Six ways Brazil can attract more investment
One thing almost all economists, business executives and political parties seem to agree on is Brazil’s need to stir up more investment. Except for some of the left-leaning parties, that includes foreign investment. A group of experts met recently at the Getúlio Vargas Foundation to discuss Brazil’s investment prospects under the new administration taking office after October elections. They offered six suggestions for boosting investor interest. Some are familiar; others may seem surprising:
Stable, rational regulatory rules. In Brazil, regulation runs rampant. Sergio Lazzarini, Professor of Business Administration at Insper in São Paulo, offers an example: “You can’t buy fuel-efficient light bulbs for government projects in Brazil because, under the law, you have to buy the cheapest possible product. So, you buy conventional light bulbs, even though they are less cost-effective.” Aside from being absurd, regulation is often unplanned. Notes Lazzarini, “How many times does the local Fire Department come in, after a project is finished, and say, ‘you can’t do this; tear it down and start over.’ The obvious question is, ‘why didn’t you tell me that at the beginning?’”
Better concession contracts. “Concession contracts are often badly drawn,” said Vinicius Carrasco, a Catholic University of Rio de Janeiro economist, “We’re afraid to offer anybody a profit. Risks are high and sometimes nobody shows up to bid.” Improvements in contracts might include protection against regulatory changes and delays, better classification of bidders in order to weed out those who are unqualified or opportunistic, and, clearer rules on returning concessions to the government in case of unexpected problems or crises.
Autonomous, non-political regulatory agencies. According to Ana Carla Abrão, a partner at the Oliver Wyman Consulting Group, “Because of the history of corruption, regulatory agencies are often afraid to make decisions. We need technically qualified, non-political regulators with the autonomy to make timely decisions.”
Swifter environmental licensing. In no area is the problem of delay and competence greater than in environmental licensing, where it can take a decade to obtain clearance and still face last-minute reversals and unexpected additional demands. “This should be a top priority area for reform,” said Abrão.
Administrative reform. “We need reforms in public administration not only to eliminate corruption but also to make the state deliver its services more efficiently,” said Abrão. These should include techniques familiar to the private sector such annual performance evaluations for public workers and performance benchmarks for work groups and departments.
More effective foreign exchange hedging. Foreign investors will inevitably face foreign exchange risk in their Brazilian investments. “We already have foreign exchange hedging mechanisms, but they are extremely expensive,” said Carrasco. “Foreign exchange risk should be more widely shared in development of projects.”
State of the Economy
Petrobras posts big second quarter profits on oil prices, debt reduction.
State-run oil giant Petrobras last week released second quarter balance sheets, showing a net profit of R$10.07 billion. That figure compared with net profits of only R$316 million for the second quarter of 2017. Profits rose on a combination of factors, including government subsidies for diesel fuel, paid directly to Petrobras, cost-cutting, asset sales and higher production and international oil prices. The company has also been successful in reducing debt-service costs. Net debt fell 13% from the end of 2017 to $73.7 billion. (see more)
Inflation accelerates to 4.48% as of July, just below annual target.
Brazilian inflation spiked in July, reflecting continued effects of an 11-day truck strike in May which disrupted everything from fuel supplies to assembly lines. July monthly inflation weighed in at 0.33%, with the 12-month figure accelerating from 4.39% as of June to 4.48%, or just a shade below the government’s target for the year of 4.5%. The rise in prices was especially burdensome to a population which had been learning to live with inflation under 3% as recently as last year. Economists, however, said most of the effects of the truck strike have now been absorbed by economic actors. They predicted much lower monthly rates in August and September, with inflation ending the year between 4.2% and 4.3%. (see more)
Foreign trade surplus falls as imports continue to surge.
