|Will Brazil finally see significant investment growth in 2019?
Investment, like GDP growth in general, has been a major disappointment for Brazil in recent years. From 2011 through 2014, Brazil invested an average of 20.7% of GDP every year. That figure had fallen to 15.2% by 2018. And it’s getting worse. Investments were off 1.7% in the first quarter of 2019 against the previous quarter, according to the Brazilian Census Bureau (IBGE). There are many reasons for the investment doldrums. One is the persistence of unemployment at or above the 12% mark, a factor inhibiting domestic consumption and discouraging investment in business expansion. Meanwhile, a deepening recession in Argentina is hurting demand for Brazilian manufactured goods. Another problem is the high cost of imported capital goods and production inputs due to a weaker Brazilian Real. But the biggest issue is sluggish congressional action on needed reforms, especially in the fiscal area. Said Armando Castelar, an economist at the Brazilian Economic Research Institute (IBRE), at a recent seminar, “Investors focus on the long term. They would like to see not just one reform passed by Congress but a stable congressional coalition able to pass many reforms over the next four years.” The absence of such a coalition, according to IBRE economist Bruno Ottoni, speaking at the same seminar, “is undermining both business and consumer confidence.” There are, to be sure, some countertrends. One is historically low interest rates, which should facilitate corporate finance. Another is burgeoning foreign investment. Foreign direct investment rose 26% in 2018 to $88.3 billion. And the trend is upward. Twelve-month FDI as of April was $92.5 billion, equal to 4.96% of GDP, the highest level, in real terms, since 2001. What are foreigners seeing that locals aren’t? One is a cheap Brazilian Real, which makes local assets more attractive than before. Another is comparatively low global interest rates, facilitating buyouts, mergers and intra-corporate lending. Government concession and privatization offers in 2019 and 2020 may serve to boost foreign inflows even more. It’s not certain that foreign investors are seeing more potential in the Brazilian economy than domestic investors are; what is certain is that, after five years of little or no growth, Brazilian companies are not very well capitalized, spreading skepticism and caution.
State of the Economy
Brazil runs big primary budget deficit in May, due entirely to pensions. Brazil’s public sector ran up a monthly primary budget deficit in May of R$13 billion, reversing a R$6.6 billion April surplus. The May deficit was due entirely to yawning gaps in the nation’s pension system. The pension deficit in May was R$14.9 billion, counterbalanced by small surpluses in federal operational spending and state and municipal budgets. Congress is currently considering a constitutional amendment that would narrow the pension gap by stretching out retirement times and altering the formula for benefits. The public sector’s 12-month deficit as of May rose to R$100.4 billion, still below the calendar 2019 goal of R$132 billion or less. (see more)
Unemployment remains stubbornly high in May at 12.3%. Brazil’s average quarterly unemployment rate ended May at a stubbornly high 12.3%, the same as the previous quarter and down only slightly from the year-ago average of 12.7%. The figure meant 13 million Brazilians continue out of work. The Brazilian Census Bureau (IBGE) noted that about 25% of the workforce is still “underemployed,” living on occasional, part-time and informal jobs. Meanwhile, average wages also remained stagnant. The average monthly wage for a registered worker in May was R$2,323, up only slightly from R$2,306 in May of 2018. (see more)
Industrial production posts another decline on weak consumer demand. Brazilian industrial production declined by 0.2% in May against the previous month on weak consumer demand and falling exports. Production was up 7.1% against May of 2018 but output a year ago was heavily compromised by a long truckers’ strike. Economists said weak performance so far this year is due to continued high unemployment, lingering consumer debt and stagnant wages. A deepening recession in neighboring Argentina, meanwhile, has eaten into exports of manufactured products, especially motor vehicles. The only bright spot in May was a rise in capital goods output, signaling continued investment interest by manufacturers. Possible cuts to domestic interest rates, meanwhile, could help support industrial production in the second half of the year. (see more)
State of Business
- Gourmet supermarket chain Magazine Luiza last week won its bid for control of footwear retailer Netshoes, agreeing to pay stakeholders R$450 million. Magazine Luiza beat out competitor Centauro and will own 100% of Netshoes’ shares. A shareholder assembly voted 90% in favor of the offer.
- The Brazilian Securities Commission (CVM) last week added two more fines to the growing legal liabilities of ex-billionaire investor Eike Batista. The commission fined Batista an additional R$560,000 for irregularities in the 2013 prospectus of oil company OGX and for irregularities in quarterly reporting over subsequent years. Earlier this year, the CVM levied record fines totaling more than R$530 million for alleged insider trading involving Batista and OGX.
- Brazilian retailer Michael Klein is once again the leading stakeholder in retail chain Via Varejo. Klein sold control of the company, which owns the Casas Bahia and Ponto Frio brands, to supermarket chain GPA a decade ago. But GPA has suffered financial problems in the years since and decided to sell its Via Varejo shares. This week, Klein bought an additional 1.6% stake in Via Varejo for R$100 million. He already owned 25% of the retailer’s shares and is now the single largest shareholder. He has announced that he will use his block of shares to exercise effective control over the company.
- Offers of new shares on the Brazilian Financial Exchange (B3) reached R$8 billion during the first half of 2019. That figure is twice as much as new share offerings for the entire year in 2018. Investors are attracted by low domestic and international interest rates, hopes for congressional passage of needed fiscal reforms and expectations for a broad economic recovery in Brazil starting next year.
- Electric power utility Neoenergia last week garnered R$3.7 billion from its initial public offering of shares. The shares were sold by major stakeholders including Banco do Brasil, the bank’s pension fund and Spanish utilities holding company Iberdrola. Neoenergia is a diversified utility, controlling generation, transmission and distribution services, with a specialty in development of alternative energy sources.
- State-run oil company Petrobras last week announced it will sell eight of its 15 refineries in Brazil. Four of the refineries will be sold by 2021. They are Abreu e Lima, in Pernambuco, Repar, in Paraná, Landulpho Alves, in Bahia, and Refap, in Rio Grande do Sul. Petrobras will sell four more refineries in a subsequent cycle. The company will retain almost half of its current refining capacity of 2.4 million barrels per day of oil in addition to lubricants, shale oil processing and petrochemicals. The company is accepting bids on the first four refineries through August 16.
- Transpetro, the logistics arm of state-run oil company Petrobras, last week signed a long-term services contract with TAG, the gas pipeline company Petrobras itself sold to France’s Engie earlier this year for $8.6 billion. TAG runs gas pipelines throughout the Northeast and Southeast. Transpetro will receive R$5.46 billion from TAG over ten years.
U.S. Dollar: The Brazilian Real closed at R$3.80 to the dollar, 1.6% stronger on the week and 2.6% stronger year-on-year. The Real strengthened on hopes for U.S. interest rate cuts. (see more)
Stocks: The Ibovespa index closed at 103,266 points, up 3.8% on the week and 38% year-on-year. Investors were cheered by rising prospects for congressional passage of a pension reform seen as necessary for avoiding future fiscal crises. (see more)
Interest Rates: The benchmark January 2021 contract closed at 5.73%, down from 6.05% the previous week. Brazilian Central Bank base rate cuts are seen as increasingly likely, given tame inflation and a sluggish economic recovery. (see more)
- Monday, July 5, Pathways for Brazilian Monetary Policy, Getúlio Vargas Foundation, Brasília
- Wednesday, July 10, Brazilian Census Bureau (IBGE) release of monthly IPCA inflation data, Rio de Janeiro
- Thursday, July 11, Brazilian Census Bureau (IBGE) release of monthly retail sales data, Rio de Janeiro