reportagem pagina 13

RESEARCH AND ANALYSIS FROM THE FINANCIAL TIMES

A CHANGE OF ApprOACH IN BrAsILIA

tHE vIEw ON BrAzIL:

02 Facing up to the fiscal challenge

GOvErNING BrAzIL:

04 A change of approach

rEsOurCE BrAzIL:

06 Petrobras’s performance test

FINANCING BrAzIL:

11 Private equity: Sowing seeds in Minas Gerais

CONsumEr BrAzIL:

17 Low-income groups feel the burden of debt

BuILdING BrAzIL:

19 Shopping centres: fast growth, regional opportunities

GuEst COLumN:

22 Brazil’s growing Africa engagement

tHE BEst OF LOCAL COmmENt:

23 Diverse views on interest rates

BuLLs ANd BEArs:

24 A rise in inflation expectations

CONtENts03.02.2011

As President Dilma Rousseff gets down to business, a sharp fiscal adjustment could be imminent p2

BrAzIL C O N F I d E N t I A L

Editor Richard LapperSenior Correspondent Henry Mance Production Editor Heidi WilsonArt Director Leo CooperSenior Designer Paramjit VirdeeCommercial Director Tas ViglatzisSubscriptions Manager Jay AbaiProduct Manager Claire Edgar Contributions and research for this issue from: John Rumsey, Cecilia Lanata Briones, Alistair Stew-art, Dominic Phillips, Corvin Brady and others

Email [email protected] www.brazilconfidential.com

Brazil Confidential is published fortnightly by The Financial Times Limited, Number One Southwark Bridge, London SE1 9HL

© The Financial Times Limited 2011

The material in this publication is protected by international copyright laws. Our subscriber agreement and copyright laws prohibit any unauthorised copying or redistribution of this publication, including forwarding by email, to any individual or other third party. Any violation of these restrictions may result in personal and/or corporate liability. © The Financial Times Limited 2010.

“Brazil Confidential”, “FT” and “Financial Times” are trade marks of The Financial Times Limited.

RESEARCH AND ANALYSIS FROM THE FINANCIAL TIMES

How to subscRibe For subscription information, please visit: brazilconfidential.com/subscribe

or email: [email protected]

Financial times Ltd one southwark bridge London se1 9HL

tHE vIEw ON BrAzIL

FACING up tO tHE FIsCAL CHALLENGEeDitoR: rICHArd LAppEr

investors have given emerging markets something of a cold shoulder in the first few weeks of 2011. And Brazil has been as roughly treated as anyone, with the Bovespa – the country’s stock market index –

down in January by nearly 4%, compared to the 2.8% fall in the MSCI EM Index. The yield on interest rate futures contracts – the financial instrument that most reflects perceptions of interest rate trends – rose by about a third of a percentage point over the same period.

It is easy to see why: local inflation forecasts are trending higher, and Brazil – with its stretched infra-structure, expensive labour market and recent increases in government spending, (not to mention its history) – has particular reasons to fear inflationary demons.

Yet there are also good reasons for confidence. After all, the factors that are pushing inflation higher – com-modity price rises and the pull of China – are also the factors that underpinned Brazil’s rise during the first decade of the twenty-first century, and will continue to shore up its external accounts. More to the point, ex-actly at the time that financial market investors are fret-ting over the deterioration in public finances, there are some signs that the new government of Dilma Rousseff is facing up to the challenges that confront it.

These challenges are considerable and can’t be underestimated. True, the headline inflation number is still in single digits, with the consensus still confined to a relatively narrow range.

But visiting Brazil over the New Year, it was hard to avoid the impression that Brazil’s economy is becoming overheated. In the ethanol industry – one of a number of boom sectors sucking in skilled labour – I came across a technician, for example, whose monthly salary had risen fivefold to more than R$17,000 ($10,210, £6,326, €7,385) since 2002, albeit with the help of one or two promotions on the way.

Taxi fares in São Paulo increased by no less than 18% last month, a rise that means the journey between Guarulhos, the site of the city’s main international airport, and the central suburb where I used to live is now twice as expensive in Real terms (let alone in dol-lars) as it was five years ago. Rents that reflect the rise in wholesale prices rather than the retail index will double this year in some fashionable areas of Rio de Janeiro.

As our charts on page 5 show, public spending – especially on wages – increased very quickly in 2009 and 2010, partly, as Guido Mantega, the finance minister, is wont to insist, to cushion Brazil from the impact of the international downturn.

But in addition, that rise also reflected short-term political considerations, ahead of the October 2010 elec-tion. Whatever the reasons, the scale of the increases

the new government’s determination to cut spending should help calm fears of overheating

BrAzIL CONFIdENtIALFebRuARY 3-16 20113

means that President Rousseff and her team have a tough job ahead of them if they are to meet the targeted primary surplus (before debt interest payments) of 3.1% of gross domestic product.

This is especially so since much of Brazilian spend-ing is fixed. Gil Castello Branco, director of Contas Abertas, a think-tank, says the government is obliged to spend about 90% of the projected 2011 budget of R$2,073bn, either in debt service or constitutionally mandated payments.

And yet the government can feasibly cut at least R$40bn and possibly more from spending, even with-out resorting to the kind of cosmetic measures that Luiz Inácio Lula da Silva’s administration deployed in 2010. Blocking the increases voted by Congress late last year would save more than R$30bn. Throwing into the mix a possible freeze on promotions within the civil

service and on recruitment, as well as a cut in expense accounts and overheads, would yield more than R$6bn.

Ministers have been forthright in their recent insistence about the need for a fiscal adjustment. Mr Mantega himself left no doubt about it during an inter-

view with Brazil Confidential late last year. Miriam Belchior, the minister of planning, has repeatedly insisted that the administration is preparing to do “more with less.” And as our report from Brasília shows on page 4, Ms Rousseff and her chief of staff Antonio Palocci are addressing these matters with some urgency.

Both she and Mr Palocci – as well as other members of government economic team – have been burning the midnight oil. And while it is true that Ms Rousseff lacks her predecessor’s political touch (her election last Oc-tober was the first time she had been voted into office),

the same cannot be said of Mr Palocci, who has been deploying his considerable political skills to negotiate changes through capital congress where his (and Ms Rousseff ’s) Workers’ Party (PT) is still dependent on the votes of its coalition ally, the Brazilian Democratic Movement Party (PMDB).

All this has been accompanied by a change in style. Whereas Mr Lula da Silva offered a fairly typical Brazilian mix of geniality and laid-back affability, Ms Rousseff is all focus, concentration and hard work, a less attractive person to be with perhaps, but one whose style is more appropriate to the tests her gov-ernment faces.

As Brazil Confidential went to press for the first time this week, it appeared that Ms Rousseff would not cede to PMDB and trades union pressure for a higher minimum wage, above the R$545 a month already announced. Ms Rousseff also seems to be win-ning in her insistence that the new managers of state enterprises such as Eletrobras (LIPR3:SAO) and Fur-nas, the electricity companies, should be technically qualified rather than political appointees, a demand that will prejudice the interests of the PMDB, which of late has enjoyed control of these businesses.

Ms Rousseff and Mr Palocci know that sizeable fiscal adjustment is vital if the government is to have any chance of achieving its stated aim of reducing interest rates later this year. In a world of quantita-tive easing and low interest rates, that is the best way to make Brazil less of a magnet for inflows of short-term capital, ease upward pressure on the Real and benefit hard-pressed exporters. Ms Rousseff must know that this will be difficult but – as one of our sources pointed out last week – she “is a woman of her word”. For the moment, investors ought to give her the benefit of the doubt. n

tHE vIEw ON BrAzIL FACING up tO tHE FIsCAL CHALLENGE

tHE BOttOm LINE

“Fiscal adjustment is vital if the government is to have any chance of achieving its aim of reducing interest rates later this year.”

the average speed of trains

in brazil.source: o estado de são

Paulo

Forecast iron ore output in 2011 – a 20% increase.source: brazilian iron

ore and base Metals ex-traction Association

25kmph

450mtons

the increase in taxi fares

announced last month in

são Paulo.source: exame

18%

chinese direct investment in

2010, accounting for about a third

of the total. source: brazilian

society for the study of Multinational compa-nies and Globalisation

(sobeet)

$17bn

Per 1,000, homi-cides in Rio de

Janeiro in 2010, the lowest in

20 years.source: o Globo

2010 exports of sugar and cane ethanol.

source: conab

29.8 $13.8bn

BrAzIL CONFIdENtIALFebRuARY 3-16 20114 BrAzIL CONFIdENtIALFebRuARY 3-16 20114

summArY

president rousseff is governing in a dif-ferent way to her predecessor.

As chief of staff, former finance minister Antonio Palocci has played a key role.

ms rousseff has employed outside consult-ants as she seeks to make govern-ment more effective.

Negotiations between the gov-erning workers’ Party and allied parties have gone well.

Brazil’s new president has been going about her business in brisk and no-nonsense fashion.

Dilma Rousseff

GOvErNING BrAzIL

A CHANGE OF ApprOACH

F or the last 38 years the Brazilian flag has flown wherever the country’s president happens to be. Not any more. In his last

day in the job Luiz Inácio Lula da Silva shelved the requirement leaving his successor Dilma Rousseff to pursue an agenda freer from public scrutiny.

The change in protocol is emblematic of a much broader shift in executive style. The ebullient, charismatic and highly public former president has been replaced by a political leader who prefers a quiet and discrete approach towards the job.

Admittedly, these are early days but in Ms Rousseff ’s first few weeks in office there have been plenty of signals of a change of approach and some indications that this could bring much-needed efficiency to the heart of Brazilian government.

And with inflation and fiscal pressures mounting (see chart) any new-found effec-tiveness could soon be put to the test.

Mr Lula da Silva loved to soak up infor-

mation in a social setting, surrounding him-self with aides and advisers and gathering ministers to discuss lots of different issues, even if they had no direct knowledge of the subject under review.

By contrast, Ms Rousseff is a more solitary figure who does her own research. At her first meeting with ministers, for example, Ms Rousseff used two separate laptops. She has besieged her team with requests for reports and studies. Meetings are briefer and to the point. “Dilma’s agenda is minimalist,” says André Pereira César, a political scientist at Brasília-based CAC, a political consultancy group.

New informal ministerial groups have been formed to discuss specific issues. For example, in discussions about cuts to the 2011 budget (scheduled to be announced in the next few weeks), Ms Rousseff has involved Guido Mantega, the finance minister, Alex-andre Tombini, the central bank chief, and Miriam Belchior, the minister of planning.

Ms Rousseff herself conducts the meet-ings and explicitly asks participants to keep the results under wraps, making it clear that leaks and unauthorised comments will not be tolerated. All this has been accompanied by greater discipline. One junior minister, Pedro Abramovay, has already bitten

LATIN

CON

TENT/G

ETTY IM

AG

ES

BrAzIL CONFIdENtIALFebRuARY 3-16 20115 BrAzIL CONFIdENtIALFebRuARY 3-16 20115GOvErNING BrAzIL

A CHANGE OF ApprOACH

A smOOtHEr CONGrEssIONAL CONNECtION

0%

10%

20%

30%

40%

50%

60%

Total expenditure except debt

Total federal government expenditure

Debt interests, financial investments and debt amortisation

20102009200820072006200520042003

On paper it might seem that Ms Rouss-eff ’s left-wing PT would still need to rely on the congressional votes of the PMDB, especially in the Senate where the PMDB is the biggest force with 21 of the 81 seats. However, many Brazilian political analysts believe Ms Rousseff will be in a stronger position than her predecessor.

First, in the lower house, the PT is the biggest party with 88 deputies compared to 79 for the PMDB. But it can also count on sup-port from a further 77 deputies from three left-wing parties, the Brazilian Socialist Party (PSB), the Democratic Labour Party (PDT) and the Communist Party of Brazil (PCdoB), all of which also enjoy stronger represen-tation than they did four years ago when between them they had only 64 deputies.

In addition, the Brazilian Social Demo-cratic Party (PSDB) and the Democrats – which together represent the nearest thing Brazil has to a right-wing opposition – are much weaker than they were in either 2007 or 2003 (with 96 deputies compared to 131 in 2007 and 154 in 2003). The PMDB won ten fewer seats in 2010 than it did four years previously and is further undermined by internal fissures. Alberto Almeida, a political scientist and consultant with São Paulo-based Instituto Análise, says there are already signs that the PT “has been intelligent in taking advantage of these divisions”, particularly in the controversies surrounding the appointment of managers to publicly owned electricity companies, recently viewed by the PMDB as something of a political fiefdom.

The PT’s political management has also become more effective. Back in 2005 the party presented two competing candidates for crucial position of president of the lower house, a division which saw them lose con-trol of the position to a provincial right-wing politician, Severino Cavalcanti. There has been no such sign of indiscipline this time around, with Antonio Palocci, the president’s chief of staff, this month securing wide-spread support for the party’s nominee to be president of the lower house, Marco Maia.

