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Latin America Equity Research
18 April 2011
Brazil 101
The 2011 Country Handbook
This 100-page handbook on Brazil serves as a useful primer and reference
guide. As more investors get involved in the country, both on the securities
and real economy side, we thought it worthwhile to revisit key metrics and
some of Brazil’s history and processes so as to better understand the
macro and capital market local dynamics.
Emy Shayo Cherman
AC
(55-11) 3048-6684
[email protected]
Banco J.P. Morgan S.A.
Fabio Akira
(55-11) 3048-3634
[email protected]
Banco J.P. Morgan S.A.
See page 100 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table of Contents
Things to Know.........................................................................4
Overview ...................................................................................5
Area..............................................................................................................................5
Population ....................................................................................................................6
Health...........................................................................................................................7
Education .....................................................................................................................8
Income Distribution .....................................................................................................9
The New Middle Class...............................................................................................11
Security ......................................................................................................................11
Tourism......................................................................................................................13
Competitiveness.........................................................................................................14
Economic Activity ..................................................................16
GDP ...........................................................................................................................16
Investments ................................................................................................................19
PAC............................................................................................................................20
Minha Casa, Minha Vida (MCMV)...........................................................................21
World Cup 2014, Olympic Games 2016 and other investments ................................22
Industry ......................................................................................................................24
Consumption..............................................................................................................25
Labor..........................................................................................................................27
Inflation ...................................................................................29
History .......................................................................................................................29
Main Inflation Indexes...............................................................................................30
Central Bank and Monetary Policy............................................................................31
Exchange Rate Policy ................................................................................................33
External Sector .......................................................................34
Exports.......................................................................................................................35
Imports.......................................................................................................................36
External Accounts......................................................................................................37
External Debt .............................................................................................................40
Fiscal Policy............................................................................40
The Annual Budget....................................................................................................40
Fiscal Indicators.........................................................................................................41
Public Sector Debt .....................................................................................................42
Sovereign Credit Ratings ...........................................................................................43
Tax System ................................................................................................................43
Credit .......................................................................................46
Brazilian Mortgage System........................................................................................48
BNDES ......................................................................................................................50
Capital Markets .......................................................................51
Bovespa Indexes ........................................................................................................52
2
Emy Shayo Cherman
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Latin America Equity Research
18 April 2011
MSCI..........................................................................................................................54
Flow of Funds ............................................................................................................55
Pension Funds ............................................................................................................56
Mutual Funds .............................................................................................................57
Politics.....................................................................................58
Brazil’s Main Political Parties ...................................................................................59
Brazil’s Presidents .....................................................................................................59
2010 Elections............................................................................................................61
Sectors ....................................................................................63
Oil, Gas & Petrochemicals.........................................................................................63
Metals & Mining........................................................................................................65
Financials...................................................................................................................67
Homebuilders.............................................................................................................68
Retail..........................................................................................................................71
Food ...........................................................................................................................72
Beverages...................................................................................................................73
Tobacco......................................................................................................................74
Agribusiness...............................................................................................................75
Pulp and Paper ...........................................................................................................77
Roads .........................................................................................................................78
Transportation............................................................................................................80
Electricity and Water .................................................................................................81
Annex 1: Historical Economic Data and Forecasts .............83
Annex 2: Brazil Strategy Dashboard.....................................86
Annex 3: Tables ......................................................................94
Annex 4: Figures ....................................................................96
Special thanks to Catherine Foster Rezende and Vinay Joseph for their contribution to
this report.
Cover photo: morgueFile.
3
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Things to Know
Brazil has a Gini coefficient of 0.567, which puts it
among the countries with the worst wealth distribution
in the world.
With a total area of 8.5 million square kilometers (3.4
million square miles) Brazil is the world’s 5th-largest
country.
Unemployment rate reached at the end of 2010 was the
lowest rate ever: 5.3%.
Brazil has also the 5th-largest population in the world,
with more than 190 million people.
Credit penetration is around 45% of the GDP, high by
regional standards but still low by developed countries’
standards.
The 6th-most populous city in the world belongs to
Brazil. São Paulo has nearly 11 million people.
Table 1: Top 6 cities in the world by population
City
Population
Shanghai - China
13,831,900
Mumbai - India
13,830,844
Karachi - Pakistan
12,991,000
Delhi - India
12,565,901
Istanbul - Turkey
11,372,613
Sao Paulo - Brazil
11,037,593
Despite the improvements, historically Brazil has a
pretty low level of mortgages, only around 7% of total
credit and 3% of the GDP.
