RBCE Brazilian Economy Overview Nov 2013

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Presentation to the UKTI's mission to Brazil on November 2013 covering Brazilian economy's situation, outlook and expectations for 2014 and beyond. Interesting for company planning to enter the Brazilian market or develop expansion strategies.

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RBCE Brazilian Economy Overview Nov 2013

  1. 1. Rafael Mastrocola December 2013
  2. 2. Helping CEOs and their teams achieve a winning performance and develop their businesses!
  3. 3. Clients Sector / Country Projects Healthcare Products and Services Distribution NASDAQ: HSIC USA Brazilian Market Entry Strategy Pharmaceuticals China Brazilian Market Entry and Strategic Partnership Beverages Canada Brazilian Distribution Strategy Advisory Beverages United Kingdom Brazilian Distribution Strategy Advisory
  4. 4. 1.142.332.741.811.850 % 1967 - 1994  6 currencies from 1967 – 1993 *  Introduction of Real Plan in 1994 Fiscal Responsability Floating Exchange Rate Regulatory Agencies Privatizations Inflation Targeting in 1999 * Cruzeiro Novo (1967), Cruzeiro (moeda) (1970), Cruzado (BRC) (1986), Cruzado Novo (1989), Cruzeiro (moeda) (1990) e Cruzeiro Real (1993)
  5. 5. 3,1% average annual growth last 20 years 3 different moments 3 different presidents 8 7 6 5 4 2,6 3 2,0 4,1 2 1 2,5* GDP (% yoy) 0 -1 1994 1996 1998 2000 * Market expectations ranging from 0,5% to 3,5%. Median 2,5% 2002 2004 2006 2008 2010 2012 Sources: IBGE, Focus Report Central Bank of Braszil, RBCE
  6. 6. GDP (% yoy) 7,5 5,2 2,7 0,9 2,5* 2,1* -0,3 Weigth (%) 2008 2009 2010 2011 2012 Agriculture 5,2 6,3 -3,1 6,3 3,9 -2,3 8,2 1,0 Industry 26,3 4,4 -5,6 10,4 1,6 -0,8 1,3 2,2 Services 68,5 4,9 2,1 5,5 2,7 1,7 2,3 1,9 Private Consumption 62,3 5,7 4,4 6,9 4,1 3,1 2,3 2,2 Gov. Consumption 21,5 3,2 3,1 4,2 1,9 3,2 1,7 3,0 Investments 18,1 13,6 -6,7 21,3 4,7 -4,0 5,9 1,0 Exports 12,6 0,5 -9,1 11,5 4,5 0,5 1,1 4,0 Imports -14,5 15,4 -7,6 35,8 9,7 0,2 8,3 0,0 Demand Supply GDP * Market expectations ranging from 0,5% to 3,5%, Median 2,5% in 2013 2013e 2014e Sources: IBGE, Focus Report Central Bank of Braszil, CS, RBCE
  7. 7. 7,7  Actual inflation target is 4,5% with ± 2% tolerance level  Recently the goverment has tried to keep inflation lower with “artificial measures”  CPI (IPCA) 2014 – 5.94% CPI (IPCA) 12-Month (%) 7,2 6,3 5,8 5,5 6,6 7,3 7,5 7,1 6,7 6,5 6,3 6,2 5,8 CPI with Gov. Intervention 11/12 1/13 3/13 5/13 7/13 9/13 SELIC Target Rate (%) 30 25 20 15 10 5 0 2003 2005 * monetary tightening Including pauses 2007 2009 2011 2013 7 Sources: IBGE, Focus Report Central Bank of Braszil, RBCE
  8. 8.   Public Financial Institutions financed most of the consumer boom in the past recent years Minimum primary balance required to stabilize the Debt/GDP ratio has diminished 3,3 3,7 -2,9 The Govt. should not reach the minimum primary balance in 2013 60 50 57,4 45,5 38,5 40 42,1 39,2 -2,8 3,4 -2,0 2,0 -3,3 2,7 3,1 -2,5 -2,6 2005 2007 2009 2011 54,2 13,2 11,7 14,7 10 0,5 1,4 2007 0 2008 4,5 2009 2,3 -2,5 -2,3 Nomial 2013 36,4 58,7 58,6 58,0 56,9 56,3 35,2 34,8 33,9 32,4 31,0 30 20 2,4 Net Public Sector Debt (% GDP) 60,9 53,4 -3,6 3,3 Primary Gross General Government Debt (% GDP) 58,0 -3,6 3,2 -5,2 2003 70 3,8 3,1 16,6 International Reserves (% GDP) 7,7 9,2 Financial Public Institutions Debt (% GDP) 2011 2012 13,5 14,2 6,8 2010 2013e * We are using data from the Ministry of Finance and not taking into account changes on the accountig of the debt 2014e 2015e 2016e 8 Sources: Ministry of Finance of Brazil, RBCE
  9. 9. Recent Evolution of Brazil’s Credit Rating. In contrast with the crisis that split up in the global financial markets in 2011, Brazil’s credit rate was raised by the main international Credit Rating agencies. 9 Sources: Ministry of Finance of Brazil, RBCE
  10. 10. World Cup Investments (R$ bn)  World Cup investments has not impacted Brazil in a significant way. R$28 bn in 4 years 1,9 1,3 8,9 Airports Stadiums 7,6  Infrastructure and Logistics Program R$470,1 bn Transportation Security 8,4 Others  Confidence is lower Business Confidence (In Points, Seasonally Consumer Confidence (In Points, Seasonally Adjusted) 140,00 Adjusted) 130 120,00 120 100,00 110 80,00 100 Manufacturing 60,00 2005 2007 Services 2009 2011 2013 90 2005 2007 2009 2011 2013 Sources: FGV, Ministry of Finance, RBCE