Mr Maia, a 46-year-old Rio Grande do Sul former metalworker and trade unionist, will now play a key role in piloting govern-ment business through the legislature. In the Senate, José Sarney, the veteran PMDB leader from Maranhão state, former Brazil-ian president and firm ally of Mr Lula da Silva, was elected to a parallel position, and is widely expected to give strong support to Ms Rousseff. n

Foundation (Funasa) and National Health of Surveillance Agency (Avisa).

The group is to be assisted by the Insti-tute for Managerial Development (INDG), a consultancy group that between 2003 and 2009 advised nine Brazilian states, includ-ing Minas Gerais and Pernambuco on how they could improve their performance.

At Anvisa, which approves the licensing of drugs that can be sold in Brazil, Mr Padil-ha is looking to speed up the time it takes to authorise drugs from an average of six to three months. In recent years Funasa, which oversees the installation of basic sanitation in poor areas, has come under criticism for the poor use of public funds. n

the president should find it easier to win backing from legislators

the dust, resigning shortly after making unauthorised comments that irritated his superior. Another, more senior figure, Fer-nando Haddad, the education minister, was abruptly told to postpone a planned holiday, as media controversy whirled around the way a national university entrance exam had been organised.

Encounters with some other senior figures have been no less bruising. After landslides and floods led to the deaths of more than 800 people last month in Rio de Janeiro state, Ms Rousseff had some harsh words for Sergio Cabral, the state’s governor, telling him she could not accept that money transferred to the state to pay for flood prevention efforts had not been used for that purpose and complaining that she could not believe he was asking for more money.

While Mr Lula da Silva was often over an hour late for public ceremonies and other events, Ms Rousseff hates delays. And she eschews public comment when she believes that it is not needed. “She won’t throw words into the wind,” says one old friend. “If you want to know what Dilma is planning check her speeches. She is a woman of her word and means to carry out her campaign pledges before the end of her term.”

While Mr Lula da Silva lived in the Alvorado Palace in the heart of Brasília and visited the more reserved Granja do Torto country house used by Brazilian presidents at weekends, Ms Rousseff has chosen to live at Granja, in an effort to retain more privacy.

Deeper administrative reform will be needed if this more hard-headed mana-gerial approach is to achieve faster and better government. But that kind of more far-reaching action is on the agenda. Ms Rousseff has asked ministries to come up with plans to save part of their budget allo-cations. Ministers have been asked to work more closely with colleagues in related departments.

Another step in this direction involves the deployment of a consultancy group that has achieved some important advances at a state level. The health minister, Alexan-dre Padilha, has been at the forefront of efforts to invite private sector bodies to help improve public sector management. Specifically, Mr Padilha has asked the Move-ment for an Efficient Brazil (MBE), a body associated with one of the country’s most prominent entrepreneurs, the steel magnate Jorge Gerdau Johannpeter, to help prepare a plan to help improve management at two government agencies, the National Health

spending on the rise

in his two terms at the head of Brazil’s government, President Luiz Inácio Lula da Silva encountered plenty of turbu-

lence in his relations with Congress, most notably when it emerged in 2005 that his Workers’ Party (PT) had used state funds to buy votes from its coalition partners. At first glance, Ms Rousseff could also face difficulties in managing an alliance that encompasses no fewer than ten parties. The biggest of these the centrist Brazilian Democratic Movement Party (PMDB) has already indicated that it is unhappy with policies and will support trades union demands for a bigger increase in the minimum wage, potentially undermining the government’s fiscal plans.

Note: Spending as a percentage of GDPSource: Contas Abertas


Hull of giant Petrobras production platform P-51, built at the brasfels yard near Rio de Janeiro

A close look at the readiness of petro-bras’s local suppliers confirms doubts about the company’s prospects.

rEsOurCE BrAzIL

pEtrOBrAs’s pErFOrmANCE tEst

Former market darling Petrobras (PETR3:SAO) en-dured an annus horribilis in 2010, when the Bra-zilian government’s handling of a stock issue per-suaded many investors to head for the exit. The

company shed 23% of its stock market value, roughly matching the retreat of Macondo-hit BP (BP.:LSE).

The possibility of a repeat capitalisation has prevent-ed a rally from taking hold. Even considering Petrobras’s excellent long-term prospects, with an estimated 60bn to 100bn barrels of oil equivalent in the new offshore ‘pre-salt’ areas, there are reasons to be cautious.

The 2010 share issue was worth more than $70bn (R$117bn, £44bn, €51bn), but $43bn of this was tied up with an oil-for-shares mechanism that allowed the feder-al government to increase its stake from 40% to 48%.

These sums are outweighed by the colossal amount that Petrobras needs to spend, and government policy is pushing capex demands ever higher. The 2010-2014 Petrobras plan earmarked investments of $224bn, com-pared with $174bn under the previous version.

The current plan still only covers the leading edge of pre-salt investments, suggesting that the allocation of $33bn is just the tip of the iceberg. Another big increase in planned investment is likely when the plan is updated, probably next quarter.

Nor do existing allocations yet account for the esti-mated $3bn to $4bn needed to develop the 5bn barrels of crude assigned to Petrobras under the oil-for-shares mechanism.

The re-capitalisation cut the company’s debt-to-equi-ty ratio to 17%, from 25%, but the scale of the company’s demand for capital was illustrated by last month’s $6bn bond issue, the company’s biggest ever.

Averting the risk of another major capitalisation ex-ercise is likely to depend on a significant increase in Petrobras revenue. This could come either from a fur-ther surge in oil prices or increased efficiency in the company’s production.

Yet there are growing signs that Brazil’s efforts to fos-ter the growth of a local supply chain, by increasing do-mestic sourcing of the hardware needed for deep-sea ex-ploration and production, could undermine productivity and slow the exploitation of the pre-salt reserves.

According to figures obtained by Brazil Confidential, floating production platforms

summArY

petrobras has followed septem-ber’s record share offering with its biggest-ever debt sale, raising $6bn last month. However, the com-pany’s massive investment needs raise the possibil-ity of further stock issues.

Brazil Confi-dential research shows that local content requirements are undermin-ing productivity. Petrobras-owned platforms, built largely in brazil-ian shipyards, are taking almost twice as long to build as those leased from international sup-pliers and built largely by Asian competitors.

BrAzIL CONFIdENtIALFebRuARY 3-16 20117rEsOurCE BrAzIL pEtrOBrAs’s

pErFOrmANCE tEst

with new production sharing contracts.Under new rules, Petrobras will be the only qualified

operator on future licences covering strategic pre-salt areas, contrasting sharply with the much-quoted

owned and engineered by Petrobras with a strong-er emphasis on local construction have so far taken almost 100% more time to complete than those built by leased platform specialists elsewhere in the world.

This tension between the scale of capital require-ments and less efficient performance of locally dominat-ed projects could become even more acute when Presi-dent Dilma Rousseff ’s administration introduces new oil laws, replacing competitively bid upstream concessions

P-57

cid.

Nite

roi

cid.

Vito

ria

capi

xaba

Mar

lim s

ul

P-51

P-53

P-54

P-52

P-50

P-48

P-43

International charter vs petrobras-owned contracts

26 2527

18 18 17

54

4347

49

32

50

44

10

20

30

40

50

60

Num

ber of months from

contract to start of production

International charter contracts

34

International charter contracts*Platform Cap bpd Main contracts Scheduled Prod. Contract vs. Contract vs. Sched. vs. signed prod. start sched. prod. prod. start prod. start (mm/yy) (mm/yy) (mm/yy) (months) (months) (months)

Marlim Sul 100,000 01/03 04/04 06/04 15 17 2

Capixaba 100,000 11/04 04/06 05/06 17 18 1

Cid Rio de Janeiro 100,000 07/05 04/07 01/07 21 18 -3

Cid. Vitoria 100,000 08/05 01/07 11/07 17 27 10

Cid. Niteroi 100,000 01/07 10/08 02/09 21 25 4

Cid. Angra dos Reis 100,000 08/08 11/10 10/10 27 26 -1

P-57 180,000 02/08 01/11 12/10 35 34 -1

petrobras-owned contractsPlatform Cap bpd Main contracts Scheduled Prod. Contract vs. Contract vs. Sched. vs. signed prod. start sched. prod. prod. start prod. start (mm/yy) (mm/yy) (mm/yy) (months) (months) (months)

P-43 150,000 06/00 04/03 08/04 34 50 16

P-48 150,000 06/02 07/04 02/05 25 32 7

P-50 180,000 02/02 10/04 04/06 32 49 17

P-52 180,000 12/03 05/07 11/07 41 47 6

P-54 180,000 04/04 07/06 12/07 27 44 17

P-53 180,000 04/05 07/07 11/08 27 43 16

P-51 180,000 05/04 12/08 11/08 55 54 8

*Platforms supplied, leased and operated by international companies.

Source:Brazil Confidential

cid.

Ang

rado

s R

eis

cid

Rio

de

Jan

eiro

Petrobras-owned contracts


Source:Petrobras, Onip

Investment in production units 2010-2020

Source:Petrobras, Onip

petrobras’s oil production targets

“Petrobras will hold a mini-mum 30% stake in any pre-salt exploration consor-tium, potentially including projects not justified by its own financing criteria.”

rEsOurCE BrAzIL pEtrOBrAs’s pErFOrmANCE tEst

0

1

2

3

4

5

6

Post-salt and soil (Petrobras) Post-salt and soil (other players)

Pre-salt (total)

20202018201620142012201020082006

Mil. bpd

This can be seen by the mix of contracts for major offshore production platforms, with roughly equal numbers of international charter contracts and Petro-bras’s own engineering, procurement and construction projects.

The chartered units tend to be slightly smaller in scale, with more streamlined engineering specifications and have specialist “floater” companies – that make or supply deep-water platforms – such as SBM Offshore (SBMO:AEX) and Modec International building to ag-gressive schedules.

The Petrobras EPC contracts are more Brazil-based, and the oil companies own engineers have demonstrat-ed impressive creativity in fitting specifications and

Norwegian model. Crucially, Petrobras will also hold a minimum 30%

stake in any consortium selected to explore for oil on per-mits in the pre-salt fields, so may be required to partici-pate in projects not necessarily justified by its own fi-nancing criteria or costs.

“Petrobras is already overburdened with projects and its managers can only be praying that the government will not carry out its promise to call a bid round as soon as

it gets the legislation approved,” says Adriano Pires, director of the Brazilian Institute of In-frastructure Studies (CBEI).

The Petrobras stock price has probably concluded its adjustment cycle, with the re-cent dilution and associated risks now fac-tored in. If oil prices remain stable or rise only

modestly, a more demanding assessment of project per-formance and investment strategy is likely to restrain the company’s stock in the medium term.

So how does the company stand? Petrobras has per-formed sluggishly in recent years, revising downwards – but still missing – its production targets. Last year. For example, output of crude oil rose by only 1.7%, compared to an initial targeted increase of 2.5%.

Petrobras can feel relatively confident about boosting production in 2011, with big new platforms such as the P-56 and P-57 set to ramp up output. Some 250,000 bpd of new production is scheduled to go on-stream this year, more than offsetting the 90,000 bpd that is expected to be lost due to the decline of older fields.

However, there are fewer new platforms in the pipe-line for 2012, and plans to sharply increase local content in the industry could further hamper output plans.

the contract breakdownThe first phase of full-scale development of the Lula field (the most prominent of the pre-salt fields) will fea-ture the deployment of eight large Brazilian-built float-ing production, storage and offloading (FPSO) plat-forms. Petrobras is pursuing an even more ambitious plan to order 28 sophisticated deepwater rigs, also to be built locally.

The large number of orders for ships, production plat-forms and rigs placed with Brazilian suppliers could lead to bottlenecks and overruns. Brazil’s own petroleum in-dustry body (Onip) acknowledged in a recent study that the domestic offshore sector is competitive in some are-as, such as subsea equipment, but suffers from low ca-pacity and high costs in other areas.

“This policy of privileging Brazilian goods and servic-es, unless measured carefully, actually increases the probability of another capitalisation,” says an oil-sector analyst at one of Brazil’s own government-owned banks.

Brazil’s local content policies are broadly inspired by Norwegian and UK models dating back to the devel-opment of North Sea oil and gas fields. The policy makes sense in Brazil with its diverse industrial base, but Petrobras planners have so far sought to limit its implementation.

0

2

4

6

8

10

Other

Installation, integration and commissioning

Construction and assembly

Engineering

Anchorage Equipment Materials and hull

202020182016201420122010

US$ bn

Source: Petrobras, Onip0

100

200

300

400

500

Offshore platformsTankersBoats and support vessels

2010

000s of tons

shipyard capacity 2010


“Industry sources describe the most competitive prices for rig-building contracts as dangerously low.”

rEsOurCE BrAzIL pEtrOBrAs’s pErFOrmANCE tEst

set alarm bells ringing.The contract will be carried out at the brand new Rio

Grande yard and industry insiders say steel processing workshops that are essential for production are not yet in place. The hulls are supposed to be delivered between 2013 and 2015.

Petrobras argues that building these units in a standardised format will make the projects more cost-effective, and José Miranda Formigli, a top pre-salt ex-ecutive at Petrobras, says that the presence of experi-enced Swedish and Chinese partners will guarantee good performance.

A huge tender for the more complex topside process-ing plant and equipment will follow later this year, with up to 120 modules of topside processing equipment and plant on offer.

