Investing in growth or Redemption, either way Brazil needs PAC 2

"Mother & Father of PAC"

 

 

 

 

 

 

 

 

 

 

 

 

 

“PAC 1 and PAC 2 are a commitment by the Brazilian State to the redemption of this country”

President Lula announced phase 2 of the the Growth and Acceleration Program in March 2010.

With planned investments totalling US$ 872bn, PAC 2 seeks to lever both public and private sector investments in a range of strategic infrastructure and service areas. Similar to PAC, PAC2 focused on investment in logistics, energy and social development, (see table 1)

A rising economy, barely touched by a western recession, unemployment below 5.6%, dramatic growth in the oil industry and social change that is raising purchasing power of poorer classes. There is a belief that Brazil’s time has finally come. Infrastructure development is seen as an engine to boost growth and bring opportunity to isolated corners of the fifth largest nation in the world.

Brazil PAC 2 Strategic areas of investment (US$)

That’s right 70% in the energy sector including more than US$ 100bn in deep water hydrocarbon exploration, production and logistics and US$ 36.2bn in electrical generation including hydro power.

 

Brazil PAC 2 Areas of intervention

Many pointed to the timing of PAC 2’s announcement as convenient for Dilma Rouseff, often known as the “mother of PAC”, in her successful launch for the Presidency.  Of course both PAC and PAC 2 are political programmes with the associated fanfare of launch.

More concerning are the massive dams planned in the Amazon, Belo Monte dam is the largest and perhaps most symbolic project in PAC, yet in phase 1 alone hydroelectric projects in over 10 basins including the 7 primary Amazon tributaries are underway.  PAC 2 plans over 50 hydropower dams with innovative approaches to preserve the environment and avoid opening areas to destructive exploitation. This “clean” approach is of course unproven and many fear irreparable harm that has been common from dam projects.

Inevitably on this scale, PAC projects have been associated with corruption and fraud, irregularities found in 30 or 88 projects analysed by the Court of Audit (TCU) and 13 projects suspended by court rulings due to corruption.

From 2011 to 2014, PAC 2’s strategic investment will direcly support and compliment the FIFA World Cup (2014) and Olympic (2016 in Rio) preparations. Ongoing investments in Sao Paolo seek to transform Bovespa into an international stock exchange and Sao Paolo a financial hub, the Sao Paolo – Rio de Janeiro corridor with its combined populations of over 60m has visions of becoming an economic megalopolis.

Dreams aside, if like PAC, PAC 2 is able to deliver on 70% of its promise it will be a huge step forward for Brazil and another feather in the cap of Lula’s legend.

“Brazil, Land of the Future” … businesses need to act today!

Companies are eyeing Brazil from afar, now 8th largest economy in the world Brazil with 194m people has achieved this on the back of internal growth. No longer.

Soon companies will be falling over themselves to engage in Brazil, the World Cup in 2014, the Olympics in 2016 will dramatically increase awareness and chart its meteoric rise to 5th largest economy soon after 2020.

Purchasing power is coupled with social change, social class C or lower middle class increased by 21m in last 7 years, another 20m expected in the next 5 years, extreme poverty will be eliminated before 2015. Brazil is seeing consumption shoot up, along with credit card usage. Of course this shift is on the back of oil, currently Brazil is about to leap frog Nigeria, yet most power generation in Brazil is from renewable resources (80% of electricity is Hydro, roughly 40% of fuel is ethanol). Brazil has become the commodities supplier to China, the only country that can meet their veracious apetite. With unemployment at 5.6% there is a skills shortage, welders are imported by the oil industry from the US!

Though commodities and industry are strong, services are poor, opportunities abound. To improve efficiency of industry and business, in niche B2B spaces where generic systems are used, to services targeting the elite consumer or indeed reliable services targeting the huge and growing consumer base.

Brazil is a highly communicative society. Mobile phone usage continues to increase, with more than 203m phones average revenue per user is actually dropping whilst mobile operators revenues increase at a much slowed 4% per annum. Roughly 20% population have access to broadband, (a government programme, PNBL, plans to increase this to 40% by 2014) and over 22% of internet users are on Twitter, one of the highest rates outside USA, social networks are an obsession.

