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Sgm brazil-digital


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  1. 1. Passport to Brazil A summary of the opportunities and challenges Ernst & Young | Passport to Brazil
  2. 2. Aerial view from Rio de Janeiro (RJ) The time has come for the Brazilian economy There are no longer any doubts and China). Goldman Sachs points or misgivings over the economic out that these countries are vital for scenario in Brazil. The constant a global economic upturn after the development and solid basis of crisis of the last two years and gives the Brazilian economy — which positive evaluations to Brazil in should register a real growth rate questions of inflation, foreign debt of 6.46% of GDP*, and, according and education. to the Central Bank in its latest report, attract over US$ 37 billion Factors such as the 204 Football in direct foreign investment in World Cup and the 206 Olympic 200 — has made the country a Games, as well as the increased key part of the strategic plans of spending power of a burgeoning international investors, and made middle class, and the future it move from being a country of investments in the deepwater “pre- the future to a country of the salt” oil reserves, contribute even present. more to attract the attentions of foreign investors. According to Goldman Sachs, Brazil presents the best The 204 Football World Cup, conditions for sustained growth for example, is projected to inject over the next few years among R$ 42 billion into the Brazilian the BRICs (Brazil, Russia, India economy, with a direct impact *Source: Central Bank of Brazil. Projections from May 2010 2 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 3
  3. 3. 20 largest Brazilian companies in 2009 Group Gross revenue (R$ billion) on GDP of R$ 64.5 billion in the spent on technological processes Petrobras 284.6 period from 200 to 204, with and drilling in the Santos Basin, Itausa 92.1 additional tax contributions of according to a study published last R$ 8. billion, according to a May by FGV. The study states that Vale 72.8 study undertaken by Ernst Young an investment of US$ 4 is needed Gerdau 41.9 in partnership with the Getulio for each barrel of oil. The return, Odebrecht 40.9 Vargas Foundation (FGV). therefore, would be promising: every R$ billion invested in oil Votorantim 40.8 According to numbers released drilling would be capable of creating Ambev 39.7 by the 206 Rio Committee, the 33,000 new jobs, either directly or 206 Olympic Games will lead to indirectly. JBS Friboi 31.1 investments estimated at R$ 28.8 Ultra 29.5 billion, with R$ 23.2 billion of that In view of this, Brazilian companies sum coming for infrastructure could be on the crest of a wave of Usiminas 21.2 projects from the three levels of economic growth generated by CSN 17.9 Brazilian government (Federal, these opportunities, gaining more prestige in the global economy. Camargo Corrêa 15.2 State and Municipal) and the remaining R$ 5.6 billion coming Companies not only in the oil and Brasil Foods 13.2 from the International Olympic gas industry, such as Petrobras, Embraer 11.9 Committee. but also those in civil construction, mining and iron and steel works, Andrade Gutierrez 11.8 The deepwater “pre-salt” petroleum such as Camargo Corrêa, Vale Tam 11.1 discovery – the largest in the and Gerdau, head the list of country’s history – will lead to Brazilian companies established in Organizações Globo 9.2 around US$ 560 billion being international markets. Cosan 7.9 Marfrig 6.8 Gol 6.7 Source: Valor Grandes Grupos (December 2009) 4 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 5
  4. 4. Brazilian Economy: Key Indicators and Forecasts Brazilian Economy: Key Indicators and Forecasts Detailed Economic Indicators 2006 2007 2008 2009 2010 2011 2012 2013 2014 Real GDP (% change) 4.0 6.1 5.1 -0.2 5.5 4.9 5.0 5.1 5.4 Nominal GDP Per Capita (US$) 5,749 7,102 8,387 7,932 9,769 10,282 10,744 11,368 11,918 Real Exports of Goods and Services 5.0 6.2 -0.6 -10.3 8.4 6.1 5.3 3.0 4.0 (% change) Industrial Production Index 2.8 6.0 3.1 -7.4 7.7 6.0 6.0 4.9 4.8 (% change) Consumer Price Index (% change) 4.2 3.6 5.7 4.9 5.1 4.5 4.2 4.0 4.0 Base Interest Rate (%) 15.06 11.98 12.54 9.92 9.68 10.08 9.96 8.67 8.58 Population (million) 189 192 195 198 200 203 206 209 212 Unemployment Rate (%) 10.0 9.3 7.9 8.1 7.8 7.7 7.5 7.5 7.5 Trade Balance (US$ billion) 46.5 40.0 24.8 25.4 10.8 13.8 15.6 14.9 13.7 BOP Exports of Goods (US$ billion) 137.8 160.6 197.9 153.0 175.4 189.8 201.5 211.0 219.9 Source: Global Insight Report: Brazil (May 2010) 6 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 7