The fact that private sector project partners BG (BG:LSE) and Repsol YPF (REP:MCE) went along with these arrangements is a testament to the appeal of the pre-salt projects. Brazil Confidential, however, under-stands that there was some tension over the issue, and Petrobras agreed to spread the risk by tendering for two more chartered units, adding up to five full-scale leased units in the Santos basin, where the main pre-salt fields lie.

The tender for drilling rigs alone has generated at least four major new complex shipyard projects. Petrobras ex-pects each rig to cost about $700m, but industry sources describe the most competitive prices, submitted by Bra-zilian consortia, as dangerously low.

Some new private sector yards have plans in train to increase productivity but it is too early to judge how successful these have been. Estaleiro Atlântico Sul (EAS), a mainly Brazilian private-sector joint venture shipyard in north-eastern Brazil in which Samsung Heavy Industries (A010140:KSC) owns a 10% stake, has put in place a highly-automated production line based on so-called flow principles and which includes provi-sion to lift heavy blocks in an automated way. The yard’s operators aspire to achieve a blend of productivity and wages sitting somewhere between Chinese and Japa-nese yards, says Angelo Bellelis, the chief executive. EAS already has 10 tankers on order, and is close to sign-ing the first contract with Petrobras for seven deepwa-ter drill ship rigs, putting that facility at full capacity for some time to come. However, the first tanker and the first production platform to be built at EAS have been delayed. (The company would not provide data on pro-ductivity.)

There are other Brazilian yard projects, some backed by experienced groups such as Odebrecht and Jurong Shipyard and OSX (OSXB3:SAO), but many others are under-capitalised and have no experience.

Private operators are also doing their best to increase the supply of qualified workers, the shortage of which is a major headache for the offshore sector, despite an am-bitious government-backed training and education programme that can draw upon 0.5% of royalty reve-nues. Both EAS and Quip, another private sector

contractual models to get the most out of local suppliers.

These EPC projects tend to feature more complex engi-neering and integration matrices, and contractors are giv-en longer schedules and more flexibility for modifications.

Local content has steadily increased in both cases, ris-ing overall from 57% in 2003 to 77% in 2010, according to Petrobras data. The chartered units usually have a strong Asian yard component, but local content is now above

60%. Petrobras has recently begun requiring international companies to work with local partners, with a view to handing over offshore operations completely.

Local content assumed more importance under President Lula da Silva and these policies were di-rectly responsible for bringing the construction of some of the biggest and most advanced production units into Bra-zilian yards. The huge P-51 and P-52 series have been built by Brasfels, a shipyard subsidiary of Singapore’s Keppel FELS.

Yet the production platforms deployed in the pio-neer pilot projects in the pre-salt fields have been char-tered internationally, allowing oil to be produced more quickly.

The first production platform on Tupi-Lula, inaugu-rated with pomp and ceremony, was a chartered FPSO. Two slightly larger leased FPSOs will be installed on the Guara and Lula fields in 2013 and 2014, respectively. However, Petrobras’s resistance to these projects has been growing.

The private sector’s worry is that Petrobras’s govern-ment masters are pushing too many projects into local shipyards too quickly. The current investment plan calls for 200 Brazilian-built supply vessels, 30 Brazilian-built tankers and 28 Brazilian-built deepwater rigs.

Petrobras currently has 45 deepwater production plat-forms on its fields, compared to Shell’s (RDSB:LSE) 15 and ExxonMobil’s (XOM:NYQ) 13, but planners say they ex-pect to order no less than 40 FPSO units by the end of the decade, each one producing up to 150,000 bpd.

Brazil’s existing shipyards are already overstretched and newer yards take several years to move from con-ception to construction and then build up their produc-tivity. An older yard, such the Maua facility in Rio de Ja-neiro, is expected to take at least 1.8m man-hours to conclude the first of several petroleum product vessels on its books. This compares to about 500,000 man-hours in a Korean yard.

Undaunted, Petrobras is piling up the orders and is even pushing the charter companies to carry out their hull conversions in Brazil. “Building or converting the hulls in Brazil has become something of a point of hon-our, but these elements do not represent the most value in the platforms. Forcing these jobs into overstretched shipyards just does not make sense,” said a representa-tive of one of the international FPSO lease companies.

Awarding Engevix, a São Paulo-based contractor with no previous experience in the offshore sector, a $3.46bn contract to build the eight FPSO hulls for Tupi-Lula also

BrAzIL CONFIdENtIALFebRuARY 3-16 201110rEsOurCE BrAzIL pEtrOBrAs’s

pErFOrmANCE tEst

ACtIONpOINts

01 petrobras’s honeymoon is over, with financing pres-sures likely to con-tinue, and govern-ment intervention on local content and investment strategy posing risks.

02 Yet, given the scale of brazil’s reserves, a vein of pragmatism points to long-term rewards.

“The sector is bracing itself for aggressive recruit-ing and wage inflation as scores of new yard projects move forward.”

on investment strategy. Petrobras, for example, is spend-ing heavily on refineries that offer a relatively low rate of return on capital. The company has a reputation for ne-gotiating hard with local contractors, but its managers have missed opportunities to save money, by for example ordering new rigs when, because of the international credit crunch, ship builders were looking to unload many half-built or completed units.

Petrobras has undeniable strengths. Brazil’s political context offers stability; the pre-salt reserves of oil and gas are impressive; and with a succession of positive results from well tests in the pre-salt fields fears about technical production risks are beginning to fade. Ahead of last month’s bond sale the company was also keen to reas-sure investors that it would finance the development for the additional 5bn barrels of crude obtained under the capitalisation from its own resources, garnering revenue from a first platform before moving ahead with the others.

“Petrobras has said it intends to double output by 2020. It took 10 years to double output to 2m barrels per day, and the new economies of scale mean that this is a credible target, but this is still a massive challenge,” says Nelson Matos, an analyst with Banco do Brasil.

But investors will need to watch more carefully the performance of projects than they have done in the past. In the stock market at least the company has lost ground over the last two years. Of course, a sharp rise in the oil price would change matters but until it becomes clear that operating results are improving the shares will underperform. n

joint venture, have have invested heavily in their own training programmes.

“We have been working to create a whole new indus-trial culture. This is a region with great potential, but we are coming up against a shortage of suitably qualified la-bour. There is already some wage distortion among the sought-after category with a technical qualification,” says the chief executive of Quip, Miguelangelo Thomé.

After investing in their own training and education and casting their net for migrant workers, pioneers such as Quip and EAS are already including loyalty in-centives, but the sector is bracing itself for aggressive recruiting and wage inflation as scores of new yard pro-jects move forward. Basic educational standards in Bra-zil are a problem, as are the shortage of technical col-leges and competition from other sectors of Brazil’s booming construction industry.

Meanwhile, critics also worry that the promotion of new industrial clusters being in the northeast and south of Brazil obey a political rather than commercial logic. The hubs in Pernambuco and Rio Grande do Sul, for ex-ample, are too distant and disconnected to established industry of Rio de Janeiro, they suggest. For example, the hull for another big production platform, the P-55, which is currently being built at the brand new EAS yard, will have to be shipped 3,500 km down the coast to an equally new dry-dock facility in Rio Grande do Sul. The deck and topside plant for the same platform is also being built mainly in southern Brazil.

Moreover, for many investors these worries are part of a broader set of concerns linked to government influence

2006 2007 2008 2009 2010 2011 forecast

Production

Iron ore (million metric tons) 317.00 355.00 351.00 310.00 370.0* 450.0*

Soy complex (million metric tons) 55.00 58.40 60.00 57.20 68.70 68.60

Chicken (million metric tons) 9.35 10.31 11.03 11.02 12.00* –

Beef (million metric tons) 9.12 10.08 8.83 8.47 8.92* –

Sugarcane (for industrial use) (million metric tons) 429.50 501.50 571.40 604.50 625.0* n/a

Orange production in São Paulo state 348.4 365.8 354.7 355.1 297.5 352.9

(million 40.8kg boxes)

Coffee (million 60kg bags) 42.5 36.1 46.0 39.5 48.1 41.9-44.7

Crude oil** (million barrels) 650.9 660.4 686.3 736.9 n/a –

Exports

Minerals and ores ($ m) 9,757 12,026 18,727 14,453 30,839 38,000*

Oil and derivatives ($ m) 13,005 16,042 23,047 14,947 22,890 –

Soy complex ($ m) 9,311 11,386 17,986 17,251 17,071 19,936*

Meats ($ m) 8,510 11,095 14,283 11,471 13,292 –

Sugar and cane ethanol ($ m) 7,771 6,578 7,873 9,716 13,776 –

Paper and pulp^ ($ m) 4,007 4,726 5,834 5,001 6,769 –

Coffee (in grain) ($ m) 3,311 3,829 4,733 4,251 5,739 6,000-6,400*

Orange juice ($ m) 1,043 1,543 1.997 1.619 1,775 –

*Estimate. **Figures for barrels of oil equivalent. Do not include Liquified Natural Gas. ^Brazilian Paper and Pulp Association – BRACELPA forecast exports of $20 billion by 2020 on investmentsSources: Brazilian Iron Ore and Base Metals Extraction Association – Sinferbase, US Geological Survey, National Mineral Production Department – DNPM, Brazilian Government Agricultural Research Body – CONAB, Brazilian Association Of Chicken Farmers – APINCO, Brazilian Census Bureau – IBGE, Sao Paulo State Agricultural Research Institute – IEA, National Petroloeum Agency – ANP, Brazilian Development, Trade and Industry Ministry, Brazilian Exporters Association – AEB, Brazilian Vegetable Oil Producers’ Association – ABIOVE, Brazilian Paper and Pulp Association – BRACELPA, Brazilian Coffee Exporters Council – CECAFE

rEsOurCE BrAzIL: tHE COmmOdItY OutLOOK


this is the first in a series of articles on Brazil’s thriving venture capital and private equity industries, focusing on developments state-by-state. In this piece we look at minas Gerais.

New administrative offices of Minas Gerais state government in belo Horizonte

FINANCING BrAzIL

prIvAtE EQuItY:

sOwING sEEds IN mINAs GErAIs

summArY

pro-business state government policies, a diversi-fied economy and above average growth rates are attracting interest from private and venture capital in-vestors to brazil’s second richest state.

money for big-ger private equity deals has come from são Paulo, Rio and abroad. but a number of seed capital and venture capital firms have be-come established locally.

Clusters of high tech and bio-science business-es are developing around the top universities. And the state govern-ment wants to see supply chains expand in areas such as mining and clothing.

As a Belo Horizonte-based professor of eco-nomics, Clélio Campolina is well aware of the shortcomings of the business culture of Minas Gerais, Brazil’s second most populous

and economically important state.But Mr Campolina, who is rector at the state’s fed-

eral university, is also enthusiastic about the way a new risk-taking business culture is developing. “I have written academic books arguing that Minas does not produce entrepreneurs, but today it is changing. There is a new generation that is innovative.”

Most of the big deals in the state are financed from São Paulo or abroad. Last year, for example, Omega En-ergia signed a R$350m ($209m, £131m, €152m) agree-ment with private-equity firms Warburg Pincus of the US and São Paulo’s Tarpon Investimentos (TRPN3:SAO) to fund growth in Minas and outside the state. In Sep-tember, Rio de Janeiro’s Mercatto Investimentos bought 29.3% of Fornos de Minas, a food company, for an undisclosed sum.

However, backed by the state development bank, a local venture capital industry is taking root. In a state where business owners have been notoriously unwill-

ing to raise capital outside the banking system, no fewer than 25 companies are now saying they are inter-ested in listing on the stock exchange. Only 10 are list-ed at present.

For now, the number of funds is small and they are fo-cused on high growth opportunities in start-ups. But Marcus Regueira, managing partner at FIR Capital and the former president of the Brazilian Association of Pri-vate Equity and Venture Capital, says that there is space in everything from traditional industries such as agricul-ture, construction and mining as well as new ones such as biosciences, pharmaceuticals, tourism, health and ed-ucation. “Minas is the best kept secret in terms of invest-ment opportunities.”

political reforms aid developmentPolitics have helped pave the way for change. The state government, led for the last eight years by Aécio Neves of the Brazilian Social Democratic Party (PSDB), has adopt-ed business-friendly policies. For example, it now takes only eight days to open a company compared to eight months before recent reforms, according to Dorothea Werneck, the state’s energetic new secretary of economic development.

The PSDB maintained control at October’s elections, and although Mr Neves has moved on to take up a seat in the Senate, his successor Antônio Anastasia intends to continue along the same path. Ms Werneck is examining ways that her department can stimulate the development of small- and medium-sized businesses.

BrAzIL CONFIdENtIALFebRuARY 3-16 201112FINANCING BrAzIL sOwING

sEEds IN mINAs GErAIs

State officials spend a lot of time explaining the advantages of non-bank financing to business owners. “The saying is ‘Minas works in silence’. I think there’s nothing more harmful than this precept,” she says. “There is lots of work to be done in explaining why it is useful to have access to capital. ‘Don’t be afraid of inves-tors’ – that is our most common advice.”

