Is sale of state-run companies the answer to Brazil’s fiscal crisis?
Yes…and…no. Brazil’s government is rich in assets. Selling them could bring in much needed revenue in the face of a fiscal crisis. But there are some caveats. One is that a sell-off plan devised by Finance Minister-designate Paulo Guedes will dedicate revenues to debt reduction only. Critics say it doesn’t attack the underlying problem of out-of-control transfer payments and benefits that are sapping the nation’s fiscal strength. They also note that, from a strictly marketing viewpoint, it would be impossible to sell massive assets all at once—there is only so much investor appetite and means. But there are also some hidden benefits to the plan, which proposes, among other things, a systematic survey and review of assets. After the review, some state-run companies could be restructured, others privatized only partially and still others, the biggest money losers, simply shut down. Some data has already been collected. According to a Federal Treasury study, the government paid out R$20.2 billion in subsidies to its own companies in 2017, up sharply from R$6.5 billion in 2012. Some 18 of the federal government’s 138 companies were described as chronic money-losers, responsible for R$14.6 billion of last year’s subsidy bill. By contrast, the government earned only R$5.5 billion in dividend and other income from the companies it owns in 2017. In other words, the job of selling, reorganizing and shutting down state companies could bring more than just one-off revenues; it could result in permanent savings. Altogether, including states and municipalities, Brazil has an astounding 418 companies owned or controlled, directly or indirectly, by the public sector. That figure is higher than in any of the 36 countries currently belonging to the Organization for Economic Cooperation and Development (OECD), an entity Brazil hopes to join in the near future. Guedes would like to reduce the number of government-owned companies, ideally to zero, although political pressures are already exempting some, especially in the strategic area of energy. In an interview with Veja newsmagazine, Guedes put the total value of federally-controlled companies at about R$1 trillion. He also noted some 700,000 government-owned properties, such as buildings and vacant urban and rural lots, that could be sold for another R$800 billion. These astronomical figures would, in principle, be applied against the even more astronomical totals for federal and public sector debt, respectively, R$3.6 trillion and R$5.2 trillion. “Doing this,” he said, “will scale back debt and, consequently, debt-service costs, fight corruption, stimulate competition and reduce prices for consumers.” It all starts next year.
State of the Economy
Third quarter shows 1.3% boost in GDP against third quarter of 2017.
Brazil’s economy, in the third quarter, continued to pull away from effects of a long recession. Gross domestic product expanded by 0.8% against the second quarter and 1.3% against the third quarter of 2017, according to figures released this week by the Brazilian Census Bureau (IBGE). Growth was led by agriculture, which expanded 2.5% year-on-year. Services were up 1.2% while industry pulled up the rear at only 0.8%. Economists were especially encouraged by the rise in total investments, which expanded 7.8% against the third quarter of last year. Growth for calendar 2018 is still seen by the government at a modest 1.4%. However, growth forecasts for 2019 are now focusing on about 2.5%, with some economists even venturing to predict 3.0%. Growth is being fueled by tame inflation, historically low interest rates, a boom in exports and rising employment opportunities and demand. (see more)
Industrial production picks up after three straight months of decline.
Brazilian industrial production rose 0.2% in October against the previous month, the first increase after three straight months of decline, the Brazilian Census Bureau (IBGE) said this week. Output was up 1.1% against October of 2017. The figures represent a recovery from effects of a debilitating truck strike in May. Especially heartening was the increase in capital goods production, up 10.7% against 2017, and durable goods, posting an increase of 6.8% against October of 2017. The rise in capital goods production could presage a return to investments by manufacturers in expansion of plant and equipment. Increased purchases of durable goods reflect effects of historically low interest rates. (see more)
Brazil posts November trade surplus of $4.06 billion, total trade hits record.