Brazil’s housing deficit is estimated at 5.6 million
homes. Additionally, household formation drives
demand for an additional 1.5 million homes a year.
Brazil is going to host two mega sporting events in the
coming years: World Cup in 2014 and Olympic Games
in 2016.
Source: IBGE.
With a GDP around US$2.01 trillion (as of 2009),
Brazil is the 8th-largest economy in the world and the
largest in Latin America.
The country is formed by the union of the Federal
District (Brasília), 26 states, and 5,564 municipalities
divided in 5 main regions.
In 2010, more than 84% of total population was living
in urban areas.
Population, income, industry and economic activity are
sharply concentrated in the Southeast region, mainly in
São Paulo.
Services accounts for 58% of the GDP, while industry
represents 23%.
Brazil can be considered a relatively closed economy,
with exports and imports representing only 11.2% and
12.1% of GDP respectively (2010).
China is about to become Brazil’s largest trade partner
on both the import and export side. In 2010, it was
responsible for 15% of exports and 14% of imports.
87% of total Brazilian imports are composed of
industrialized products.
4
Although the Central Bank is not officially independent,
it has de facto autonomy and has worked with an
inflation-targeting regime since 1999.
In terms of market cap, the Brazilian stock exchange
(Bovespa) is the largest in Latin America and the 11thlargest in the world at US$15 trillion market cap.
Together, Petrobras and Vale account for around 27%
of Bovespa’s total market cap.
Brazil has had 36 presidents since the proclamation of
the republic in 1889.
The country passed through a military dictatorship from
1964 to 1985.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 3: Region Details
Overview
North
Area
With a total area of 8.5 million square kilometers
(3.4 million square miles) Brazil is the world’s 5thlargest country. It is also the third-largest country in
the Americas, after Canada and the US, and the largest
in South America, bordering all the countries of the
continent except Chile and Ecuador. Brazil occupies
about 40% of South America’s territory.
Area
3,659,637.9 km² or 45.4%
Population
15.9 million or 8.3% (2010)
GDP
R$154.7 billion or 5.1% (2008)
4.1 people/km²
US$5560 per capita (annual)
HDI
0.764 (2005)
Climate
Equatorial (high temperature and high annual precipitation)
States
Acre, Amapá, Amazonas, Pará, Rondônia, Roraima,
Tocantins
Northeast
Table 2: Top 5 countries in the world by area
Area
1,558,196 km² or 18.3%
km²
Country
Population
53.1 million or 27.8% (2010)
GDP
R$397.5 billion or 13.1% (2008)
34.6 people/km²
Area in square kilometer
Russia
17,075,400
Canada
9,976,139
China
9,596,960
US
9,519,666
Brazil
8,547,403
Source: IBGE.
US$4075.2 per capita (annual)
HDI
0.720 (2005)
Climate
Tropical near the coast and semi-arid in the interior
States
Alagoas, Bahia, Ceará, Maranhão, Paraíba, Pernambuco,
Rio Grande do Norte, Sergipe
Midwest
The country comprises 26 states, the Federal District
and 5,565 municipalities. Brazil is divided into five
main regions: North, Northeast, Midwest, Southeast and
South. These administrative divisions, set by Instituto
Brasileiro de Geografia e Estatística (IBGE), are
composed of states with similar cultures and
economical, historical and social aspects.
Figure 1: Brazil Divided by Region
Area
1,606,371.5 km² or 18.9%
Population
14.1 million or 7.4% (2010)
GDP
R$279.0 billion or 9.2% (2008)
8.75 people/km²
US$11,087 per capita (annual)
HDI
0.815 (2005)
Climate
Savanna climate
States
Goiás, Mato Grosso, Mato Grosso do Sul, Distrito Federal
Southeast
Area
924,511.3 km² or 10.9%
Population
80.4 million or 42.1% (2010)
GDP
R$1,698.6 billion or 56.0% (2008)
86.91 people/km²
US$11,528 per capita (annual)
North
Northeast
Midwest
HDI
0.824 (2005)
Climate
Tropical in the northwest, semi-arid in the north and
temperate in the south
States
Espírito Santo, Minas Gerais, Rio de Janeiro, São Paulo
South
Southeast
Area
575,315 km² or 6.8%
Population
27.4 million or 14.4% (2010)
GDP
R$502.1 billion or 16.6% (2008)
47.6 people/km²
South
US$9936 per capita (annual)
HDI
Source: IBGE; J.P. Morgan.