Brazil posted a July foreign trade surplus of $4.23 billion, down 28% from June and 33% from July of 2017. The seven-month surplus of $34.2 billion was down sharply from $42.5 billion for the first seven months of 2017. The declining year-to-date surplus came despite a 7% rise in exports, which were buoyed by strong commodities prices and rising shipment volumes. But the increase in exports were far outstripped by the 21% rise in imports for the first seven months of the year. Imports are up, in part, on a taxation change which has made it convenient for Petrobras to repatriate a number of offshore oil platforms. The platforms have added $3.3 billion on the import side so far this year. But the main reason for the rise in imports is increasing domestic demand, economists said, keeping hopes alive for a sustainable economic recovery. (see more)
State of Business
- Mining giant Vale last week became the first Brazilian company to fully recover an investment grade credit rating since Brazil itself was downgraded in the wake of the 2014 corruption scandal. Moody’s Investors Service became the third, and last, of the major agencies to elevate Vale back to an investment grade rating. Vale had been downgraded along with Brazil. Later, the ratings agencies maintained the downgrade because of losses due to the 2015 dam break and landslide at a Vale-owned site in Minas Gerais. Since then, Vale has paid down most costs accruing from the 2015 accident, sold off satellite assets and sharply reduced debt.
- Tax-exempt debentures are enjoying a field day. The debentures, issued by private companies based on an evaluation by the Brazilian Development Bank (BNDES), totaled R$10.8 billion in the first half. By contrast, the market bought only R$9 billion in tax-free debentures during the entire year in 2017. The debentures enjoy tax-free status once the BNDES certifies that proceeds will be used in domestic infrastructure projects.
- The Brazilian Development Bank (BNDES) confirmed last week that it is ratcheting down its business loans. First-half lending was R$28.1 billion, down 20% from the first half of 2017; new loan approvals of R$30.7 billion declined 13% from the first half of last year. The bank is lending less, in part, because of heavy loan re-payments of its own to the Federal Treasury. But the government is also trying to encourage private sector lending to businesses, especially the largest and most credit worthy. One way to reduce BNDES lending to big companies is to charge them market rates. The bank noted, in its first-half report, that small and mid-cap companies accounted for higher percentages of total lending than in 2017.
- Online auto parts vendor Canal da Peça last week announced a partnership with one of Brazil’s biggest filling station chains, Ipiranga. The partnership will allow filling station owners and their customers to order parts online at reduced costs. Canal da Peça was founded in 2012 with an initial investment of R$29 million and is now seeking additional investors.
- Brazilian motor vehicle production continued robust in July, with domestic sales supporting output even as exports began to wane. According to figures from the National Motor Vehicle Manufacturers Association (Anfavea) this week, January through July production of 1.68 million motor vehicles was up 13% from the first seven months of 2017. Domestic sales were 1.38 million, a year-on-year gain of 14.9%. But seven-month exports of 430,000 were down 3% from the same period a year earlier. Exports are down because of a foreign exchange crisis in Argentina, traditionally Brazil’s best overseas market. Domestic sales, on the other hand, have been favored by low interest rates.
- Editora Abril, one of Brazil’s most traditional magazine publishers, last week announced major cuts to its line-up, along with other cost-cutting measures. The publisher will close at least six monthly publications, including Brazilian editions of Elle and Cosmopolitan. The company has contracted restructuring firm Alvarez & Marsal to manage its make-over. Abril holds some R$1.3 billion in debt and posted net losses last year of over R$300 million.
U.S. Dollar: The Brazilian Real closed at R$3.82 to the dollar, down 1.6% on the week and 18% year-on-year. The Real weakened on increasing political uncertainties ahead of October elections. (see more)
Stocks: The Ibovespa index closed at 78,625 points, down 0.7% on the week but up 17% on the year. Stock prices have stagnated in recent weeks on political uncertainties. (see more)
Interest Rates: The benchmark January 2020 contract closed at 8.12%, up from 7.89% the previous week as annual inflation spiked (see item above). (see more)
- Friday, August 10, Brazilian Census Bureau (IBGE) release of monthly retail sales data, Rio de Janeiro