Vol 8 (2011) - Issue 2

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Keynote on Brazil: Reaping from Country and Corporate Recovery

The cost premium of investing in Brazil is reducing to a more attractive risk-return balance in the eye of a wider range of foreign investors. Practical aspects supporting this reality should be observed by capital investors or industry players who have not yet grasped the opportunity of investing in the South American giant.



Country recovery: improved institutions are attracting foreigners

Brazil’s economy is growing steadily and consistently. A per annum GDP average growth of nearly 6% is expected for the next five years. This is merited by an impressive improvement in Brazilian social-political institutions and macroeconomic fundamentals. Four examples deserve to be mentioned.

Firstly, the economics-driven Central Bank and the politics-oriented National Treasury Secretariat (STN) have streamlined between them non-overlapping objectives and implemented world class debt management policies and predictable controls for inflation, interest and exchange rates. As a result of this, by 2014 projected public debt will be 27.8% of GDP and public nominal deficit will be zeroed, both down from 60.4% (2002) and 5.2% (2003) respectively. The Brazilian currency, the Real, has been continuously appreciating: 136% since president Lula’s first term election and 13.5% since January 2010. The country’s basic interest rate (SELIC) started 2010 at 10.75% and inflation rate kept below 6%: both down from 27% and 17% respectively when Lula entered office in 2003.

Secondly, the central government’s social policies are upgrading consumer spending by the 100 million active consumers market (total population is 192 million). Unemployment and poverty levels are at their lowest: 6.1% and 16 million people respectively, down from 12.3% (2004) and 28.1 million (2003). Credit-GDP ratio, now 49.5%, has been systematically rising from 25% in 2003 and is expected to reach 70% in 2014. The Growth Accelerating Pact set forth by former Minister of Energy, then Chief of Staff, now newly installed president, Ms Dilma Rousseff, is increasing public and public-private investment in general infrastructure. Brazil’s investment rate, which was only 14.7% in 2003, is currently 18.9% and the government is pushing it to 22.4% by 2014.

Thirdly, the consolidation of capital and industrial regulations through Brazil’s SEC-equivalent (CVM), antitrust and market-sector authorities are enhancing ever-growing corporate governance and transparency. 70% of Brazilian IPO funding comes from abroad and foreign portfolio investment grew by 150% in 2010.

Fourthly, non-listed and small and medium-sized companies (SME) now too follow IFRS-compliant accounting standards and issue electronic, IRS integrated, invoices. Registration and fiscal bureaucracy have been simplified for these companies that in fact represent the best investment opportunities in Brazil. Corporate governance and professional management cultures are being extended to them, or this is the goal, by the NACD-twinned Brazilian Institute of Corporate Governance (IBGC) which is about to release a much expected SME corporate governance guide to stimulate their perpetuation and funding.



Corporate recovery in Brazil: understanding the environment

Focusing now more specifically on investment and the turnaround of businesses in distress, it is necessary to consider some key practical aspects of the Brazilian growing turnaround practice and the five-year-old, US Chapter 11-style, Corporate Bankruptcy and Restructuring Law (CBRL).