0.831 (2005)
Climate
Subtropical in almost all of the region
States
Paraná, Rio Grande do Sul, Santa Catarina
Source: IBGE, J.P. Morgan. Note: HDI – Human Development Index (United Nations).
5
Emy Shayo Cherman
(55-11) 3048-6684
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Latin America Equity Research
18 April 2011
Figure 4: Average Life Expectancy
Population
Brazil has the 5th-largest population in the world,
with more than 190 million people. Brazilians are
unevenly distributed in the territory. More than 40% are
concentrated in the Southeast region, while just 7% live
in the Midwest.
Years
80
78.6
78
76.4
75.3
76
75
73.7
74
72.9
72.8
Colombia
Brazil
72
70
68
Figure 2: Brazil’s population
Chile
Uruguay
Argentina
Ecuador
Venezuela
# of People
200,000,000
Source: IBGE, UN.
195,000,000
190,000,000
185,000,000
180,000,000
175,000,000
2005
2006
2007
2008
2009E
2010E
2011E
2012E
Source: IBGE.
Brazil’s population is currently growing at an annual
rate of 1%, with a declining trend. Since 1960, the
growth rate of the Brazilian population has fallen,
having slowed from more than 3% per year in 19501960 to 1% in 2008. An IBGE research estimates that
this positive rate is going to decrease until 2040, when
population growth rates will turn negative.
The fertility rate is youth inflected in Brazil, meaning
that on average women become mothers earlier than in
the developed countries. The birth of children in Brazil
is more concentrated among women between 20 and 24
years.
Figure 5: Fertility rate
Figure 3: Population growth until 2050
Number of children per woman
Millions of People
4.06
220
4
210
3
2.79
2.51
2.39
2.06
1.86
1.76
2008
2010E 2015E 2020E 2025E 2030E
1.59
1.53
1.51
1.5
1
190
0
180
170
2000
3.43
2
200
1980
2005
2010
2015
2020
2025
2030
2035
2040
2045
1985
1990
1995
2000
2005
2050
Source: IBGE.
Life expectancy at birth in Brazil is increasing and
reached almost 73 years in 2010, while in 1998 it was
69.6 years. In general, men do not live as long as
women. While men born in 2009 are expected to live
until 69 years of age, women are expected to live to
almost 77 years. Despite all the developments observed
in this indicator, Brazil still has a low life expectancy
rate compared to developed countries. Japan is the
country with the highest life expectancy, with 82.6
years on average, and Brazil occupies the 92nd position
in the world, behind 6 other Latin American countries.
6
The expected number of children born per woman in
Brazil is also falling. The fertility rate was 1.9 in 20072008, ranking Brazil 136th out of 195 countries (the
first being the country with the highest birth rate). With
this number the country is below the world’s average,
which is 2.5 children per mother. The trend suggests
stabilization at 1.5 children per woman and the
maintenance of this number in the long term.
Source: IBGE.
On average, the population density in Brazil is 22.6
persons per square kilometer. With this number the
country can be considered a sparsely populated area,
given the world average is 45.8 people per square
kilometer. The most populated place in the world is
Macau (China) with more than 18,000 of people per
square kilometer.
The population in Brazil is more concentrated on the
coast, which is partly explained by the European
colonization (1500s onward) that took place in those
areas. In the North region, the country still has
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
unoccupied areas, mainly because of the presence of
huge and dense forests, such as the Amazon.
Figure 7: Urban Population as % of Total
100.0%
80.0%
Population distribution can also be understood as a
reflection of economic development. São Paulo, where
the population density reaches 160 people per square
kilometer, accounts for more than one third of the
country’s GDP.
Among Brazilian regions, while the North is responsible
for hosting only 7% of the country’s population, the
Southeast hosts 40%, with more than 22% of the
population living in São Paulo, the largest state of the
Southeast region.
Figure 6: Population density by state
Hab/km²
0 – 10
10 – 40
40 – 70
70 – 100
100 – 200
200 or more
Source: IBGE.
Urbanization: A movement of migration to urban areas
can be observed in the whole world. In 2007 more than
half of the world’s population was living in cities.
Brazil is no exception to this tendency. Since 1950 the
urbanization rate has been rising, and the population
living in urban areas has more than doubled. In 2010
more than 84% of the total Brazilian population was
living in urban areas. The problems caused by this fast
and intense flow of people can already be observed in
almost all big cities in the country. The lack of planning
to receive all these new city dwellers was responsible
for a disorderly urban growth, which was not followed
by improvements in infrastructure, such as
transportation, sewage, hospitals and schools.