Brazil racked up a November foreign trade surplus of $4.06 billion for a year-to-date surplus of $51.6 billion. Total trade during the first 11 months of the year hit $388.3 billion, up 14% from the same period in 2017 and a new record. Record trade is coming as both imports and exports advance. Brazil is unlikely to match the 2017 trade surplus of $58 billion but it will certainly surpass total trade. According to economists, rising imports are as important for the economy as the advance in exports since imports include raw materials and capital goods used by manufacturers as well as consumer goods. Total exports for the first 11 months of the year were $220 billion, up 9% from 2017, while imports were $168.3 billion, up 21%. (see more)
State of Business
- Online retail revenues skyrocketed in Brazil during the last weekend of November, highlighted by traditional “Black Friday” sales. Volume reached R$3.55 billion, up 25% from last year, according to figures this week from Ebit/Nielsen, which tracks the sector. Lower interest rates and rising employment helped fuel the surge in buying.
- Engineering and construction giant Odebrecht last week signaled it will seek to renegotiate some $3 billion in overseas debts with creditors. Odebrecht informed creditors it will not pay $11.5 million in overdue interest on outstanding bonds. In addition, the company has hired three international consulting firms as a preliminary to an informal renegotiation and restructuring of debt. The company has faced financial difficulties since 2014 because of its involvement in a broad corruption scandal in Brazil.
- Who’s buying and who’s selling in Brazil this week? Petrobras raised $823 million with the sale of offshore and onshore oil rights to two buyers. Perenco bought three offshore areas while 3R Petroleum bought 34 onshore sites. The sales are part of a Petrobras strategy to pay down debt and refocus on core oil and gas development.
- U.S. investment fund Carlyle has purchased a 22.3% stake in Brazilian hamburger chain Madero for an estimated R$700 million. Madero has experienced rapid growth to 139 restaurants since its founding in 2005. Carlyle bought the stake from the chain’s founding partners.
- French oil giant Total purchased the Minas Gerais-based Zema chain of gas stations for an estimated R$500 million. The purchase represents Total’s first foray into Brazilian fuel retailing. The chain belonged to its founders, the Zema family. One family member, Romeu Zema, is Governor-elect of Minas Gerais.
- Who’s investing in Brazil this week? Real estate brokerage platform QuintoAndar this week announced additional financing of R$250 million from international investors, led by General Atlantic. The money will be used to expand operations from the company’s current bases in São Paulo and Rio de Janeiro to Belo Horizonte, Brasília, Porto Alegre and Curitiba.
- French hotel group Accor announced a R$250 million investment to retrofit an aging building in Copacabana into a new hotel belonging to its Fairmont brand. The new property will be the first Fairmont unit in South America.
- Southern steelmaker Gerdau announced investments of R$550 million to expand existing facilities in Pindamonhangaba, São Paulo. The investment is part of a plan to boost production capacity from 600,000 metric tons per year to one million. The upgraded plant will specialize in lighter more resistant steel types used by the auto industry.
- State-run energy giant Petrobras this week finalized a joint venture arrangement with U.S. oil development company Murphy Oil. The two companies will pool their Gulf of Mexico oil rights, with Murphy Oil acting as operator and holding an 80% stake in the joint venture. The U.S. company will pay Petrobras $795 million for the Brazilian company’s Gulf of Mexico rights.
U.S. Dollar: The Brazilian Real closed at R$3.90 to the dollar, 0.8% weaker against the previous week and 17% weaker year-on-year. The Real is weakening on worries about higher U.S. interest rates. Losses have been kept to a minimum via occasional Central Bank intervention in the market. (see more)
Stocks: The Ibovespa index closed at 88,026 points, down 2% on the week but up 14% on the year. Stocks declined on profit-taking and global market volatility. (see more)
Interest Rates: The benchmark January 2020 contract closed at 6.93%, down from 6.98% the previous week as 2019 inflation forecasts continued to decline. (see more)
- Friday, December 7, Brazilian Census Bureau (IBGE) release of monthly IPCA inflation data, Rio de Janeiro
- Wednesday, December 12, Brazilian Central Bank Monetary Policy Committee meeting, Brasília
- Wednesday, December 12, III Forum on Changing Role of the State, Fecomércio headquarters, São Paulo
- Thursday, December 13, Brazilian Census Bureau (IBGE) release of monthly retail sales data, Rio de Janeiro
- Thursday, December 13, FGV/IBRE/Estadão seminar: 2019 Perspectives: Challenges for the Next Administration, FGV Auditorium, São Paulo