Although some private equity and institutional investors – mostly in the US and Britain – are expressing growing concern about the State’s role in Brazil’s economy, the South American country appears unstoppable in boosting domestic, as well as foreign investments in fueling the nation’s stellar economic growth and emergence as a major global player. While many advanced economies, ours included, struggles to revive its flagging economy, one country is proving the exception to the global recession, and no, it’s not China: it’s Brazil. Brazil’s economy is not just healthy, it is on a torrid roll. Brazil’s economy is set to grow by more than +7% this year, according to both government forecasts and numerous investment firm economic research. That will further cement Brazil as the region’s top economy and one of the largest economies in the world according to League Tables. As recently as 2006, Brazil’s economy ranked second in Latin America after Mexico. No mas.
In Brazil hardly a day goes by without further proof of the country’s rise: record petroleum revenues, record government spending, record levels of consumption and growing income levels. The finance ministry expects gross domestic product (GDP) to rise almost 7% this year, and average 5.7% over the coming years. Last week unemployment levels hit a record low of about 6.7%, according to the Brazilian Institute of Geography and Statistics, while the government says an estimated 25 million Brazilians have moved comfortably into the middle class since 2002, while those living in extreme poverty fell from 12% to about 4% between 2003 and 2008. “Brazil has managed to come out of the [global financial] crisis well,” said Fernando Puga, Director of economic research at Brazil’s development bank, the BNDES, pointing to booming internal consumption, partly the result of expanded credit lines during the crunch. Even José Serra, the opposition candidate in the upcoming presidential election, has been forced to admit that, under Lula, there has been substantial economic progress. However, he implies the country’s rise could be even better under him, employing the campaign slogan: “Brasil pode mais” (“Brazil can do more”).
Similarly, the Brazilian currency, the Real(R$) is also gaining as record low borrowing costs in the U.S. and Europe prompt investors to seek higher returns in faster-growing developing nations like Brazil. The Real touched a nine-month high of R$1.7031 to the Greenback in September. Economists forecast it will weaken to R$1.78 per dollar by December, according to the median estimate in Bloomberg surveys. Barclays predicts it will strengthen to R$1.7 against the Greenback over the next six months. Meanwhile, Brazil’s central bank has raised its benchmark lending rate 200 basis points, or 2%, since April to 10.75% to drive inflation down to its annual target of 4.5%. Brazil’s benchmark rate is more than 900 basis points higher than the key interest rates in the U.S. and the Euro zone making Brazil a haven to attract international investors based on its stronger fundamentals, thus boosting the outlook for the nation’s GDP. The Real touched a nine-month high of 1.7031 on Sept. 14. Economists forecast it will weaken to 1.78 per dollar by December before rebounding to 1.7 at the end of 2011, according to the median estimate in Bloomberg surveys. Barclays predicts it will gain to 1.7 per dollar over the next six months. Read more from the WSJ here.
FT Video : Brazil Economy Over-heating..??
All this economic good news is unfolding even as Brazil holds its presidential election — on Sunday, October 3. Although the investor favored Rightist candidate, Jose Serra, is trailing the progressive candidate, Dilma Rousseff, foreign investors are bullish about Brazil’s outlook because they see no radical changes on the horizon, and because Brazil’s stellar economic performance was nurtured and managed by the current ruling Liberal economic policies – something, perhaps, the Democrats in Washington might learn from. But I digress. . .
Observers say Dilma Rousseff is expected to continue the economic policies of Luiz Inácio “Lula” da Silva, whose presidential term ends in January after eight years in office. Rousseff’s key economic advisor, Antonio Palocci, who won widespread praise from investors when he served as Lula’s first finance minister. Meanwhile, Luciano Coutinho – the president of development bank BNDES – is widely seen as her likely finance minister, is currently a central bank governor. Coutinho is also widely respected, even among supporters of Serra. He was just named Financier of the Year by Latin Trade magazine. Although some investors express concern about the State’s role in Brazil, the South American country appears unstoppable in boosting local and foreign investment. In addition, using China, Brazil, India, the Socialist Democracies of Europe, and perhaps inevitably Cuba as precursors, there is an emerging school of economic thought arguing the superior nature of State-run capitalism economic model – something I’ve written about in numerous earlier posts.
Last week oil giant Petrobras, Latin America’s largest company by revenues and profits, made world history when it raised $70 billion in a share sale. It was the largest share offer ever and twice as big as the largest M&A deal in Latin America the past five years, the $35.3 Bn merger of America Telecom with America Movil in 2006. It was also almost as much as all M&A deals in Brazil last year, which totaled $72 billion, according to Thomson Reuters. The IPO catapulted Petrobras to become the fourth largest company in the world in market capitalization, according to Bloomberg. Petrobras’s market value of $214 billion ranks only behind Exxon Mobil Corp., Apple Inc. and PetroChina Co. and ahead of companies like Microsoft Corp. and Wal-Mart. Meanwhile, the BM&F BOVESPA stock exchange has become the second largest in the world in terms of market capitalization, it announced. Its market value of $ 17.7 Bn, fully 25% higher than the New York, London, and NASDAQ Exchanges combined. “It is with great pride that, from a truly Brazilian Exchange, we can tell the world that not in New York, not in Paris, but in São Paulo, at our Exchange, we carried out the biggest offering in history,” Lula said at Bovespa on Friday. The sale comes as two new surveys show Brazil as one of the leading investment targets in the world. On September 21, Bloomberg revealed that a new survey among 1,408 investors, analysts and traders showed Brazil as the preferred place to invest. Brazil’s economic stability has led to a growing influx of foreign investment. Direct foreign investment (FDI) rose from 43% to 72% of GDP between 2001 and 2009, according to the finance ministry. Read more from the London Guardian here. Funds raised from the IPO will be used by Petrobras to help finance its ambitious $224 Bn offshore business expansion plan to cement its role as one of the world largest petroleum producers. However, the Petrobras share sale is not without controversy. Many investors were unhappy with the delay of the sale, caused by strategic differences between Petrobras’ management and Lula’s administration. The delay had sent Petrobras stocks tumbling with losses of $70 Bn in market capitalization in recent weeks.