56.0%
60.0%
40.0%
36.1%
75.6%
78.4%
81.3%
82.8%
84.3%
1991
1996
2000
2005
2010
67.7%
45.1%
20.0%
0.0%
1950
1960
1970
1980
Source: IBGE.
Health
The Brazilian health system is made up of a complex
network of public and private institutions that regulate,
legislate and oversee the health system. They also
provide finance, manage health services, produce and
distribute health inputs and research and train human
resources in health.
In 2007 the public sector was responsible for 49% of
health spending in Brazil. These expenses are divided
among the central government, the states and the
municipalities. The central government generated 47%
of the resources, the states 26% and the municipalities
27%. The private sector was responsible for the
remaining 51% of spending with health. The private
share resources were utilized in insurance (51%),
medicine (28%) and direct disbursements (21%). In
terms of expenses per capita, considering both the
public and the private sector, Brazil spends during a
year US$483.87 on health per person.
The country has a Unified Health System (Sistema
Único de Saúde – SUS), created in 1988, that aims to
provide universal health coverage. Today, the SUS
reaches 75.9% of the population. The remaining 24.1%,
are covered by the Supplementary System (usually
private health plans), but they are also entitled to access
to SUS’s health services. The government is engaged in
developing projects aiming to facilitate the population’s
access to basic care. An example is a program called
“People’s Pharmacies,” which facilitates access to
essential medicine.
In Brazil total expenses associated with healthcare
amounted to 8.4% of GDP in 2008. This is not a bad
number. Indeed, compared to other BRIC countries,
Brazil is the one with the highest allocation to health in
terms of GDP. But Brazil is still very far from the
expenditure on healthcare of developed markets.
7
Emy Shayo Cherman
(55-11) 3048-6684
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Latin America Equity Research
18 April 2011
Figure 8: Healthcare Expenditures as a % of GDP (2008)
Education
%
10.4
9.6
9.0
9.0
8.8
9
8.4
8.1
6.9
5.9
6
5.2
4.3
4.0
3
Russia
Mexico
Chile
Japan
Brazil
Australia
UK
Italy
Argentina
Germany
Source: World Health Organization (WHO).
In 2008 more than 45.7 million people were linked to
health plans, representing only 24.1% of the population.
Of these, 63.1% are associated with complete private
health plan and 19.1% are linked with complete public
health plans (typically civil servants and public sector
retirees).
Table 4: Healthcare Members (2008)
%
Health Plan
% of Total Population
With health plan
On average, a Brazilian student spends 6.9 years at
school, which is not enough to complete the basic
education. Only 22% of the population is able to
complete secondary school. This is an extremely poor
indicator, since in Argentina, for example, this
percentage jumps to 55%. Nowadays, registration at
basic education reaches 97% of students between 7 and
17 years old. This percentage decreases considerably for
secondary education. Only 9% of adults complete a
post-secondary (college) program.
24.1
with complete private health plan
15.2
with complete public health plan
4.6
with private or public plan - limited coverage
2.6
plan with non identified coverage
Brazil also has a poor indicator when it comes to
illiteracy rates. In 2007, 14.1 million people were
illiterate. The country is behind almost all the countries
in Latin America and even behind several other
emerging markets.
1.6
Without health plan (SUS coverage only)
75.9
Total
100
Figure 10: Illiteracy Rates 2007
% of total population
1.0
0.5
0.2
0.0
Cuba
Georgia
1.1
US
3.5
Italy
4.8
Chile
5.4
Paraguay
6.7
Venezuela
7.2
China
7.3
Mexico
12.0 10.4
10.0 9.3
Russia
34.0
Colombia
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Brazil
Total revenue of the health insurance sector came in
at R$65.5 billion in 2009. In the last few years, the
sector started to see increases in the number of health
plan members, and consequently, revenues started to
grow. Since 2003, while the number of insured has
increased by 36%, sector revenues have increased by
130%.
Bolivia
Source: ANS.
Peru
France
US
0
India
11.1
12
The Brazilian education system is divided into 3
levels: basic, secondary and higher education.
Theoretically, basic education is mandatory for children
between 6 and 14 years old and free for everybody
(including adults). The basic level takes 9 years to be
fully completed. Secondary education lasts 3 years, is
also free but is not mandatory. Higher education, which
includes university study, is free only in public
universities.
South Africa
15
India
16.0
China
18
Source: UN – UNDP.