The state has helped in other ways too. The state de-velopment bank, the Department Bank of Minas Gerais (BDMG), is cooperating with a number of local players after its board authorised spending of up to R$20m in venture capital investments, an amount that could eventually be increased to R$50m. It has already chan-nelled some of the money into funds, investing R$2.5m in the HorizonTI run by Belo Horizonte-based Confra-par and R$10m in a separate fund invested in sustaina-ble projects.

The bank is also looking at supporting a fund ear-marking investment in innovative start-ups that is mod-elled on the so-called Criatec Fund, a R$100m facility sup-ported by other Brazilian development banks. “We realised we need to do more than just offer credit. We need to offer modern capital market instruments,” says Paulo Paiva, its outgoing president.

Mr Paiva recognises that there are some limita-tions. Onerous federal government regulations limit the scope of development bank activity, for example. But he says that the bank’s extensive contacts with businesses based in the state can help open doors for both domestic and foreign investors. “We can give an

entrée into the Minas business scene [which can be a] closed shop,” he says.

ties with academiaAnother institution created by government, the Research Support Foundation of Minas Gerais, best known by its acronym Fapemig, has also emerged as a source of ven-ture capital funding and was the first such foundation in Brazil financially to support the sector. It has invested in Confrapar’s HorizonTI and is investing in a life sciences fund, run by the locally based FIR Capital (see below).

The federal universities in the state have put a new emphasis on links with the private sector. In Belo Hori-zonte, the federal university of Minas Gerais (UFMG) runs an incubator – known as Inova – and a tech park is being built in its grounds. Last year alone, the univer-sity filed for 350 national and 110 international patents, says Mr Campolina.

The products developed by UFMG range from sports shoes to a vaccine for leishmaniasis, a poten-tially fatal disease transmitted by sand flies. Produc-tion of the shoes is already under way in the Minas city of Nova Serrana.

Other federal university clusters are found at Viçosa, famous for its technical prowess, which in conjunction with the Fundação Arthur Bernardes, has spawned a tech incubator and Lavras, renowned for agricultural courses. Research centres include the Brazilian Agricultural Re-search Corporation (Embrapa) in Sete Lagoas.

The Federation of Industries of Minas G e r a i s

minas Garais

belo Horizonte

INsIGHtmINAs BusINEss At A GLANCE

North westStarting to attract energy intensive agro businesses thanks to cheap electric-ity. Irrigation is improv-ing agriculture.

NorthA mix of companies in sectors ranging from textiles to metals. Três Marias dam supplies hy-droelectric energy for the region around the town of Montes Claros, where industries also include insulin and cement pro-duction and agribusiness. The Superintendência do Desenvolvimento do Nor-deste (Sudene) provides financing for industrial development.

North EastVale de Jequitinhonha, one of the poorest areas of Brazil. Underdevel-oped mining includes silica and graphite and ornamental rocks.

westThere are steel and met-als industries around the towns of Triângulo Mineiro. Uberlândia is a centre of agroindustry, ethanol and chemicals.

Central Area (around Belo Horizonte)

150km around the capi-tal. Mining companies, steel and car and car parts. The best academic institutions, infrastruc-ture and technology re-sources. Companies with HQs in the area include Fiat, Arcelor, Toshiba, Usiminas and Google.

EastMining and metallurgy on the highway to Rio de Janeiro.

southCentre for tech industries including electronics and telecommunications. In Itajubá industries include auto parts, fibre optics, textiles, electron-ics, helicopters (Helibrás) and military weapons. More than 110 companies are concentrated around Santa Rita do Sapucaí and the so-called Elec-tronic valley. University has stimulated cluster of electronic compa-nies. Home to Instituto Nacional de Telecomuni-cações and Escola Técnica de Eletrônica.

south EastThe Vale do Aço/Rio Doce is a steel center. Large companies include Usiminas (steel) and Cenibra (paper and pulp).

BrAzIL CONFIdENtIALFebRuARY 3-16 201113FINANCING BrAzIL sOwING

sEEds IN mINAs GErAIs

ACtIONpOINts

01 Local venture capital company Araújo Fontes is seeking out local companies that are looking for third party private equity investors. confra-par and newcomer DLM invista are looking for foreign participation in funds. FiR capital already works with us partner Draper Fisher Jurvetson.

02 A tight-knit business communi-ty and suspicion of newfangled financ-ing impede deal-making in the state and makes a local partner useful.

03 the state devel-opment bank Minas Gerais Development bank and Research support Foundation research centre (Fapemig), are both active and receptive to parties looking to get investment ideas off the ground.

“We have many more options to invest than capital under management. We would like to attract more capital and to keep expanding our remit all over Brazil”

Araújo Fontes, which started up sixteen years ago, has a fund and advisory business. In its fast-growing ad-visory business, the manager grooms companies by putting in place proper accounting, struc-tures and policies. The managers present these companies to some 70 venture capital and private equity funds, charging the com-pany a retainer and success fee on receiving investment that varies between 1.5% and 4.5%. In its advisory business, Araújo Fontes is eclectic. It looks at companies with an annual income of R$15m-100m across IT, mining, logistics, heavy and civil construction and food production and distribu-tion, says Evaldo Fontes, managing partner at the firm. Demand for such opportunities is great and the advice business is now scouting companies in Goiás, Paraná and the northeast, in particular Recife, he adds.

On the other side of the business, it is managing a R$15m seed capital fund focused on biotechnology and life sciences called Novarum. Araújo Fontes is current-ly selling stakes in the six companies in which No-varum has investments. Mr Fontes says he would like to launch either more seed capital or mezzanine and credit funds. Mezzanine funds have the advantage of allowing investors to buy convertible debt, giving them time to get comfortable with the company be-fore committing equity, he says.

An important lesson from the experience with No-varum is that companies that benefit from venture and seed capital need follow-on financing, says Mr Fontes. “We learned the hard way that you need a second round of funding for these small companies.”

The third of this group of fund managers is FIR Capital, which has been active since 1999 and in which Draper Fisher Jurvetson, the US venture capital firm, acquired a minority holding in 2007. FIR Capital’s fo-cus is on innovative small and medium-sized compa-nies with sales of up to $150m per year. “We have many more options to invest than capital under manage-ment. We would like to attract more capital and to keep expanding our remit all over Brazil,” says Mr Regueira.

(Fiemg), which would like to foster closer ties with academia, in particular in developing supply chains in key manufacturing sectors, is also promoting its own business education efforts.

Fiemg is cooperating in these efforts with the local chapter of the Instituto Euvaldo Lodi, attached to the National Confederation of Industry, to support and train local businessmen and prepare them for outside investment. “The institute is going to be the nerve cen-tre of Minas industry. It will map out opportunities and plan the path for industry,” says Olavo Machado Junior, the federation’s president. He is seeking a tie-up with the Fundação Dom Cabral, which has an inter-nationally rated MBA programme.

specialist business modelsWhat’s more, Minas is rapidly developing a reputation as a Brazilian hub for seed and venture capital, with a num-ber of players from the state gaining national promi-nence. Three specialised local managers have developed business models that combine fund management with advisory work.

Confrapar specialises in early-stage venture capital and has tapped a range of funds and brought in gov-ernment money. For its HorizonTI fund, Confrapar at-tracted 40% of the monies from the Federal Ministry of Science and Technology’s innovation programme, known as Finep (whose Inovar programme supports innovative ideas), and 30% from the state of Minas through Fapemig and the BDMG. The remaining 30% comes from 30 private Brazilian investors including Confrapar’s own partners, high net worth individuals, and family offices. HorizonTI typically invests about R$2m in its target companies. It has made three invest-ments and plans a further seven in companies in a stage of fast growth. As Carlos Eduardo Guillaume, chief executive of Confrapar, puts it: “There is no fund like ours operating in São Paulo.”

Mr Guillaume is already seeing pension fund interest as Confrapar starts to raise money for future launches and predicts this year will be a tipping point as domestic pension funds allocate more to private equity.

Company Name Name Job Title Email

Araújo Fontes Evaldo Fontes Managing partner [email protected]

Banco de Desenvolvimento de Minas Gerais (BDMG) Walter Elias Furtado Capital markets consultant [email protected]

Confrapar Carlos Eduardo Guillaume CEO [email protected]

Consultant Dr Ivan Moura Campos [email protected]

DLM Invista Mateus Tessler Operational manager [email protected]

E Prime Care Leonardo Florêncio Director of operations and innovation [email protected]

Federação das Industrias de Minas Gerais (FIEMG) Olavo Machado Junior President [email protected]

FIR Capital Marcus Regueira Managing partner [email protected]

Lima Netto, Campos, Fialho, Canabrava Advogados Luciano Fialho Senior partner [email protected]

Portugal, Vilela, Behrens e Advogados Bernard Portugal Senior partner [email protected] or [email protected]

Secretary of Development of Minas Gerais Dorotea Werneck Secretary [email protected]

Universidade Federal de Mians Gerais (UFMG) Clélio Campolina Rector [email protected]

Source: Brazil Confidential

who’s who in minas

14 BrAzIL CONFIdENtIALFebRuARY 3-16 2011

Dr Leonardo Florêncio

CAsE studYEprImECArE

FINANCING BrAzIL sOwING sEEds IN mINAs GErAIs

The brainchild of a medical doctor and a technician, Belo Horizonte-based Eprimecare shows the many channels through which money is reaching determined Bra-zilian entrepreneurs. On its inception in 2005, the company targeted efficiency and cost improvements to outpatient treatment, sell-ing these services to health insurers, says Dr Leonardo Florêncio, the chief execu-tive. Improvements were fo-cused on making home-care teams more efficient or, add-ing technology to remind patients to take medicines, for example.

In the long term, Brazil, in common with the rest

of the world, has an ageing population and there are limits to the amount of ad-ditional spending the public system will bear, says Dr Florêncio. In the short term, the country has a severe shortages of hospital beds, he adds.

The company quickly developed to cover in-hospital chronic illnesses, ranging from hyperten-sion to diabetes. “When we analysed the market, we realised home health care represents just 0.5% of patients whereas 30% of Brazilians have chronic ill-ness,” he says. To scale up, the business needed money for research and develop-ment and working capital. It received a R$360,000 grant from Fapemig, the research institute. After intensive coaching, Eprimecare and 12 other companies were presented by Finep at an investor forum and attracted Confrapar.

Outside investors helped put in place structures rang-ing from marketing, and budget controls through to corporate governance. Fundamentally, the busi-ness model has changed too: today the firm services clients rather than selling its proprietary technology, says Dr Florêncio. n

In Minas, FIR Capital has investments in Belo Hor-izonte that span the mining industry, including through Devex, which offers solutions to optimise the running of mines, and Sambatech, which has services that include simplified internet videos and streaming. FIR also in-vests outside the capital, including in Itajubá-based Safe Trace, which specialises in guaranteeing the provenance of meat offering, an “auditable result in all production stages, from the field to the consumer’s plate”. The man-ager is currently seeking to raise R$400m for its fourth fund in Brazil.

One Minas Gerais manager to watch is DLM Invis-ta, whose nascent private equity unit specialises in identifying software as a service (so-called SaaS) op-portunities. (SaaS is a cheap, pay-as-you-go service for companies, offering Internet-based services in areas such as accounting and customer relationship management.)

The private equity unit is seeking to create a R$200m fund and already has 40% committed from institutional funds willing to put in more than R$1m apiece, with the expectation that 20% of financing will come from for-eign sources, says Mateus Tessler, operational manager in the firm’s São Paulo office. DLM has identified hun-dreds of companies to invest in both in Minas and other states, he notes.

All this is starting to attract growing domestic and foreign interest. For example, Mr Guillaume found investors were cautiously receptive when he held road shows for Confrapar last year in the US and UK. Yet many foreigners remain cautious. Perhaps one of the reasons is that for all its dynamism and opti-mism, the industry in Minas looks decidedly lopsid-ed, with the emphasis on tech companies rather than industries in which the state has been traditionally strong. Local industrialists complain that venture capital funds are obsessed by high-growth areas. “They are ignoring a great swathe of Minas’ strengths in more basic industries,” says Mr Machado Junior at Fiemg. n

Company Website Description

Associação Brasileira de Private Equity & Venture Capital www.abvcap.com.br Industry body for Brazil operating out of São Paulo

Companhia de Desenvolvimento Econômico de Minas Gerais (Codemig) www.codmig.com.br Mixed public-private sector company that directs investments in Minas with an emphasis on infrastructure

Federação das Industrias do Estado de Minas Gerais (FIEMG) www.fiemg.org.br Industry association of the state of Minas

Financiadora de Estudos e Projetos (FINEP) www.finep.gov.br Financing body attached to Federal Ministry of Science and Technology that provides

money for technical studies and projects

Fundação Centro Tecnológico de Minas Gerais (CETEC) www.cetec.br Technology centre that works with companies to improve competitiveness

Fundação de Amparo à Pesquisa do Estado de Minas Gerais (FAPEMIG) www.fapemig.br Development agency that provides financing and support for technical innovation

INOVA Incubator www.inova.ufmg.br Incubator for technology firms at the Federal University

Instituto de Desenvolvimento Integrado de Minas Gerais (INDI) www.indi.mg.gov.br Institute that provides technical assistance for investors

Instituto Euvaldo Lodi (EL) www.fiemg.org.br/iel Institute attached to the National Confederation of Industry that gathers information and plans long-term development

Universidade Federal de Minas Gerais (UFMG) www.ufmg.br Federal University of Minas Gerais


minas Gerais and federal research and funding institutions


summArY

Fund Name: Dreyfus brazil equity Fund

Fund manager group: bNY Mellon ARX

Assets under management: us$1.3bn

domiciles: bra-zil, Dublin, Korea, Japan, and the united states.

senior strate-gist: Alexander Gorra is based in Rio de Janeiro

we look at two rio de Janeiro funds that are positioned defensively: BNY mellon Arx’s dreyfus Brazil Equity fund and polo Capital’s event-driven and relative value fund.