  5. 5. Major events give even more stimulus to the economy Elements such as a stable will stimulate Private Equity and economy, the 204 World Cup, Venture Capital markets, IPOs the 206 Olympic Games and the and mergers and acquisitions in deepwater “pre-salt” oil reserves Brazil. However, knowing how discovery off the Brazilian coast to capitalize on each of these are huge incentives for economic opportunities is a challenge for With these events, the number potential returns in these growth across the board that the administrators of these funds. of funds investing in companies countries outweigh any political with a large potential for growth or legal risks and structural is increasing — in companies that instabilities. The impact of the World Cup 2014 have passed the initial stages and In this favorable economic are preparing themselves to go public on the markets. scenario, innovating companies a) Impact over final demand (expenditures related to the World Cup in Brazil) R$ 29.60 billion with an entrepreneurial spirit • Investments It is fair to say that, with the are sometimes able to reach a R$ 22.50 billion strong economy, new businesses growth rate of 60 to 70 per cent • Operating expenses R$ 1.20 billion have excellent chances of per year. Currently, the country • Visitors’ expenditures R$ 5.90 billion attracting investment. Along has many companies that, along b) Impact over the national services and goods production R$ 112.79 billion these lines, Private Equity with these characteristics, enjoy c) Impact over income R$ 63.48 billion and Venture Capital funds, for solid financial structures and d) Impact over employment 3.63 million instance, hold more than US$ a firm economic base. They e) Impact over tax collection R$ 18.13 billion 0 billion waiting to be invested are companies that concern in Brazil in the coming years, themselves in adopting best according to data from the practice in corporate governance, Brazilian Association of Private resulting in more transparency in Equity and Venture Capital their financial statements. The most benefited sectors (economic activities (ABVCAP). These funds are The natural next step, after with increased production) looking to emerging markets following these processes, is more and more, since companies to go public on the world stock are of the view that the higher markets. Civil Food and Services Utilities (gas, Information construction beverage water, energy services etc.) Source: Study Ernst Young in partnership with Getulio Vargas Foundation (FGV) 8 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil
  6. 6. Transactions on the rise In the last three years, 74 financing (due to expansion In mergers and acquisitions companies have completed IPOs in credit), infrastructure (due the expectation is even more in Brazil. Only in the first quarter to the 204 World Cup, 206 positive owing to the natural of 2010, there were five IPOs Olympics), real estate (due to consolidation of the markets. — compared to six in all of last housing programmes and the rise A return to accelerated growth year. According to specialists, in credit for the sector) and oil in these types of businesses is the sectors where companies are and gas (due to the “pre-salt” oil expected in 200. Just in the more likely to go public are retail discoveries). first quarter of this year a little (due to a heated internal market), more than 50 operations were registered, an increase of 60 Brazil: Top-10 Sectors Ranked by Value Added per cent in comparison with the 2008 Level 2009 Percent Change Percent Share of GDP same period of 200. In relation (Billion US$) (Real terms) (Nominal terms) to PE and VC investments, the report Fundraising Investment 1. Public Admin. and Defense 120.4 3.9 9.7 Review 2010, put out by the 2. Agriculture 91.3 -1.2 7.4 Emerging Markets Private Equity 3. Real Estate 78.5 2.0 6.4 Association, shows that emerging countries, such as Brazil, received 4. Refined Petroleum and Coke Production 72.9 -2.0 5.9 26 per cent of global investments 5. Construction 72.7 -8.8 5.9 from those funds totaling US$ 6. Business Services 56.8 1.1 4.6 22.6 billion in 200. 7. Banking and Related Financial 56.6 6.3 4.6 8. Retail 55.7 3.4 4.5 9. Education 49.9 6.7 4.0 10. Food Products 44.8 -1.5 3.6 Source: Global Insight Report: Top-10 Total 699.5 56.6 Brazil (May 2010) 0 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil
  7. 7. How to attract resources and grow How can growing companies findings, the biggest challenges index reached a peak of 35 agencies of risk classification, get in on the action with for Brazil to maintain its appeal points, there was a drop of 73 the Brazilian market shows international and national to foreign investors and have points in a short space of time, itself to be an attractive option, investors? Besides the influence in funding allocation not forgetting the turbulence demanding that the up and attractiveness of Brazil on decisions by multinational of the global markets in this coming companies, with strong the international stage, the companies are: a fall in its period. With this reduction potential for growth, prepare business that prepares itself historically high interest rates, and the current status of the themselves for the arrival of for the influx of investment the need for tax reform and the “Investment Grade” agreed investors. funds should have, along improvement of infrastructure. by the main international with a differentiating It is the combination of these entrepreneurial idea, sound and other factors that result in governance and efficient the so called country risk index. Foreign Direct Investment (US$ billion) administration. Awareness of Calculated by JP Morgan, in May 45.1 socio-environmental questions 200, this variable totaled 242 39.99 is another point of rapidly points — that is an additional 37.33 increasing importance. cost of 24.4 per cent on a 34.62 company that operates in the But, besides corporate matters, country. 25.95 that should be dealt with by companies, the 2010 Global The good news is, though, that 18.78 Private Equity Watch Report, this percentage has been falling carried out by Ernst Young, consistently during the last few states that there still exist years. If compared with the governmental economic same period of the previous challenges. According to the year, when the country risk 2006 2007 2008 2009 2010 2011 Source: Central Bank of Brazil 2 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 3
  8. 8. Exports Balance of trade US$ 153 billion in 2009. Accumulated result in 2009 is Increase of 109% in comparison US$ 25 billion: +2% compared to 109% 2% 2003 (US$ 25 billion). with 2003 (US$ 73 billion). Public sector net debt International Reserves Equivalent to 43% of GDP in 2009. US$ 239 billion in 2009. Decrease of 20% in comparison with 385% Increase of 385% in comparison with 20% 2003 (53.53% of GDP). 2003 (US$ 49.2 billion). Direct foreign investment Selected economic indicators of 2009 compared to 2003 Industrial Production US$ 25.3 billion in 2009. 118.20 in 2009 (Fixed Base Index: Growth of 156% in relation to 2003 2002 = 100). Growth of 20% in 156% (US$ 10.1 billion). 20% relation to 2003 (98.23). Base (Selic) interest rates 1 Brazil Risk Closed 2009 at 8.75% per year. At the end of 2009 it was 192 basis Decrease of 47% in comparison with 47% 2003 (16.50% per year). 59% points. Fall of 59% in comparison with 2003 (463 basis points). Currency Total credit The average US dollar exchange rate in 2009 was R$ 2.00. Decrease of 35% in 45% of GDP in the 35% relation to 2003 (R$ 3.08). 76% end of 2009: +76% in comparison with 2003 (25.5% of the GDP). 3 Basic-need grocery package A picture of the economy 2 IPCA Inflation The average value of the basic-need grocery package closed 2009 at R$ Closed 2009 at 4.31% per year: 202.00. Increase of 4% in comparison -54% in comparison with 2003 4% 54% with 2003 (R$ 195.00). (9.30% per year). Sales of automobiles Formal employment 3 million units were sold in 2009. 40.4 million job positions at the Growth of 150% compared to 150% 2003 (1.2 million units). 37% end of 2009: +37% in relation to 2003 (29.5 million). Commercial sales 4 Grain harvest 213.05 in 2009 (Fixed Base Index: 2003 133.8 million tons in 2009: +8% = 100). Increase of 113% in relation to 113% 2003 (100.00). 8% in comparison with 2003 (123.5 million tons).4 1 Special System for Liquidation and Custody – Central Bank Rate. 2 Extended Consumer Price Index - IBGE. 3 Average price of the basic-need grocery package as per Dieese in December, 2003; price corrected by IPCA on December, 2009. 4 Harvest estimate by Conab for 2009/2010 is 144 million tons (page 16). Source: Highlights - Actions and Programmes of the Federal Government of Brazil (May/June 2010) 4 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 5
  9. 9. Projection of average annual salaries through 2030, in US$ Minimum wage From January 2003 up to Country 2007 2030 Growth (% per year) March 200, the minimum wage had a nominal increase of China 1,294 5,165 6.2% 55%, and real increase of 73% South Korea 16,685 31,294 2.8% (above inflation as measured Brazil 4,240 7,549 2.5% by indexes like INPC/IBGE). Mexico 8,347 14,536 2.4% In January 2003, the minimum Russia 4,979 8,263 2.2% wage would buy .4 Basic-need United States 38,066 55,137 1.6% grocery packages. With the Italy 36,622 49,453 1.3% adjustment to R$ 50, this Argentina 4,672 6,135 1.2% capacity grew to 2.3 Basic- Japan 34,261 44,393 1.1% need grocery packages (+64%) Germany 34,298 43,986 1.1% in March 200. Great Britain 35,686 45,496 1.1% France 39,384 49,711 1.0% Source: Highlights - Actions and Programmes of the Federal Government of Brazil (May/June 2010) Source: Sustainable Brazil - Economic growth and consumption potential (2008) 6 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 7