  11. 11. Household Leverage Ratio Going foward, we should expect unemployment to pick up slightly along with lower increases in real wages which should contribute less for 2014 growth 50,0% 45,0% 40,0% 35,0% 30,0% 25,0% 20,0% 15,0% 2005 Unemployment Rate (%, Seasonally Adjusted) 2007 2009 Average Real Wage (R$) 2011 2013 YoY Growth 3MMA (RHS) 2.000 10,0% 1.900 5,0% 1.800 0,0% 1.700 -5,0% 1.600 -10,0% 7% 1.500 -15,0% 5% 1.400 -20,0% 15% 13% 11% 9% 2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013 Sources: FGV, CAGED, Central Bank of Brazil, RBCE
  12. 12. BRL 2,60 2,40  BRL should continue devaluated  PBR helped to increase CA deficit  Market Expectations  2,30 Year End 2013  2,40 Year End 2013 2,20 2,00 1,80 1,60 1,40 2007 2008 2009 2010 2011 2012 2% 72.000 57.000 1% 42.000 0% 27.000 12.000 -1% -3.000 -2% -18.000 -33.000 -3% -48.000 -4% -63.000 -78.000 2000 2002 2004 Current Account Balance (in US$ mn) -5% 2006 FDI (in US$ mn) 2008 2010 2012 Current Account Balance as a % of GDP (RHS) Sources: IBGE, Focus Report Central Bank of Braszil, CS, RBCE
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  14. 14. GDP (R$ bn) 202; 5% 536; 15% North Northeast 350; 9% Midwest Southeast 2.088; 57% South Area 11% North Northeast Midwest 507; 14% Northeast: Utilities (20% of total), construction (17.5%), agriculture (17.1%), commerce (15.9%), manufacturing (9.3%) Midwest: Agriculture (19.1% of total), construction (9.4%), finance (9%), commerce (8.4%), manufacturing (4.7%) 7% 45% 19% North: Extractive/ mining (18,5% of total); agriculture (10%), construction (7,1%), manufacturing (4,8%) Southeast: Oil & mining (71.1% of total); IT services (70%); finance (67%), manufacturing (60%), transportation/ storage (59.4%) Southeast South 18% South: Agriculture (25.5% of total), manufacturing (21%), utilities (20%), commerce (19.5%), transportation and storage (18%) 14 Sources: IBGE, RBCE
  15. 15. Categories Rank # Rank Country 1 51 Regulatory framework 82 Business environment and infrastructure 76 Human, cultural and natural resources 12 5 USA 10 United Kingdom 29 Overall Index Switzerland China 55 Mexico 56 Brazil 60 India 64 Russia 15 Source: World Bank
  16. 16. Factors (in order) Infrastructure Tax Regulations Tax Rates Gov. Bureaucracy Infrastructure Rank/144 Quality of overall infrastructure 107 Quality of roads 123 Quality of railroad infrastructure 100 Quality of port infrastructure 135 Quality of air transport infrastructure 134 Labor Regulations Corruption Worforce Education 16 Source: World Bank
  17. 17. Other Latin America OECD China Brazil Procedures to start a business (number) 9 5 13 13 Time to start a business (days) 53 12 33 119 Time to pay taxes (hours per year) 367 176 338 2,600 Cost to export* ( USD per container) 1,268 1,028 580 2,215 Cost to import* ( USD per container) 1,612 1,080 615 2,275 3.1 1.7 1.7 4.0 2013 Time to resolves insolvency (years) 17 Source: World Bank
  18. 18. Dilma approval from 38% to 41% 1st cenario Dilma would win in the first round 2nd cenario there would have second round 18 Source: Data – Folha
  19. 19. MAIN DUE DILLIGENCE ISSUES NORMALLY IDENTIFIED Material tax, environmental and labor risks and contingencies Informality in the operations e.g. unrecorded transactions Owner: “the company is 95% clean” MANY SOLUTIONS AVAILABLE TO ELIMINATE OR MITIGATE RISK Escrow Owners personal interests included in the company’s interests (and vice-versa) Alternative Transaction Structures “Outsourced” or unregistered employees Asset Deals Inadequate accounting practices controls and reconciliations = triggering significant accounting adjustments and tax risks Inadequate cash management Adapted from multiple sources DON’T UNDERESTIMATE THE NEED TO DEEP DIVE INTO THESE ISSUES 19
  20. 20. Entry Planning Stepping in Acquisition Joint Venture Market Screening Entry Strategy Planning Strategic Partnership Transaction Advisory Greenfield Project Planning and Execution Advisory Business Development Post-Merger Integration (PMO) Investment Monitoring Partnership Business Development Advisory 20
  21. 21. 1. Diversity and Opportunity: Brazil is very complex! 2. Elections can bring new information and surprise the market. Dilma is ahead. 3. Economy is still growing Growth 2014 (2.1%) Inflation 2014 (5.94%) 21
  22. 22. 4. Many ways to plan your market entry strategy: Understand market dynamics very carefully: - Middle-class consumption - Informality - Bureaucracy - Import taxes 5. Brazil will win the World Cup in 2014! 22
  23. 23. Rafael Mastrocola Partner +5511 96037-1324 www.belotti.com.br rafael@belotti.com.br

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