FINANCING BrAzIL

FuNd mONItOrthis is the first of a regular series looking at the performance and strategies of Brazilian investment funds.

dreyfus Brazil Equity fundAt 6%, BNY Mellon ARX’s forecast for 2011 inflation is at the top end of the range. So, perhaps understandably, Al-exander Gorra, the fund’s senior strategist, has taken a de-fensive stance in recent months: “In the fourth quarter, we became very concerned with inflation; it was setting off all our alarm signals.”

In response, Mr Gorra took profits on shares that he views as sensitive to movements in interest rates and shifts in the economic cycle, and increased exposure to stocks in sectors, such as raw materials, finance and utili-ties, which he considers to be natural hedges against ris-ing prices.

In the utility sector, Mr Gorra says that he has pre-ferred companies that are involved in the generation rather than distribution of electricity, arguing that gen-erators enjoy more flexibility in relation to pricing. While distribution companies face tough pressure from regula-tors, generators typically negotiate power sales through ten- to 15-year inflation-linked contracts. Even so, Mr Gorra still carefully analyses specific companies, taking care to spot when contracts come up for renewal when prices can jump.

Among the generators he likes are AES Tietê (GETI4:SAO) and Tractebel Energia (TBLE3:SAO). And he also favours a couple of integrated generation and distribution concerns: Companhia Paranaense de En-ergia (Copel) (CPLE6:SAO) and Light (LIGT3:SAO). Po-litical change – in the shape of the election of a market-friendly candidate from the Brazilian Social Democratic Party (PSDB) to the governorship of Par-aná – has eased some of the regulatory pressures faced by Copel. And Mr Gorra expects the Rio de Janeiro-based Light to be a big beneficiary from the expected rise in the state’s infrastructure spending and its im-pact on local growth.

In the financial area, the range of stocks open for in-vestment has widened following the listing of a number of credit card and insurance companies. Mr Gorra is cau-tious though about the prospects of small- and medium-sized banks, arguing that his stance was partly vindicat-ed by the R$2.5bn ($1.5bn, £0.9bn, €1.1bn) government bailout three months ago of Banco PanAmericano (BPNM4:SAO). “We have been concerned about hyper-

growth modes. These banks were aggressively lending without good risk-management capability,” he says.

The fund has 7.7% of its assets invested in Itaúsa (ITSA4:SAO), the holding company of the eponymous bank, which presents a useful arbitrage to the underlying bank stock as it trades at a roughly 10% discount; 3.6% in Bradesco (BBDC4:SAO); and 2% in Banrisul (BRSR6:SAO), the state bank of Rio Grande do Sul. Mr Gorra says the lat-ter is well established in the local market and is trading at a discount of more than 20% to its peers, because the stock is less liquid and the bank is controlled by the state government.

Mr Gorra is keeping a beady eye on the retail sector, where he has taken profits because of inflation. The fund invests in Lojas Hering (LHER4:SAO) and Lojas Marisa (AMAR3:SAO), which have performed spectacularly in recent months, but have lost some momentum of late as a result of rising interest rates. polo Capital managementThe terms of trade may be positive and portfolio inflows strong, but Claudio Andrade, the manager of the Rio de Janeiro-based Polo Fund, argues that the risks of invest-ing in Brazil are becoming “significant positioning and the commodity cycle have been long and the markets could be vulnerable.”

Although the big picture is less salient, macro trends do guide allocation. In 2008, the fund cut exposure to natural resources stocks and concentrated on domestic-related sectors, such as banking and homebuilders, while last year it increased exposure to natural resources at the expense of domestic retail names.

Like Mr Gorra, Mr Andrade is positioned defensively, but Polo takes a distinct tack on his favoured utility and banking stocks. Mr Andrade looks in particular at merg-ers and acquisitions and regulation, and the way that misperceptions about both these and the macro-pic-ture can lead to price distortions. “We focus on specific risk related to individual situations in everything from risk arbitrage through to distressed situations. In gen-eral, the fund is not a way to express macro bullishness, but seeks out specific opportunities where there may be overlooked opportunities,” he says.

In telecommunications, for example, Mr Andrade is taking a close look at consolidation, arguing that restruc-turing under way at Oi, the mobile company, is one factor creating upside. Polo has a large position in Oi, which took over Brasil Telecom (BRTO4:SAO) in 2008 and is now negotiating a 12.7% stake to Portugal Telecom (PTC:LIS). With that deal now completed, Oi is expected to integrate Brasil Telecom and Mr Andrade is expecting manage-ment improvements to follow. “Current manage-

BrAzIL CONFIdENtIALFebRuARY 3-16 201116FINANCING BrAzIL

FuNd mONItOr

ment is largely ineffective,” he says. Mr Andrade is also watching potential changes in regu-

lations of electricity companies. He is particularly positive about Companhia Energética de São Paulo (CESP) (CESP5:SAO), the state-run generator, which he says has “had a terrific run” as investors turned less negative over the extension of the company’s concession and the new government in São Paulo appeared more supportive. “CESP was a cheap option and had very little downside as everyone became much more certain extension would be granted with a limited cap on what it can charge,” he says.

Regulatory changes are creating opportunities in the banking industry. For example, last year the cen-tral bank moved to break up the duopoly that Redecard (RDCD3:SAO) and Cielo (CIEL3:SAO) enjoyed in the credit card business. More intense competition has ensued with banks such as Santander (SANB11:SAO) starting their own card operations, and that has driven down spreads to a greater extent than the market had anticipated. n

summArY

Fund manager: Polo capital Man-agement

manager location: Rio de Janeiro

Fund name: Polo Fund (event driven/relative value)

Assets under management: us$347m

domicile: cayman islands

Fund manager: claudio Andrade

Brazil local funds, long short as of dec 31, 2010

Brazil local funds, long bias and long only, as of dec 31, 2010

2010 2009

CDI 9.75% CDI 9.88%

Return Return Return Return (%) (% CDI) (%) (% CDI)

BBM Equity Hedge FICFI Mult 12.74% 130.63% 26.89% 272.25%

Brasil Capital FICFI Mult 16.64% 170.61% 42.58% 431.14%

BNP Paribas Long And Short FI 13.21% 135.47% 13.08% 132.47%

Multimerca

Bnym ARX LS FICFI Mult 17.80% 182.51% 21.36% 216.25%

Bresser Hedge FI Mult 10.24% 105.01% 19.24% 194.77%

BRZ LS Advanced FICFI Mult 9.62% 98.68% 14.92% 151.10%

BRZ Long Short FI Mult 9.01% 92.36% 11.63% 117.78%

Claritas Long Short FI Mult 16.93% 173.57% 32.92% 333.32%

Constellation LS FICFI Mult 17.00% 174.32% 33.11% 335.27%

Ca Long Short FI Mult 10.84% 111.14% 12.41% 125.65%

CS Long Short Eq FIQFI Mult LP 11.35% 116.40% 18.04% 182.62%

CSHG Strategy LS FI Cotas de FI Mult 10.89% 111.64% 14.54% 147.18%

Duna Long Short FICFI Mult 11.11% 113.93% 12.42% 125.75%

Equitas Equity Hedge FI Mult 11.34% 116.25% 12.90% 130.65%

Explora Long Short 30 FI Mult 10.77% 110.42% 21.27% 215.33%

Fama Sniper FICFI Mult LP 7.03% 72.10% 26.01% 263.30%

FI Fator Arbitragem Mult 8.17% 83.78% 12.14% 122.96%

Fides Long Short Plus FI Mult 6.32% 64.81% 31.19% 315.81%

Fides Long Short FI Mult 7.03% 72.08% 18.02% 182.49%

Focus Long Short FI Mult 1.60% 16.38% 12.33% 124.85%

Gap Long Short FI Mult 16.99% 174.22% 13.81% 139.87%

Leblon Equities Hedge FIC FIA 16.94% 173.70% 46.85% 474.40%

Np Hedge FIC de FI Mult 10.77% 110.40% – –

Neo Long Short Feeder I FICFI Mult 13.51% 138.57% 7.68% 77.72%

Nest Mile High 30 FICFI Mult 9.65% 99.00% 4.98% 50.38%

Nest Mile High FI Mult 9.60% 98.45% 5.28% 53.44%

Oceana Long Short FI Mult 11.76% 120.64% 21.58% 218.50%

Perfin LS FI Cotas Mult 14.66% 150.39% 28.69% 290.44%

Pollux Long Short FI Mult 6.20% 63.63% 24.69% 249.94%

Polo Norte FI Mult 10.02% 102.74% 49.22% 498.30%

Polo CSHG FICFI Acoes 4.35% 44.63% 86.98% 880.70%

Quest Long Short 30 FI Mult 11.67% 119.66% 15.66% 158.54%

Schroder Brasil LS FI Mult 11.70% 119.99% 11.56% 117.06%

Sul America Equity Hedge FI Mult 9.63% 98.78% 12.11% 122.57%

Itau Equity Hedge Advanced Mult FI 11.84% 121.39% 8.23% 83.31%

Victoire Long Short CSHG Master FI 24.04% 246.53% 33.34% 337.53%

Mult

Average 11.47% 117.63% 22.22% 224.96%

Note: The CBI is an interbank lending rate against which long short funds typically measure their performance.Source: Brazil Confidential

2010 2009

Ibovespa 1.04% Ibovespa 82.66%

Return Return Return Return (%) (Ibov +) (%) (Ibov +)

