

With reforms and stability, Brazil is becoming a normal country


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Recession is over and growth in 2010 can be 5%+

-15

-10

-5

0

5

10

15

99 00 01 02 03 04 05 06 07 08 09

Taxa Trimestral Anualizada

Taxa Acumulada 4 ltimos trimestres%aoano

PIB

Source: AC Pastore & Assoc iados


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Bovespa and S&P (USD)

Source:Bloomberg

20.0

60.0

100.0

140.0

180.0

220.0

260.0

300.0

340.0

380.0

420.0

460.0

500.0

540.0

Ja

n-05

Ma

r-05

Ma

y-05

Jul

-05

Sep-05

Nov

-05

Ja

n-06

Ma

r-06

Ma

y-06

Jul

-06

Sep-06

Nov

-06

Ja

n-07

Ma

r-07

Ma

y-07

Jul

-07

Sep-07

Nov

-07

Ja

n-08

Ma

r-08

Ma

y-08

Jul

-08

Sep-08

Nov

-08

Ja

n-09

Ma

r-09

Ma

y-09

Jul

-09

Sep-09

Index

IBOV

S&P

As a result, markets have been bullish and recovered fast


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Companies have been able to raise capital through share issues

Bovespa - Primary Offer of Shares

29 13

29

59

9 8

0

50

100

150

200

250

2003 2004 2005 2006 2007 2008 2009*

Number

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

R$millio

Number Volume

* Up to October 10Source: CVM


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However, business climate in Brazil is not that favorable

Easeof...

DoingBusiness2010rank*

DoingBusiness2009rank*

Changeinrank

DoingBusiness 129 127 2

StartingaBusiness 126 127 1

DealingwithConstructionPermits 113 107 6

EmployingWorkers 138 141 3RegisteringProperty 120 116 4

GettingCredit 87 84 3

ProtectingInvestors 73 70 3

PayingTaxes 150 146 4

TradingAcrossBorders 100 94 6

EnforcingContracts 100 99 1

ClosingaBusiness 131 129 2

*Rankoutof83economiesNote:DoingBusiness2009rankingshavebeenrecalculatedtoreflectchangestothemethodologyandtheadditionoftwonewcountries.


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Although not so bad when compared to other BRICs

Source:DoingBusiness2009


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Competitiveness is improving, but not so fast

Source:WorldCompetitivenessYearbook IMD

*Rankoutof57countries


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WCY Government efficiency is seen as the worst among BRICs

CompetitivenessFactors Brazil OECDAverage* China IndiaRussian

Federation

Overall 40 23 20 30 49

EconomicPerformance 31 25 2 12 49

GovernmentEfficiency 52 27 15 35 39

BusinessEfficiency 27 25 37 11 54

Infrastructure 46 19 32 57 38

*Averageof28countries(nodataofrankingforIcelandandSouthKorea)Source:WorldCompetitivenessYearbook IMD


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Competitiveness of Nations Index - FIESP

Databasestructure:83variablesgroupedintoeightfactorsthatdeterminethecompetitiveness,asfollows:

Source:FIESP


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The FIESP index tells a similar story

Source:FIESP


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Tax burden - %GDP

*2009correspondsJanuaryJulyCentral government primary expenditures - %GDP


Source:ReceitaFederal

*2009correspondsJanuaryJuly

Tax burden is one of thehighest among emergingcountries and government

spending keeps increasing

Most of the spending isconsumption and transfers;of the Central Gov. primaryexpenditures, investment isjust 1% of GDP


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Spending in Social Security as a % of GDP and % of Aged Population (65+) in Total Pop.

(2004)

0.0

5.0

10.0

15.0

20.0

25.0

0.0 5.0 10.0 15.0 20.0 25.0

Pop. 65+ (%)

S

pending/GDP(%)

Brazil 2005

Spending = 1.12 (Pop.) 3.27

Japan

Austria

Korea

Poland

ItalyFrance

Spain

Portugal

Spending in Social Security is way out of line with international comparison


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Logistics: another weak point

* Average of 28 countries (no data of ranking for Iceland and South Korea)

Source: Logistics Performance Index 2007 The World Bank


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Logistics: BRICs and OECD


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Corruption no significant improvement (except for India?)

Source:CorruptionPerceptionIndex TransparencyInternational


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Performance in mathematics - PISA 2006

Source:OECD

Education is stil l a sore point...


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Average years of schooling of the labor force* in Brazil

* Workers with 10 years or more.

Source:PNAD

But also improving. Slowly...


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Problems and OpportunitiesThe bulk of the Fiscal Stimulus has a permanent impact on government spending:

Temporary Measures:

Tax rebates beg. of the year: R$ 8 bi

IPI reduction for cars 2T09: R$ 1.5 bi (cont.3T09)

Tax rebates motorcycles

and construction R$ 1.7 bi

IPI reduction appliances: R$ 250 mi

Other tax rebates: R$ 3.3 bi

Increase in unemployment

insurance/benefits R$ 126 mi

Permanent Increases:

Wage hike of government employees:

2009: R$ 17.8 bi

2010: + R$ 11.1 bi 2011: + R$ 7.2 bi

Total: R$ 36.1 bi.

Increase in Bolsa Familia: R$ 1.7 bi

Increase in Pensions: R$ 5 bi (2010)

Taking out some investment expenditures from the primary surplusdefinition and increasing BNDEScapital with government securities, also impact the bottom line (Net Borrowing Requirements)


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Government debt - % GDP


As a result, public debt is increasing again and the trend is up


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But the momentum is clearly favorable

With the end of the crises the global demand for nature relatedproducts (agribusiness, minerals, steel,pulp) should continue to grow

With hydroelectric potential still untapped, ethanol, the Campos basin and the Pre-Salt reserves, Brazilhas secured energy independency

Brazils image offshore have never been better continuous capital inflow

World Cup (2014), bullet train Campinas-Sao Paulo-Rio and Olympics (2016) provide good opportunities- and risks - and add to self-esteem (construction companies and contractors will benefit)

Pre-Salt implies huge investments with spillover effects in the rest of economy (all technology, materialsand equipment related to oil exploration will benefit)

As a result, FDI and portfolio investment will stay high and thereal will remain appreciated

Brazil will continue to loose comparative advantage in manufactures, except for the ones related to thesectors above and others where the company can add distinctive value (Havaianas sandals, Embraer)


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Risks As in previous periods of euphoria (late 50s and the 70s), hubris, vested interests and ideology can lead to

bad decisions, leading to misallocation of resources, government deficits, inflation and/or recession

Brazilian savings rate is still low (around 20% of GDP) and insufficient to finance the big investment ticketsplanned for next years, like these:

Pre-Salt: $200 bil. USD + (total still uncertain)

Bullet train: $20 bil. USD

World Cup $5 bil. USD (?) Olympics $15 bil. USD + (over pricing?)

Plus all the other related to PAC (energy, transportation), education, upgrading of armed forces (fighterjets, nuclear submarine, etc.), broadband universal penetration and so on

Total investment (private and government) in 2009: $234 bil. USD (17% of GDP); investments

have fluctuated around 18% of GDP

Since private savings are fairly inelastic in the short and medium term, there is a need for moregovernment savings and/or a continuous high inflow of foreign money only sustainable if the virtuouscycle and the favorable image have continuity

What will be the lasting value (social rate of return) of some of the above investments?

Documents

Business Opportunities in Brazil