Petrobras’ IPO, the largest in history anywhere, is the clearest example of what Brazilians call the “new Brazil” – a booming, investment-friendly South American nation that is steaming towards a future of prosperity and global clout. ‘ It is with great pride that, from a truly Brazilian Exchange, we can tell the world that it didn’t happen in Frankfurt, it didn’t happen in London and it didn’t happen in New York. It happened in São Paulo.’
Then there’s the fact that the sale included the Brazilian government’s purchase of shares, boosting its stake from 40 to 48%. That marks a “reverse privatization” of Petrobras, which shed its State monopoly in 1997 and later started selling shares to Brazilian and foreign investors. Although some investors express concern about the State’s role in Brazil, the South American country appears unstoppable in boosting local and foreign investment. In addition, using China, Brazil, India, the Socialist Democracies of Europe, and perhaps inevitably Cuba as precursors, there is an emerging school of economic thought arguing the superior nature of State-run capitalism economic model – something I’ve written about in numerous earlier posts. Despite this, however, the news that the government increased its stake in Petrobras will result in continuing concerns over the potential for State intervention in the company’s operations, especially as the likely winner of next month’s presidential election—the former Minister of Mines and Energy and ex-Chief of Staff, Dilma Rousseff—supports a strong state role in strategic sectors of the economy,” IHS Global Insight says in a commentary today. On the other hand, many would argue that if the government invested taxpayer funds, then it has a legitimate shareholder claim – like any other investor – on behalf of the public as an investor in the company’s stock.
Still, some foreign investment gurus, like Templeton’s Mark Mobius, say the sales record was not the result of Petrobras’ true value, but rather a potential bubble. “The entire Petrobras issue,” he noted, “is an abomination and a terrible violation of shareholder rights,” Mark Mobius, who oversees $34 Bn as executive chairman of Templeton Asset Management, told Bloomberg. “We may be entering an IPO bubble. It means that people are just not looking at the values and irrationally buying these things.”
Despite its partial State-ownership, Petrobras is considered a well-run company, especially when compared to its oil peers in Latin America, Mexico’s PeMex and Venezuela’s PDVSA. In 2009 Petrobras increased revenues by +14% to $105 Bn, while profits grew 18% to $16.6 Bn. That ranks Petrobras as the top Latin American company in revenues, ahead of PeMex, with $83.4 Bn. It also ranked Petrobras as the most profitable company in the region, beating second-place Telefonica (Mexico), which posted $7.7 Bn in profits. PeMex managed to post losses of –$7.2 Bn in 2009. Meanwhile, PDVSA saw revenues decline 41% to $75 Bn last year, while profits fell 53% to $4.4 Bn, according to the company’s annual report. Petrobras may sell additional shares to meet the continued demand. According to Reuters, the sale last week had a total demand of $87 Bn.
Brazil is starting to see consolidating industries, effecting operational improvements and capitalizing on untapped markets. And Brazil is increasingly on private equity firms’ radar screens and consequently activity is intensifying. Strong economic fundamentals are driving investment activity.
Sovereign wealth funds from the Middle East and Asia were among the biggest investors buying into the offering, which also had “tremendous demand” from U.S. mutual funds and other institutional investors, according to the Reuters report. While many of the largest private equity (PE) firms in the world have had sporadic dealings in Brazil — the largest economy in South America and one of the fastest growing in the world — PE firms are only now starting to establish a permanent presence as they look to participate in Brazil‘s future growth. According to according to a new report released today by Ernst & Young LLP entitled, Private Equity in Brazil: Ready for its moment in the sun, Read more here. Brazil is starting to see consolidating industries, effecting operational improvements and capitalizing on untapped markets. Says Jeff Bunder, Ernst & Young LLP’s Americas Private Equity head, “Brazil is increasingly on PE firms’ radar screens and consequently activity is intensifying.” He added, “Strong economic fundamentals are driving investment activity.”
In the interim, Brazil is gearing up for the 2014 Soccer World Cup and the 2016 Olympics in Rio de Janeiro, which will require significant investments in infrastructure. Some estimates put those as high as $30 Bn – a promising opportunity for early-movers, despite Brazil’s cumbersome tax regulations and inefficient infrastructure, Brazil is clearly on an economic roll, with a very sunny outlook ahead. Read more from the Latin Business Chronicle here.
Sources: Bloomberg, WSJ, LBC Photos: The Guardian, Google stock