Advis FIA 0.16% -0.88% 95.21% 12.55%

Aguasclaras Acoes FIC de FIA 29.67% 28.62% – –

Argucia Income FIA 14.95% 13.91% 88.08% 5.42%

Ashmore Brasil Acoes FICFI Acoes 0.48% -0.57% 101.52% 18.86%

Atico Acoes FIA -4.87% -5.92% 97.49% 14.84%

Atmos Acoes FIC de FIA 24.23% 23.19% – –

BBM Fermat FIA 19.26% 18.22% – –

Bc FICFI em Acoes 38.96% 37.91% 185.64% 102.98%

BNY Mellon ARX FIA 16.88% 15.83% 110.25% 27.59%

BNY Mellon ARX Income FIA 12.06% 11.02% 71.37% -11.29%

BRZ Valor FIA 15.35% 14.31% 127.97% 45.31%

Capitania Equities FIC FIA 5.08% 4.04% 106.10% 23.44%

Claritas Acoes FICFI em Acoes 13.74% 12.70% 90.22% 7.56%

Constellation FIC FIA 26.87% 25.82% 114.14% 31.49%

Cox FIC de FIA 37.87% 36.83% 104.69% 22.04%

CS “Fig” Premium FIA 3.98% 2.94% 81.33% -1.33%

CS Ibx Premium FIA 4.38% 3.33% 74.85% -7.81%

CSHG Strategy II FI Cotas de FIA 11.02% 9.98% 99.28% 16.63%

Duna Premium FIC de FIA 3.70% 2.66% 85.07% 2.41%

Dynamo Cougar FIA 22.55% 21.51% 81.55% -1.11%

Explora Long Acoes 30 FICFI Acoes 20.76% 19.72% 122.02% 39.37%

Fama Challenger FIC FIA 4.68% 3.64% 129.90% 47.24%

Fama Futurewatch FIC FIA 0.58% -0.46% 109.29% 26.64%

FI Fator Jaguar Acoes 1.03% -0.01% 81.45% -1.20%

Galleas Partners I FIA 7.96% 6.92% 81.62% -1.04%

Gap FIA 21.17% 20.12% 89.55% 6.89%

Gavea Acoes FICFIA 7.20% 6.16% 83.04% 0.38%

Geracao FIA -4.03% -5.07% 87.35% 4.69%

Gti Value FIA 18.54% 17.50% 163.51% 80.86%

Gwi Classic FIA 9.81% 8.77% 112.59% 29.93%

HG Top Acoes FICFIA 8.23% 7.19% 79.64% -3.02%

Humaita Value FIA 3.08% 2.04% 107.61% 24.95%

Ip Part FIC FIA 23.03% 21.99% 87.41% 4.75%

Ip Particip Institucional FICFI Acoes 24.10% 23.05% 86.41% 3.75%

Jardim Botanico Focus FIA 25.90% 24.86% 71.66% -10.99%

Kadima Acoes FIC FIA 12.19% 11.15% 60.67% -21.99%

Kondor FIA 14.40% 13.35% 133.52% 50.86%

Leblon Acoes FIC FIA 20.19% 19.15% 100.08% 17.42%

Leblon Equities Partners FIA 59.26% 58.22% 72.48% -10.18%

Long Brasil Acoes FI 10.22% 9.17% 92.53% 9.87%

M Square Acoes CSHG FIC FIA 27.75% 26.71% 84.55% 1.89%

M Square Acoes FICFIA 28.09% 27.05% 88.14% 5.49%

Maua Bolsa FIC FIA 1.96% 0.91% 103.25% 20.59%

Meta Valor FIA 6.38% 5.33% 77.03% -5.62%

Modal Bull FIC FIA 10.68% 9.64% 103.00% 20.34%

Oceana Valor FIA 4.69% 3.65% 100.07% 17.41%

Opportunity Logica II FIA -8.91% -9.95% 84.42% 1.76%

Orbe Value FIC FIA 18.91% 17.87% 35.62% -47.04%

Pollux Acoes FIA 20.29% 19.25% 159.77% 77.11%

Quest Acoes FIC FIA 10.17% 9.13% 87.91% 5.25%

Rb Fundamental Mb FIC FIA 9.92% 8.87% 63.81% -18.84%

Rio FIA 9.52% 8.48% 113.99% 31.33%

Schroder Alpha Plus FIA 0.64% -0.40% 72.98% -9.68%

Skopos HG FIC FIA 47.03% 45.98% 97.45% 14.79%

Squadra Long Biased FI Cotas de FIA 21.89% 20.84% 98.66% 16.00%

Squadra Long Only FI Cotas de FIA 30.67% 29.62% 157.83% 75.18%

Sunset CSHG FIC FIA 15.91% 14.87% 149.89% 67.23%

Tarpon CSHG FIC FIA 38.81% 37.76% 76.03% -6.63%

Tempo Capital FIC FIA 2.02% 0.98% 63.25% -19.40%

Vinci Gas Dividendos FIA 5.27% 4.22% 51.80% -30.86%

Vinci Gas Fundamento FIC de FIA – – – –

Vinci Gas Long Biased FICFIA – – – –

Vinci Gas Lotus FIC de FIA 0.37% -0.68% 95.81% 13.16%

Xp Investor FIA 9.45% 8.41% 145.35% 62.69%

Average 14.45% 13.41% 97.93% 15.27%



summArY

Consumer debt is growing in brazil but is still relatively small as a percentage of GDP. However, loan rates are high and many borrowers are unsophisticated.

much recent borrowing has been by low-income groups, who are less likely to have bank accounts and are more dependent on expensive in-stalment arrange-ments offered by retailers.

the lack of reliable national credit bureau makes it difficult for banks to price risks and adds to the cost of credit.

Banks are relatively sanguine about their exposures, although the central bank has moved to clamp down on lending by increasing minimum reserve requirements.

Central bank moves to cool lending come as many Brazilians are feeling the pinch of paying by instalments.

CONsumEr BrAzIL

LOw-INCOmE GrOups FEEL tHE BurdEN OF dEBt

Note: Consumer loans as a percentage of GDPSource: BCB-Depec and IBGE

Note: Base 2007=100Source: BCB-Depec and IBGE

0%

10%

20%

30%

40%

50%

Total credit operations to the private sector

Total credit operations to individuals including mortgages

Total credit operations to individuals

Mortgage operations

20102009200820072006200520042003

90

120

150

More than R$10,000 R$5,000-10,000

R$2,000-5,000 R$ 1,000-2,000

R$500-1,000 Less than R$500

2010200920082007

Consumer credit climbs higher

the poorest borrow more

cristina Campos is caught in a vicious circle. The 58-year-old São Paulo school teacher owns her own apartment, but still has debts equal to more than ten times her R$3,000 ($1,804, £1,118,

€1,307) monthly salary. “I owe to everyone,” says Ms Campos. “I began using cheque especial [a Brazilian form of overdraft]. Then I used a credit card to buy things in the supermarket. Then I took out a loan from the bank. Because I’m a public servant, it’s easier to borrow mon-ey. Then I end up owing the loan and the credit card and it all mounts up.”

Ms Campos is part of a broader trend. As banks extend lending to low-income customers, people like Ms Cam-pos have started to borrow more and are finding it harder and harder to make repayments. Recent research by the National Confederation of Goods, Services and Tourism, showed that nearly three out of every five households were in debt and that more than one in five families were late in making payments to their creditors. In the same survey, 7.9% of respondents said that they would be una-ble to pay down their debt.

Consumer debt levels are still a lot lower in Brazil than in the developed world but figures from the central bank show the stock of consumer debt has edged upwards in recent years, amounting to 14.6% of gross domestic product last year, compared to less than 6% in 2003. And in addition sev-eral features of the market give cause for concern.

First, borrowing is expensive, partly because basic in-terest rates are high and partly because creditors typical-ly charge quite high spreads. Ms Campos enjoys the ben-efit of special low-interest loans that her bank, the publicly owned Banco do Brasil, has made available to civil servants. But she still pays interest on a five-year R$30,000 loan at 2.5% per month. Although lending rates have fallen sharply over the last decade, they still average about 40% a year.

Moreover, about 40% of Brazilians do not have a bank account and are therefore dependent on credit extended by retail stores where loans – embedded in instalment ar-rangements – can cost as much as 16% per month. In Brazil even basic goods are bought with monthly instalments. Together with credit card instalments and high rates for services such as fees for private health care or education, high outgoings mean that Brazilians are often stretched. As well as meeting her bank loan payments each month, Ms Campos, for example, pays interest on her credit card debt at the rate of 11% per month, which means she has to

find an additional R$1,000. Take into account the R$550 monthly service charge for her apartment and Ms Campos has little money available for anything else. “I have to try not to spend, I economise a lot,” says Ms Campos.

Second, much of the recent increase in borrowing has been by low-income groups, who are especially depend-ent on the instalment system. A study by MasterCard (MA:NYQ), the credit card group, showed that in classes C and D (households with incomes of between R$705 and R$4,854 per month) 54% did not have bank accounts. Fig-ures from Experian (EXPN:LSE) show that between 2007 and 2010, loan growth was fastest among the lowest of Brazil’s five income quintiles, the so-called E class, a cat-egory that is even more dependent on instalment credit.

Many of these new borrowers have little experience of debt and tend to be very unsophisticated borrowers. “Consumer credit is a little like alcohol,” says Roque Pelizzaro Junior, president of the National Confederation of Shopkeepers in Brasília. “When you start out, you of-ten overdo it.”


Alexandre tombini, president of the central bank, last month in Davos. the bank has clamped down on lending

INsIGHtCONsumEr prEssurE GrOws

Controversially high lending rates are attracting grow-ing interest from consumer groups, with banks the butt of much criticism. Lower income consumers are par-ticularly vulnerable to falling victim to the credit trap, says Lisa Gunn, executive coordi-nator at the Institute for the Defense of the Consumer in São Paulo.

According to a federal complaints register, which records consumer actions made through the official consumer defence organiza-tion, Hipercard Banco Múlti-plo received the second larg-est number of complaints of any company during 2009 and 2010. Banco Itaucard was the third most complained about organization. Publicly-owned Banco do Brasil and Banco Citicard were in eighth and ninth spots.

High rates and charges were the main bugbear. In its own provisional survey, IDEC found that consumers can pay charges and interest payments equivalent to up to 45.4% over a 60-day period on borrowings from one credit card company. Similar

implied rates charged by retailers ranged from 6.7% to as much as 29% over the same period.

The findings are likely to add pressure for more effective regulation of consumer lending. Ms Gunn says that poorer customers, especially those who rely on store cards, national lottery outlets and other non-bank lenders, are not provided with sufficient information about borrowing costs. She says that the IDEC is work-ing with the Ministry of Justice to push for tighter regulation of the sector. “We want to move away from the model of just fixing problems after they have oc-curred,” she says.

The National Monetary Council, a government regulatory body, already publishes a list of suggested tariff levels. The CMN plans to introduce a code to reduce the number of charges banks can make in relation to cards in order to simplify the sys-tem and make it more trans-parent. Separately, in order to clamp down on abusive lending with unrealistically low minimum payments, the CMN is considering increasing minimum card payments to 15% in June and again to 20% in December. n

CONsumEr BrAzIL LOw-INCOmE GrOups FEEL tHE BurdEN OF dEBt

All this is complicated by a third factor. Brazil lacks a reliable national credit bureau, so lenders have to rely on a patchwork quilt of private data and a voluntary credit bureau, where it is up to borrowers to register. This lack of information helps explain why banks take a con-servative approach to lending and make such high esti-mates for non-payment.

“Even the largest banks have significant gaps in their data,” says Francisco Valim, Experia’s Chief Executive. “In-dividual credit behaviour is a mystery to all the banks and none have differentiated themselves in assessing risk. Indi-viduals can outsmart banks by taking credit from multiple sources.”

Even so, creditors are relatively sanguine. Mr Pelizza-ro says recent increases in minimum salaries (scheduled to rise to R$545 a month in February) and falls in unem-ployment have helped the capacity of borrowers to ser-vice their obligations.

And banks are trying to expand their business among low-income customers. For example, Bradesco, one of Bra-zil’s biggest banks, has waived requirements for mini-mum balances and no longer insists on proof of earnings, measures that have helped it open 11m accounts for low-income customers since 2000.

Bradesco’s managing director, Odair Afonso Rebelato, says the bank takes a conservative view of risk, assuming that 10% of borrowers will default, compared to a current rate of 7%. Banks and retailers alike offer only small amounts of credit to individual low-income customers. Mr Pelizzaro, for example, says credit is typically set at a month limit of R$500.

Moreover, many banks also insist that borrowers agree to pledge future earnings under so-called credito consignado arrangements. “Most bank exposure is con-centrated in very safe payroll deducted credit, taken at source before it gets to the employee,” says Celina Van-setti-Hutchins, senior analyst at Moody’s (MCO:NYQ), the credit rating agency, in New York.

Even so, the authorities are seeking to cool the market, with the central bank clamping down on bank lending in December by imposing higher reserve requirements. n

Bad loans by credit amount

Consumer credit as a percentage of Gdp

R$0-50 R$50-100 R$100-250 R$250-500 More than R$500

2008 27.51 22.18 23.95 12.91 13.45

2009 25.98 24.71 23.11 12.12 14.07

2010 32.31 20.95 22.54 10.98 13.23

Note: Percentage of total bad loans by yearSource: CNDL Brazil

Including mortgages Without mortgages

Brazil 19% 15.20%

Mexico 6.20% 3.20%

Argentina 6.10% 4.20%

Chile 44.50% 9%

France 53.70% 12.90%

Germany 40.30% 9%

Spain 77% 14.40%

India 9% 4.30%

US – 16.50%

UK – 15.30%

Source: Central Banks (or its equivalent) of each country for credit data and IMF for GDP

LATIN

CON

TENT/G

ETTY IM

AG

ES


Source: Abrasce

Source: Abrasce, individual companies

Source: Abrasce, individual companies

20

40

60

80

100

20102009200820072006200520042003200220012000

R$bn

Total GLA/m2

2012

(e)

2011

(e)

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0

3

6

9

12

15

0

3%

6%

9%

12%

15%

Growth in GLAMil. m2

0

100

200

300

400

500

2012

(e)

2011

(e)

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

No. of shopping malls

sales in malls, 2000-2010

Gross leasable area in malls, 2000-2012

shopping malls, 2000-2012

BuILdING BrAzIL

sHOppING CENtrEs: FAst GrOwtH, rEGIONAL OppOrtuNItIEs

summArY

Brazil has room for more shopping malls, with the biggest operators boast-ing vacancy rates under 3%.

mall owners are enjoying wide margins, and appear fairly insu-lated from infla-tion and interest rate rises.

Consolidation so far has been modest, and is likely to acceler-ate only after the ongoing growth spurt.

shopping mall owners were star-perform-ing stocks in 2010, benefiting from the twin booms in property and retail. we believe that regional exposure is central to companies’ longer-term attractiveness.

this week has seen the disappointing IPO of Sonae Sierra (SSBR3:SAO), the first of several medium-sized shopping mall owners expected to list in São

Paulo in 2011. Sonae Sierra priced its shares at R$20, be-low the target range of R$21.50-$26.50, giving the offer-ing an overall value of R$478m ($287m, £177m, €207m). But that underwhelming entrance should not deter in-vestors from the sector’s underlying growth story.

Flush with rising wages and easier credit, Brazilians are spending faster than they save. Retail sales have grown by over 8% year-on-year for each of the last four-teen months; the latest figures, for November 2010, showed a 9.9% increase, above forecasts.

Malls – which offer consumers choice, security, and respite from the heat and rain – are well-positioned to benefit. Thanks to increased car ownership, they are more accessible to low-middle income earners, such as the Classe C, who make up 52% of the population. Multi-plan (MULT3:SAO) and Aliansce (ALSC3:SAO), the first major mall owners to report full-year figures for 2010, saw a year-on-year same-store sales increase by 12.4% and 14.9% respectively. With rents increasing as part of the wider property boom, the companies’ ebitda margins are typically 60-80%.

The number of malls in Brazil has risen from 280 in 2000 to 408 in 2010. Gross leasable area (GLA) has in-creased over 80% during the same period: from 5.1 mil-lion square metres to 9.5 million square metres.