Of course Brazil has not invested enough, poor transport infrastructure holds up opportunities, (as PAC government investment in infrastrcuture is behind plan) it is one of the toughest places in the world to set up a business, enrollment has improved dramatically in schools so poorly trained teachers are overwhelmed often with more than 100 students per class in very poor facilities, even private schools see 40 to 50 children per class, health care is fragmented, private plans expensive.

Companies cannot succeed in Brazil if they do not commit, it is a long term venture, relationships take time to build, presence is essential. For those who stay the course the rewards can be huge.

What are the secrets to success in Brazil?  …  Put simply “eyes wide open” commitment and patience.

• Brazil has to be a strategic step for a company, a long term venture, any short term “quick buck” approach will no doubt fail.
• Foreign companies need to enter the country with their eyes open. Brazil is an unequal country labour laws that require 13th salary and money to be put aside for payment on a staff members departure are there to protect rights, understand these unique laws.
• Understand your target market but don’t fixate on research. Sao Paolo state has 48m population and generates nearly 50% GDP of Brazil, or 25% GDP of South America. Knowing your market and target customer segments is critical but focus on business relationships and sales, Brazilian executives are highly professional and experienced and managing risk, your business will see innovative developments specific to this market, work with your partners.
• Relationships are critical and cannot be rushed, take time to get to know your key clients, partners and channels. Building a customer  or client base takes time anywhere, but quality, especially in services and B2B is appreciated and rewarded, relationships or referral count.
• Conduct due dilligence then engage in a joint venture. It is a lengthy process to set up a business in Brazil, don’t try to fight the system. Once you have established a grounding, options to buy out a local company or set-up from scratch are still on the table.
• Taxation is complicated and often onerous so work with local specialists. Note-ably in regards to imports and moving goods or services between states, these protective barriers are historical, like all vested interests they are likely to change only slowly.
• Ensure you work with an extremely good law firm. Lawyers are involved in all aspects of business, again don’t fight the system ensure you are well advised.

Tip: Load Google toolbar into your browser and you can translate other language web pages into English.

World high interest rates in Brazil, increasing to 11.25%, FT explains why!

This is a rare referral to an excellent balanced FT article “Brazil continues to wrestle with dilemma over interest rates” just as we see interest rates  likely to edge higher to 11.25% Wed 19^th Jan 2011.  A measure to counter inflation this article stresses concerns about world beating interest rates in Brazil, some would say at usury levels. Extremely high government expenditure, unlikely to be curbed soon, loose fiscal policy with the state accounting for 40% of the economy, rising budget defecit and with that low savings rates for an emerging market at 15% are all detrimental factors.

The resultant inbalance as the article points out has lead to some credit card rates of over 238%, whilst business can borrow from BNDES at 8%, furthermore whilst  Government employees are able to take on mortgages at 8% the average person would be charged over 30%.

But at what price to economy? quite apart from the impacting on the  individual, stiffling innovation and holding back potential. At what point will keeping interest rates high and encouraging currency appreciation start to hit industry?

Brazil, not an easy place to do business… but worth it

Brazil is not an easy place to do business, the World Bank’s publication “Doing Business 2010” ranked brazil 129 out of 183 countries, barely no move from 2009 (125^th). Despite the internal growth, rising middle class, Brazil sadly has a long way to go to catch up with the likes of China (89^th). The biggest hurdles for Brazil.

The tax system, ranked 150^th out of 183 economies in “paying taxes” illustrates how the complexity of taxation impacts on business. Tax is complex and opaque, businesses invest in extensive records to ensure they have information archived to cover an eventuality possibly one their accountants and lawyers and local tax office was not aware of. Paperwork is onerous. Taxation for goods moving across states unfathomable to a mere mortal.

Opening a business is slow and arduous. The World Bank lists Brazil as having some of the most procedures to open a business (16 in Brazil compared to 3 in China) and one of the post complex countries to register property.

World Bank ranking for “Ease of Doing Business” , 2010

 

Fascination & disappointment – twitter conversation during 2010 World Cup

Global 2010 World Cup conversation on Twitter

Domestic Credit Card use in Brazil

Domestic credit in Brazil totaled 101.2% of GDP in 2008, below China (123.3% of GDP) but higher than India (81.3% of GDP).