  10. 10. The 20 biggest consumer markets 2030 2007 in US$ billion* in US$ billion* 1 United States 9,125 1 United States 15,585 2 China 3,862 2 China 12,755 3 India 2,530 3 India 5,265 4 Japan 2,357 4 Japan 2,818 5 Germany 1,489 5 Brazil 2,507 6 Great Britain 1,365 6 Great Britain 1,924 7 France 1,098 7 Mexico 1,854 8 Brazil 1,066 8 Germany 1,813 9 Italy 1,019 9 France 1,528 10 Russia 823 10 Italy 1,340 11 Mexico 820 11 Indonesia 1,141 12 Spain 723 12 Russia 1,136 13 Canada 626 13 South Korea 1,072 14 South Korea 618 14 Spain 1,047 15 Indonesia 602 15 Canada 989 16 Turkey 458 16 Turkey 974 17 Australia 400 17 Philippines 966 18 Argentina 373 18 Pakistan 734 19 Philippines 373 19 South Africa 729 20 Thailand 353 20 Australia 721 Source: Sustainable Brazil - Economic growth and consumption potential (2008) (*) 2005 US$ adjusted for Purchase Power Parity 8 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil
  11. 11. About Ernst Young in Brazil Ernst Young Brazil was chosen will have a huge impact on as one of the leading players who the Brazilian economy, thus, will stimulate global corporation creating opportunities for growth due to the robust Ernst Young Brazil to energize potential of the Brazilian market its business deals. and because of the country’s The Entrepreneur of the Year Award is the most outstanding Main numbers speedy recovery following the The expertise needed for this growth is already in place. In event held annually by Personnel 2,300 global financial crisis. 200, the Ernst Young University Ernst Young in Brazil. In its Ernst Young has recorded (EYU) was acknowledged by 2th edition in the country, the Partners annual revenue growth of the market as one of the two award has already honored 30 Brazilian entrepreneurs who Offices 2 20 per cent over the last few best corporate universities in years and gained ever growing Brazil – this acknowledgment distinguished themselves with Cities where EY penetration in the market. In was given by the CUBIC Awards revolutionary and sustainable 0 has offices a list of the biggest and best Brazil in 200. ideas over time. This year the 500 companies compiled by the event was held in partnership Annual growth 20% Brazilian economic magazine, Also, for the second year with Endeavor, a nonprofit Exame, 76 are clients of running, Ernst Young Brazil organization that promotes Target annual 30% Ernst Young Brazil — of was elected the best Latin sustainable development in Brazil, growth until 203 which 26 are publicly traded American company in the field through support to innovative companies and 50 are private. of tax advisory services for the entrepreneurs and encouraging In 200, these companies year 200. The survey was the entrepreneurial culture. recorded sales of US$ 33 carried out by the International billion — equivalent to per cent Tax Review. In Brazil, Ernst Young gross revenue performance of the Brazilian GDP in 200 of Ernst Young operates in 0 2003 - 2009 (in R$ millions) US$ ,5 trillion. cities with a team of 2,300 489 professionals (including 428 Our target for the next three partners) allocated in 12 offices, 373 years is to achieve 30 per cent offering consulting and auditing 341 growth per year, taking into services to companies that do 272 222 consideration factors such as business in all sectors and of 180 the 204 Football World Cup, all sizes – from those which are the 206 Olympic Games starting up to organizations and the deepwater “pre-salt” which are active players in the petroleum discovery that global market. 2003 2004 2005 2006 2007 2008 2009 20 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 2
  12. 12. Contacts Maria Helena Pettersson Strategic Growth Markets Recife (PE) Partner-leader +55 2573 370 Salvador (BA) Carlos Asciutti Brasília (DF) Corporate Transactions Partner +55 2573 3636 Belo Horizonte (MG) Our offices Paulo Sergio Dortas Rio de Janeiro (RJ) Assurance Partner - IPO +55 2573 370 Campinas (SP) Antonio Cocurullo São Paulo (SP) Advisory Director +55 2573 370 Curitiba (PR) Edson Neves Blumenau (SC) Tax Director + 55 2573 370 Porto Alegre (RS) 22 Ernst Young | Passport to Brazil Ernst Young | Passport to Brazil 23
  13. 13. Ernst Young Assurance | Tax Transactions | Advisory About Ernst Young Ernst Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve potential. © 2010 EYGM Limited. All rights reserved. 24 Ernst Young | Passport to Brazil