Yet, despite this steady increase in supply, vacancy rates at all the biggest mall owners have fallen below 3%. That suggests there’s room for expansion. Brazil’s mall sector is relatively underdeveloped compared to interna-tional peers. Malls represent only 18% of total retail sales, compared to 50% in Mexico. Brazil currently has 49 square metres of GLA per 1,000 people, while Mexico has 105 square metres.

However, the regional picture is varied. In São Paulo and Rio de Janeiro, the opportunities for new malls are limited. Malls account for nearly half of retail sales in those two cit-ies; in São Paulo, fewer than ten cinemas are now located outside of shopping centres. Cost pressures are increasing, due to exceptionally high land prices and rising construc-tion costs. Meanwhile, growth potential appears stronger in secondary cities, where retail sales have been increasing

fast. Already all municipalities with a population of more than 400,000 have at least one shopping centre – showing how the most ambitious mall owners have been headed into the interior. Now another tier of towns – those with populations above 200,000 – are coming into play.

the market leader: Br mallsFive mall companies – Multiplan, BR Malls (BRML3:SAO), Aliansce, and Iguatemi (IGTA3:SAO), and General Shop-ping (GSHP3:SAO) – have floated on the Bovespa since

BrAzIL CONFIdENtIALFebRuARY 3-16 201120BuILdING BrAzIL sHOppING CENtrEs:

FAst GrOwtH, rEGIONAL OppOrtuNItIEs

shoppers in a mall in brasília in December

INsIGHtALtErNAtIvE wAYs tO INvEst IN tHE sECtOrSquarestone Brasil: Prop-erty developer Squarestone turned to Brazil after selling its UK portfolio in 2006, but has struggled to live up to its own expectations. The company aimed to raise at least £150m in an IPO on the UK’s AIM market last April, but was forced to rethink amid low interest. Ulti-mately, only one of its two malls – Golden Square in São Paulo – was included in the listed vehicle, Squarestone Brasil. The listing raised a modest £39.5m, attracting no US investment, perhaps be-cause of currency risk. With financial losses continuing during the Golden Square’s development stage, Square-stone’s shares have seen little volume. Squarestone’s privately-held asset – a mall in Garulhos, São Paulo – has more momentum, following a refurbishment. Sales grew 18.4% year-on-year in Decem-ber, a good basis for filling empty stores and renewing five-year rents. Squarestone is now selling the mall, worth around £55m, and says potential buyers include pen-sion funds, mall operators and wealthy individuals.

Brookfield Brazil Retail Fund: Brookfield Asset Manage-ment (BAM:NYS) launched the Brookfield Brazil Retail Fund in 2007, and has invested $800m in 15 shopping malls, including one that is under development. Having initially aimed at high-income seg-ment, Brookfield now plans to focus more on Classe C consumers, outside the major capitals.

Brazilian retailers: The malls’ buoyant mood goes alongside that of major retailers, such as Lojas Ren-ner (LREN3:SAO), Marisa (AMAR3:SAO), and privately held C&A. About half of Marisa’s 278 stores are in malls; they are frequently an-chors for Classe C complexes. The chain has introduced its own credit card for custom-ers, and another card in partnership with Itaú Bank, which together account for more than 50% of purchases.

Supermarkets: Supermar-kets, including Lojas Ameri-canas (LAME4:SAO), Pão de Açúcar (PCAR3, PCAR5:SAO), and chains owned by Walmart and Carrefour, are growing in importance. Their ability to set up stores away from malls, and attract other shops to come with them, may ultimately challenge mall owners’ dominance.

Cinemas: The shift towards ‘destination retail’ – whereby the malls aim to offer con-sumers a day’s entertain-ment, beyond shopping – has seen a rise in the number of cinemas. There are now 2,502 cinema screens in Brazilian malls: an average of 6.1 per mall, up from 3.3 per mall in 2005. The market leader is Cinemark (CNK:NYQ), with 433 screens, 82 of which have 3D technology; it plans to add a further 50 screens this year.

2007. Their primary and secondary share offerings raised a total of $5.8bn, and the stocks rallied sharply in 2010, beating both the Bovespa and the fourteen-member property index. (Some stocks slipped back in January – potentially because investors are switching to sovereign bonds, expecting further interest rate rises, says Guil-herme Assis, an analyst at Raymond James.)

BR Malls has built up the biggest portfolio of malls largely through acquisitions – most recently, buying mall owner CIMA for R$800m in late 2010. There is still considerable mileage in this strategy, given than much of the sector remains in the hands of small groups, which are often locally focused and family-run. The biggest four listed owners – Multiplan, BR Malls, Aliansce, and Iguatemi – currently own just 15% of the country’s leasable area. (Their footprint rises to 27%, if one counts the entire GLA of the malls in which they own stakes, and not just their shares.)

BR Mall’s strategy has entailed taking on a fair amount of leverage – net debt was 25% of its equity value at the beginning of the year, and the company has subsequently raised $300m in perpetual bonds yielding 8%. However, with rents linked to inflation, current debt levels appear manageable.

Crucially, the company, in which US investor Sam Zell has been reducing his stake, is geographically diversified, with 46% of its GLA outside of São Paulo and Rio de Janei-ro. Recent inaugurations include a mall in Sete Lagoas (Mi-nas Gerais) – the first in a town of 214,000 people – which attracted over 40,000 shoppers on the first day. Over 80% of BR Malls’ planned expansion is in the two biggest cities, yet the company is likely to make acquisitions elsewhere. Its ebitda target of $1bn by 2013 is ambitious and credible.

However, other mall owners risk being drawn into a battle to squeeze São Paulo and Rio de Janeiro. Iguatemi, in particular, looks overly concentrated on the high-in-come market in São Paulo, home to two-thirds of its leas-able area. Multiplan, which is currently strong in Minas Gerais, is also planning most of its expansion in the south-east. (Unlike Iguatemi, Multiplan is seeking to ca-ter to different socio-economic groups – Classes A, B and C – within the same mall.)

In contrast, Sonae Sierra, which will reinvest around half of the proceeds of its IPO in expansion projects, is seeking to redress its lack of regional exposure. Eight of its existing ten shopping centres are in São Paulo, but its three development projects lie in Minas Gerais, Paraná and Goiás. By 2013, therefore, 48% of its GLA will lie outside São Paulo (it has no presence in Rio). However, its current va-cancy rate – an above-average 3.9% – is a slight concern.

private equity digs deeperThe modest approach of some listed players – who are ex-cessively focused on the south-east, with limited lever-age – opens the door to private equity. Prosperitas an-nounced in November that it is investing in Macapá, Amapa (population 398,000), currently the biggest town in Brazil without a mall. Together with a local partner, the group will invest approximately RS$110m in the

BLOO

MBER

G


“Large, out-of-town retail parks may emerge, marking a shift away from fashion-centred malls.”

BuILdING BrAzIL sHOppING CENtrEs: FAst GrOwtH, rEGIONAL OppOrtuNItIEs

01 shopping malls’ sales are likely to grow faster than overall retail sales in the short and medium term.

02 Br malls, with its aggres-sive growth stance and its regional presence, has particularly strong prospects.

03 significant pri-vate equity oppor-tunities exist beyond the traditional hubs.

ACtIONpOINts

Source: Abrasce

Note: Estimates for two malls unavailable. *Planned 2011 and 2012 inaugurations onlySource: Abrasce, individual companies

Note: Rebased (01/02/2010 = 100)Source: Datastream, Brazil Confidential

0 10 20 30 40 50 60

Including announced expansionsCurrent

(Whole sector)

Sonae Sierra

General Shopping

Iguatemi

Multiplan

Aliansce

BR Malls

% of owned GLA outside São Paulo and Rio de Janeiro

0

1

2

3

4

5

6

7

20102009200820072006200520042003200220012000

Avg. no. of

screens per mall

0 5 10 15 20 25 30 35

Planned malls*Existing malls

Over 60,000m2

50,000-60,000m2

40,000-50,000m2

30,000-40,000m2

20,000-30,000m2

10-20,000m2

0-10,000m2

% of total

Share of malls in

each size bracket

75

100

125

150

175

MultiplanAliansceBR MallsIguatemiBovespa

1/2/11

3/1/11

1/12/1

0

1/11/1

0

1/10/1

01/9

/102/8

/101/7

/101/6

/103/5

/101/4

/101/3

/101/2

/10

mall owners’ regional presence

the rise of cinemas in malls

New malls are bigger

mall stocks outperformed the Bovespa in 2010

development.Similarly, Vision Brazil Investments, a hedge fund that

bought the majority of Barueri mall in São Paulo from Gen-eral Shopping, is planning to invest in up to five malls in second-tier cities in Paraná, São Paulo, Rio de Janeiro, and Bahia. Its strategy is to estab-lish the first mall in an area, sealing contracts with anchor stores to create an obstacle to rival developments nearby. Ken Wainer, a partner of VBI, says costs have been kept low, for example by buying up land not on the market. First-movers to the regions should accrue significant advantage.

Borrowing from abroadAs malls spread throughout Brazil, their character is changing. Most obviously, malls are becoming bigger. Average GLA now stands at 23,300 square metres, up from 18,200 square metres in 2000. Complexes with less than 10,000 square metres of GLA – which currently rep-resent one in four malls – are no longer being built.

Malls are also becoming part of larger complexes, as owners seek modest diversification from retail. Multi-plan is including 16,830 square metres of office towers in two of its new São Paulo malls; it says it sold 6,680 square metres of offices in another São Paulo project within three days, with no advertising. Aliansce plans to add a fifteen-story office tower to its new Boulevard Shopping Belo Horizonte. Iguatemi announced in January 2011 that it is investing R$383.6m in a mall in Votorantim, São Pau-lo, whose 60,000 square metres of GLA will include four office blocks with an estimated sale value of R$80m.

Ultimately, as land prices rise, and transport links improve, large out-of-town retail parks may emerge. Such developments would mark a shift away from fash-ion-centred malls. Certainly, short-term data suggest that clothing is no longer driving malls’ success. Sales of clothing rose only 9.2% year-on-year in November, compared to a 20.5% rise in furniture and household items. BR Malls’ anchor stores, many of them fashion-focused, saw only 6.9% growth in the fourth quarter of 2010. But for the moment, malls are likely to diversify their offering away from fashion, without lurching to-wards the outskirts.

Several owners claim that they gain competitive ad-vantage by using internationally-tested techniques. General Shopping has opened an open-air mall in Campinas (São Paulo) – a low-cost model in terms of construction and air-conditioning, which it plans to replicate elsewhere in south and south-east Brazil. So-nae Sierra Brasil points to IT systems used by its own-ers elsewhere. Squarestone Brasil (SQB:LSE) says it has introduced western European mall style: increasing visitors’ stay in the mall by moving the food court to the top floor, while also redesigning the complex to improve lighting.

Such innovations may help owners to eek out advan-tage in highly competitive markets in the biggest cities. In growth areas, however, the emphasis will remain on getting in first and tying up key anchor stores. nSource: Individual companies, Brazil Confidential


it is perhaps not surprising that Petrobras is gaining prominence in West Africa. After all, surely Brazil’s oil giant has access to “inside information”, obtained in the form of

geothermal readings gleaned from oil-bearing basins that are adjacent to similar structures on the other side of the South Atlantic? But Brazil’s growing relationship with Africa is about much more than these geological bookends.

Historically, of course, there has been the common experience of the slave trade and European colonialism. But the relationship has started to acquire new intensity in the first years of the twenty-first century.

For a start, the agreement of peace in Angola, the biggest of Portugal’s former African colonies, has helped trigger a big build-up of trade and invest-ment ties between Brazil and lusophone Africa. From heavyweights, such as Vale and Petrobras, to a string of construction concerns, Brazilian business has moved into the African mainstream. Vale is a domi-nant player in Mozambique’s burgeoning coal sector.

In Angola, Odebrecht is the largest employer in the private sector and is involved in activities ranging from construction to ethanol and supermarkets. It, is present in Mozambique, too, as well as Liberia, Libya, and South Africa.

Elsewhere, Andrade, for example, is building the Boussiaba Dam in Algeria, the Mongomeyen Airport in Equatorial Guinea and a new road in Mauritania, while Camargo Corrêa is developing the Mepanda N’Kuwa hydroelectric plant in Zambia, the Benguela cement plant in Angola and, in conjunction with the Brazilian owner, Vale, the Moatize coal complex in Mozambique. Brazil’s bankers, it now seems, are following their corporations: the state-owned Banco do Brazil and the private bank, Bradesco, have joined forces to partner Portugal’s, Banco Espírito Santo. The new combine aims to acquire stakes in financial institutions across the continent.

Second, after his election as president in 2002 Luiz Inácio Lula da Silva gave much more promi-nence to his country’s diplomatic presence, both in Portuguese-speaking countries and the continent more generally. During his two terms in office Mr Lula da Silva visited Africa on no fewer than 12 sepa-rate occasions, visiting a total of 17 countries. Brazil opened a dozen new embassies in Africa and Mr Lula da Silva has declared that one of his biggest priorities in future will be to increase further the ‘South-South’ linkages between the two regions.

