Brazil: A Macro-economic Outlook

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Brazil: A Macro-economic Outlook by Fabio Niccheri, Partner, PricewaterhouseCoopers. Presentation featured at the 2nd International Conference: Brazil: A pathway into the future from the Emerging Markets Institute at Cornell University's Samuel Curtis Johnson Graduate School of Management and Better Brazil

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Brazil: A Macro-economic Outlook

  1. 1. Brazil: A Pathway into the Future – Cornell UniversityDespite a series of bottlenecks affecting the Brazilian economy; mainly ininfrastructure, education, security, tax system, political system, among others,the country has gone through significant business transformation during thelast 2 decades.Brazilian companies have been playing an important role in the process ofrecognition of the country as the main business area in Latin America. Brazilcounts with large companies in essentially all economic sectors, includingindustrial, mining, agricultural, retail, services, financial institution, amongothers. Many of those companies are efficient and compete globally, despitethe so called Brazil cost. They have also made acquisitions abroad andcontinue to do so.Several factors lead to this history of success of Brazilian companies. Thoseinclude:o Managerial talent. The long history of instability, high inflation, economic plans among other difficulties helped to forge highly competent management, flexible and capable of adjusting plans and deal with adversities.o Privatizations. Since the beginning of the 90’s privatization of highways, steel, mining, energy, chemical/petrochemical, telecommunications and industrial businesses paved the way for these companies to grow and become large conglomerates.o Growing domestic market. Brazil had a material portion of its high class population keen to consume products that were not available and a material portion of its total population without economic conditions to consume basic products. These obstacles to growth were reduced with the opening up of the country to imports and the launch of Real plan and other measures in the following years that reduced inflation to reasonable levels
  2. 2. and promoted higher income level to an important portion of the population.o Natural resources. Although not directly affecting some of the industries, Brazil has natural resources and climate that significantly contributes to growth. For example, many areas of the country benefit from 2 crops annually.o Capital markets improvement.The Brazilian Capital Markets suffered a radical transformation from de 90’s tothe last decade.During the nineties the number of public companies in Brazil decreased byapproximately 100 companies. During the second half of the nineties until2003 less than 10 companies went public in the Brazilian stock market.Since then, fueled by the country perspectives, business dynamics and newstock market rules including the creation of the “Novo Mercado”, the picturechanged completely. Around 150 companies went public in Brazil (BOVESPA )from 2004 to 2011 (average of 18.5 per year, with a pick of 64 IPOs in 2007)The IPO wave that started in 2004 strengthens companies’ cash positions andhelped the development of green field investments and acquisitions, creatinga virtuous cycle.The revival of the Brazilian stock market generated a wave of investmentsfrom Private Equity firms that finally managed to exit investments in Brazilthrough IPOs, yielding high returns and creating stimulus for new investments.With respect to the Brazilian M&A market, the first half of the 2000 decadeshowed approximately 400 annual M&A transactions in Brazil, a number thatincreased to around 650 in the last half of the decade (number only achieved
  3. 3. during the internet bubble in the late 90’s) and to around 750-800 in the last 2years.Another interest shift in the M&A market is that during the nineties most ofthe acquirers in M&A transactions were foreigners (approximately 2/3) whilein the last and current decade it is the opposite (approximately 2/3 of theacquirers are Brazilian companies). Private Equity firms are responsible forsome 30% of the acquisitions, based on the successful track record previouslyachieved.Some of the hurdles of doing deals and doing business in Brazil havesignificantly decreased.o Informality which was previously common, is now a practice of a minority of companies, especially if only those with size to enter more developed business transactions are considered. Business environment and culture do not accept certain informal practices anymore. The companies and government and creating new controls such as SPED (electronic information system for exchange of information between government and companies and e-invoicing).o Brazil has adopted IFRS (with certain adjustments) as its GAAP (accounting rules), although many private companies are still not using several of its provisions. This will eventually become largely adopted even by private companies and will make it easier for investors to analyze accounting figures.o Transparency and other stock market rules dealing with minority shareholders protections have benefited the market.Brazilian companies have ups and downs, such as the economy, but have beingfollowing an upward trend. The future includes challenges related to thecurrent world economic situation and the bottlenecks still affecting theBrazilian economy and business environment, which were analyzed by Mr.Ramos, Mr. Cottani and Mr. Silva. Brazil is one of the largest world economies
  4. 4. and being a developing country presents more long term opportunities.Perspectives for Brazilian companies are promising even if global economyperformance isn’t great, as the domestic market potential is still unexplored.But additional effort is necessary for Brazil to solve infrastructure issuesalready affecting the growth capacity of companies and reduce the burdenfrom tax and social issues.

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