However credit card use has been growing steadily in recent years with an increase from 24% of total sales being made by credit card in Brazil in 2001 to close to 50% in 2007, as compared to 55% in United States and 48% in UK.

Credit card use (% of total sales) as means of payment in selected countries

Domination of banking in Brazil by the largest five players

The largest five financial institutions dominate National Financial System in Brazil (SFN) by a long shot, with between 83% and 86% of number of employees, number of branches and total deposits, whilst they account for 79% of total assets, 73% of stockholders equity and 69% of net income (Q109). The largest ten financial institutions account for 92% of net income and 80% of net equity.

The ten largest Brazilian banks include three government owned institutions (Banco do Brasil, Caixa Econômica Federal and Banrisul), four national private banks (Itaú-Unibanco, Bradesco, Votorantim and Safra) and three foreign institutions (Santander, HSBC and Citibank). Brazilian banking is dominated by the top five players in terms of share of total assets these are respectively Itáu-Unibanco (20.9%), Banco do Brasil (19.9%), Bradesco (14.7%), Santander (11.7%).

National private banks dominate net equity and assets, while the government owned banks account for a large proportion of deposits and credit transactions. The figure below illustrates the breakdown of banking, full-service banks, commercial banks and Caixa Econômica Federal, by institution type (Central Bank of Brazil, Q109).

Domination of Big five banks in Brazil

Brazil banking comfortably exceeds the BIS international capital adequacy ratio

Brazil comfortably exceeds BIS

The minimum BIS capital ratio for Brazilian banks is 11.0%, versus an international benchmark of 8.0%. The average capital ratio was 18.4% (18.2%, excluding BNDES) in Q109, 17.8% for government-owned retail banks and 18.7% for private-sector banks.

Consolidation of the Brazilian banking system, 1995 to 2004

The number of financial institutions has declined considerably in Brazil since 1995 as a direct effect of the economic stability achieved as a result of the Real Plan, implemented in 1994.

Hyperinflation in previous decades allowed banks to secure extremely high earnings from non-interest bearing liabilities, including cash deposits and funds in transit. Post Real Plan, monetary stability exposed major inefficiencies in financial institutions significantly reducing float revenues. Hence a collapse in the number of full-service, commercial, development, savings and investment banks from 265 in 1995 to 179 in 2009.

The Brazilian financial system was restructured under PROER, (Program to Foster Restructuring and Strengthening of the Brazilian Financial System). Implementing regulatory changes took two years (1995 to 1997). PROER established credit lines and special tax exemptions in order to foster M&A initiatives, corporate reorganizations and financial restructuring in the private banking sector. The federal government also established PROES (1997 to 2004) (Incentive Program for the Reduction of State Government Participation in Bank Financial Activity and the Privatization of State Financial Institutions). PROES privatized 12 state-owned banks, closed 22, and financially restructured nine others. Privatizations generated revenues of R$11.7bn, and federal government debt issues totaled R$61.9bn in the same period.

Breakdown of the Brazilian Financial System by no. Institutions, March 2009 (Central Bank of Brazil)

Brazil … “Land of the present”

Brazil, “Land of the future.. and always will be” an old joke in Brazil, today the joke is reversed.

Quietly and slowly Brazil has been tackling fundamental social problems, now with less than 5% of its 190m population living in extreme poverty, becoming an agricultural giant, establishing sound legal structures and financial systems.  One of the lowest risk large oil producers, non-renewable energy for domestic use is still below 55%. An established democracy with a peaceful culture it has much to boast about.

Brazil has huge social challenges ahead, not least the 35% of the population that have no sewerage systems, the 64% living in inadequate housing or the12m plus living in informal settlements in urban areas, favela’s and slum’s where police fear to operate.

Brazil is not a quiet ugly duckling, it is an independent, handsome cygnet, but what direction will it take? How will the socialist democratic government steer the unwielding federal and state bureaucracies? Towards stable, decentralised government, with participation and engagement of business in social reform, or increased centralization, ghettoization, injustice and marginalisation of the urban poor.

“Land of the Future” seeks to provide intelligent commentary, information and anecdotes on the rocky path that Brazil will tread in the coming years.