Africans view the success of Brazil’s poverty reduc-

tion programmes with increasing interest. Bolsa Família, a social welfare payment conditional on school or clinic attendance much expanded by Mr Lula da Silva, has been widely copied, with five Afri-can governments – those of Kenya, Ghana, Ethiopia, Zambia and Malawi – introducing similar schemes. Brazilian state-owned financial institutions have reinforced this engagement. The BNDES, Brazil’s state-owned development bank, has extended some $2bn (R$3.4bn, £1.3bn, €1.5bn) of credit lines to Angola.

Technical cooperation is already growing between Africa and Brazil is on the rise too.

Embrapa, Brazil’s legendary agricultural research institute, initiated one of its most important research breakthroughs by using African Kikuyu grass as a durable hybrid for the cattle ranches of the Mato Grosso. Now that African “favour” is being returned with Angola, Mozambique and other governments deploying Brazilian technology to build up embryon-ic industries based on ethanol and other green fuels. The Brazilian ‘do-it-my-way’ approach to pharma-ceuticals, especially in the low-cost production of anti-retrovirals, has many African admirers: a plant to manufacture ARVs using Brazilian technology and expertise is being established in Kenya.

But one should not conclude that the corporate traffic is all from west to east – far from it. In fact, the likes of mining giant Anglo American have long been one of the largest foreign investors in Brazil. Naspers, the South African media conglomerate, has invested heavily in Brazil since 2006, buying into magazine publisher Grupo Abril, the mobile value-added ser-vices company Movile (formerly known as Compera nTime) and BuscaPé, the e-commerce business. In November SABMiller, which has already made significant investments elsewhere in Latin America, took new steps to breach the Brazilian market, when it acquired a small Argentine brewer.

More importantly, underpinned by this network of commercial and political ties, geo-economic and even geo-strategic interests have also started to converge. Resource-rich Brazil and Africa have made common cause in global economic forums. Brazil and South Africa – along with India – are already cooper-ating closely in trade negotiations linked to the Doha Development round. The two regional trade organi-sations to which they are linked – South America’s Mercosur and Southern Africa’s SADC – are working together as well. Against a background of a multi-decade bonanza in demand for resources, that com-monality of interest can only strengthen. n

michael power, strategist at investec Asset Management in cape town, south Africa

GuEst COLumN mICHAEL pOwEr

BrAzIL’s GrOwING AFrICA ENGAGEmENt

“Mr Lula da Silva visited Africa on no fewer than 12 separate occasions, visiting a total of 17 countries”


The Brazilian central bank increased interest rates on January 19, dampening inflationary pressure but adding to the pressure on the overvalued Real. Further rate rises are seen as probable when the bank’s monetary policy committee meets in March. Fearing for the impact on competitiveness and jobs, business and trade unions are unhappy about the policy and the issue has figured promi-nently in debate within the Brazilian media. Pro-market commentators such as Luiz Carlos Mendonça de Barros argue that rates may have to be increased much higher if the spectre of rising inflation is to be vanquished. But more radical com-mentators such as Antônio Delfim Netto, the Keynesian former economy minister, argue that the authorities should adopt a more pragmatic stance.

BrAzIL’s INFLAtION dILEmmALuiz Carlos mendonça de Barros, strategic director of Quest Invest-ments, writing in valor on Jan 17:Inflation is already a serious problem in countries such as China, India, Russia and Brazil, partly because aggregate demand in these economies is now greater than it was before the crisis. But Brazil is a country that could have particular difficulty in adjusting. There is virtually full employ-ment and unions have been able to achieve wage increases at above the rate of infla-tion. Many private companies are battling to retain technically qualified staff and such is their optimism about their incomes and the future availability of credit that Brazilians are continuing to increase their spending. The public sector is also spend-ing at a much faster rate, reinforcing the growth of domestic demand. And invest-ment, both by the private sector and the states, is also strong. Sectors such as oil and electricity are scheduled to increase their investments, as plans to exploit the pre-salt oil reserves and build the two hydroelectric dams on the Madeira River come to fruition. So, all in all we have a difficult situation in Brazil: high levels of consumption and investment; some key inputs like labour and cheap electricity in short supply; and international food prices becoming more expensive. What’s worse in some ways we are in a more difficult posi-tion to confront these problems than we

tHE BEst OF LOCAL COmmENt

were in 2007 and 2008. Then the Real was appreciating strongly against the dollar, government spending was lower and the la-bour market a lot looser than it is today. A little while before the crisis on Wall Street there was an expectation that a rate rise of between 400 and 500 basis points would be necessary to slow the economy down. It makes you wonder whether the 200 basis point increase that the market is now pric-ing in will be enough.

LEt’s LOOK At tHINGs FrOm A NEw ANGLErubens Barbosa, writing in O Globo on Jan 25: The immediate reaction of economists and the specialist media to the spike in infla-tion has been to consider as inevitable an increase in interest rates that are already the highest in the world. … The time has come to look at this from a new angle. The government and the private sector must start a debate about the criteria the central bank use when they think about rates. … In Brazil, we take a more strictly monetary view [when we set interest rates] whereas in the US there are wider concerns [such as unemployment and economic growth]. … After 15 years of successful economic poli-cies that have kept inflation under control, Brazil is entering a new phase, oriented towards growth, expansion of the internal market and its competitive connection to overseas markets. In this context we need to re-evaluate polices that made a lot of sense in the previous stage. When it defines its interest rate policies the central bank ought not to base its analysis on purely financial criteria. It is worth reviewing the rules to include a concern for employment and growth, in the way that the central banks of the US and China do.

tHE NEEd tO GEt FIsCAL pOLICY rIGHtmiriam Leitão and Alvaro Gribel, writing in O Globo on Jan 21: Rising interest rates produce perverse ef-fects in the economy. The most immediate is to send signals to the foreign exchange market that achieve exactly the opposite of what is intended. Brazil is not the only coun-try to increase rates. China and India have also done so. But rates in Brazil are already far too high, and that makes the country more attractive for capital that wants to come for the short term. To get out of this problem, there has to be more convergence between monetary and fiscal policy. The central bank can’t get the economy right on its own.

BOmBArdmENt FrOm FINANCIAL tErrOrIsts Antônio delfim Netto writing in Carta Capital, a left-of-centre news weekly on Jan 25:Self-proclaimed intellectuals insist on belittling the success of the government and spreading distrust, while the world has still not recovered from crisis. And they are winning with the increases in interest rates. … It has become clearer and clearer that over the past three years Brazil challenged the problems of financial crisis much more successfully than most countries, especially the most developed ones. … [While the rest of the world has been hit by high unemployment and low growth] in Brazil we totally overcame the world crisis, reaching full employment and evolving positively with an increase in the supply of jobs. Internationally, out of a group of 20 of the most developed economies we were the one that got un-employment down most. … In spite of all this, the public has been obliged to suffer a semi-terrorist bombardment from soci-ologists, economists and all manner of fi-nancial analysts who judge themselves to be intellectuals of great wisdom and use the media to belittle the old government and sow distrust and uncertainty about the new one. Obviously, they haven’t won the battle of public opinion but they have completed some trades by defending the increase in interest rates.

Antônio Delfim Netto slams “semi-terrorist bombardment”

BrAzIL CONFIdENtIALFebRuARY 3-16 201124BuLLs ANd BEArs

FoRtNiGHtLY coMMeNt oN tHetReNDs AMoNG tHe FoRecAsteRs

Quarterly Gdp Q309 Q409 Q110 Q210 Q310

Real GDP growth (y/y % change) -1.8 4.9 9.3 9.1 6.8

monthly key indicators Sep-10 Oct-10 Nov-10 Dec-10

IPCA:Consumer price index (y/y % change) 4.7 5.2 5.6 5.9

IPA-DI: Wholesale price index (y/y % change) 9.5 11.0 13.3 13.9

Unemployment (%) 6.2 6.1 5.7 5.3

Retail sales (y/y % change) 12.0 8.7 9.9 –

Industrial output (y/y % change) 6.4 3.6 4.1 –

Exports ($bn) 18.8 18.4 17.7 20.9

Export growth (y/y % change) 35.3 30.5 39.4 44.1

Imports ($bn) 17.7 16.5 17.4 15.6

Import growth (y/y % change) 40.5 28.9 45.0 26.8

Trade balance ($bn) 1.1 1.9 0.3 5.3

Current account balance ($bn) -3.9 -3.6 -4.7 -3.5

International reserves, Liquidity Concept ($bn) 275.2 284.9 285.5 288.5

FDI into Brazil ($bn) 5.4 6.8 3.7 15.4

Brazilian FDI overseas ($bn) -0.05 -1.9 1.1 -4.7

Equities 01/02/2011 2 wk prev % change % change YTD

Bovespa 67,847.3 70,919.8 -4.3 -2.1

Petrobras 27.7 27.64 -0.3 1.3

Vale 51.9 53.4 -2.9 7.0

Currencies 01/02/2011 2 wk prev % change % change YTD

BRL per USD 1.66 1.674 -0.60 0.3

BRL per EUR 2.24 2.3 -2.70 -3.6

Government bonds 01/02/2011 2 wk prev Change Change YTD

Yield on 10-year USD- 4.563 4.435 0.13 -0.05 denominated bonds

Spread over US Treasuries 1.14 0.77 0.37 -0.17

Yearly key indicators 2008 2009 2010

Real GDP (% change) 5.2 -0.6 7.7

Industrial output (% change) 2.9 -7.2 10.6

Retail sales (% change) 9.1 5.9 7.1

Consumer price index (end-period; %) 5.9 4.3 5.8

Unemployment (%) 7.9 8.1 6.7

General Government Net Debt (% of GDP) 37.9 42.3 36.7

Trade balance ($bn) 24.8 25.3 20.3

FDI into Brazil ($bn) 45 25.9 48.5

Brazilian investment overseas ($bn) -20.5 10.1 -11.5

Gross fixed investment (% real change) 13.6 10.4 22.5

Selic Rate (end of year; %) 13.75 8.75 10.75

Source: IBGE, BCB, FGV/IBRE, IMF, EIU, Datastream, Bloomberg

The rise in prices “is not just a matter of commodity prices, but also of strong domestic demand”

After January inflation beat expectations, several forecasters have revised their full-year outlooks. the debate centres on food, credit and fiscal policy.

inflation forecasts are rising. A year ago, only about 10 of the 100 economists surveyed

by the central bank thought prices would rise by more than 5.4% in 2011. Now the median forecast is 5.64% – up from 5.53% the week before (Jan 21) and 5.42% the week before that (Jan 14). The median for 2012 has also increased, to 4.70% from 4.54%.

The main trigger was Janu-ary’s inflation data: the IPCA-15 index came in at 0.76%, above the 0.7% expected by the market, due to steep rises in services and transport. That didn’t faze those at the top end of the forecasting scale, such as Barclays Capital, whose 2011 projection remains 6.3%.

But other forecasters reacted. MB Asociados, a São Paulo con-sultancy, increased its full-year estimate to 5.8% from 5.5%. It places responsibility squarely with the government for “using old and mistaken theories that suggest that a bit more inflation is no bad thing and that it even helps growth.”

Evidence of this, the con-sultancy says, can be found in the government’s attitude to the minimum monthly wage – which “will rise to R$550 ($328, £205, €240) or probably more” – and to growth (the government is targeting average growth of 5.9% until 2014). MB Asociados also believe that food inflation is here to stay, pointing out that Argentine soy production is be-ing affected by La Niña.

In contrast, Andre Pereira of Gradual Investimentos argues that food prices have been pushed up by recent flooding in São Paulo and Rio de Janeiro, and “won’t be a serious problem in

the coming weeks”. As a result, his forecast is up only modestly, to a below-average 5.4%.

Meanwhile, the low end of the forecasting spectrum is disap-pearing. BBVA has raised its 2011 forecast – from 4.9% to 5.3% – arguing that high inflation in late 2010 will have further second-round effect. The rise in prices “is not just a matter of commodity prices, but also of strong domes-tic demand,” says Enestor dos Santos, an analyst at BBVA. “The credit data [showing that lending rose 20.5% year-on-year in 2010] is a reflection of that.”

RBS analysts are less wor-ried about credit, saying that the

central bank’s “macro-prudential measures caused a meaningful fall in bank lending to individuals” in December, of 10% compared to November in seasonally-adjusted terms. RBS joins the bulk of fore-casters who expect a 50 basis point rate hike in Mar 2.

Certainly, the minutes of the central bank’s monetary policy committee (COPOM), released on Jan 27, were hawkish: strongly justifying recent tightening measures, and expounding on how inflation damages the country’s growth, household incomes, and risk premium. Al-though the bank said that some recent inflation rises were prob-ably seasonal, it added that the latest reading from its Economic Activity Index indicates that “the period of most intense cooling in economic activity could have expired.” Yet even moderate rate hikes may not lower inflation ex-pectations now. Inflation is now a major concern for the central bank, and the COPOM’s latest minutes strongly suggest that rates will increase on Mar 2. By then, the forecasters’ consensus will likely have been shaken up again, by fiscal announcements due in mid-February. n

reportagem pagina 13

Documents