Figure 9: Heath Plan (Insurance) Sector Revenues
R$ Billion
70
50
40
60.3
65.5
2008
2009
53.7
51.9
60
28.5
32.2
37.1
42.1
30
20
10
0
2003
2004
2005
2006
2007
2010 (JanSep)
Source: ANS.
8
Although the illiteracy rate is high, it has fallen
consistently over the last 50 years. In 1960, 45% of the
population did not attend school and consequently did
not know how to read. This rate is continuously falling,
and in 2007 the illiteracy rate was 10%, the lowest
percentage ever.
Emy Shayo Cherman
(55-11) 3048-6684
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Latin America Equity Research
18 April 2011
Figure 11: Illiteracy Rate in Brazil
Table 5: Education Expenses (2006)
%
50.0
45.0
40.0
33.0
25.0
30.0
19.0
20.0
14.7
13.8
13.3
12.4 11.8
11.6
11.4
11.0 10.4
10.0
10.0
0.0
1960 1970 1980 1991 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007
Total investment in education as a % of GDP
Year
Primary
Secondary
Higher
2000
2.7
0.6
0.9
2007
3.1
0.7
0.8
Total Investment in Education per Student (in R$)
Year
Primary
Secondary
Higher
2000
11,032
3,971
61,363
2007
22,073
5,511
55,445
2008
25,587
6,366
59,050
Source: INEP/MEC.
Source: IBGE.
According to the OECD, Brazil spends US$1,550 per
student per year on basic education. As can be seen in
the figure below, this amount is far from the OECD
average (US$7,283).
Only 18.7% of the population between 17 and 24 years
old has access to higher education, and among these
students only 27% are in a public university. In
Argentina 75% of the college students attend public
university and in Mexico 66%.
Figure 12: Education Expenditure per Student
Income Distribution
In Equivalent US$ converted using PPPs
15 000
12 500
10 000
7 500
OECD Average
5 000
2 500
Luxembourg
Switzerland
Norway
US
Austria
Denmark
Iceland
UK
Italy
Sweden
Netherlands
Belgium
Canada
Slovenia
France
Japan
Australia
Ireland
Spain
Germany
Finland
Korea
Portugal
Israel
Czech
Hungary
Estonia
Poland
Slovak
Russia
Chile
Mexico
Brazil
Turkey
0
Source: OECD.
The weak results observed in education indicators seem
not to be in line with government expenses in the sector.
In 2007 Brazil spent 5.1% of its GDP on education
(primary, secondary and higher levels). Compared to
other countries, this percentage is reasonable. In 2007,
Chile spent 3.4% of its GDP on education and
Argentina 3.8%. So why hasn’t education in Brazil
reached international standards? The problem is that the
government spends so much on students that are in
higher education (university) that it has few resources
left for students in the primary and secondary education.
In 2008, while the public sector spent R$25,000 per
student per year in basic education (which lasts 9 years),
it spent almost R$60,000 per student per year enrolled
in college education (which typically lasts 4 years).
One of Brazil’s greatest problems is the distribution of
incomes among the population. The country ranks
poorly in international comparisons as one of the
countries with the highest income inequalities in the
world. According to the Gini coefficient, which
measures income distribution in the population and is
one of the most used inequality measures – zero means
perfect equality and one perfect inequality – Brazil has
always been among the worst performers, reaching in
2007 the 113th position among 123 countries..
Table 6: Gini Coefficient (2007)
Country
Gini 2007
1
Denmark
0.232
2
Sweden
0.25
3
Slovenia
0.258
4
Norway
0.258
5
Bosnia and Herzegovina
0.262
7
France
0.267
11
Germany
0.283
23
European Union
0.316
50
India
0.368
69
Russia
0.405
91
Mexico
0.461
94
China
0.469
99
Argentina
0.483
111
Chile
0.549
113
Brazil
0.567
115
South Africa
0.578
Source: CIA World Factbook.
9
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
In the last four decades of the 20th century (1960-2000),
Brazil showed very little evolution in terms of wealth
distribution. The first signs of improvement started in
the beginning of the 21st century, when the country was
able to align economic growth with inequality
reduction, mostly due to a more stable macro
environment. Indeed, income inequality has been
declining sharply and continuously. Still, in spite of this
important decline, at the current rate of improvement it
would take more than 20 years for Brazil to achieve a
level similar to those countries with high development.
Between 2001 and 2009, the level of inequality in
Brazil declined 8.4%, moving from 0.593 to 0.538.
Comparing this with other countries, one can say that
the rhythm of this movement is relatively accelerated
since only one quarter of the countries measured were
able to reduce their inequalities quicker than Brazil.
Table 7: Bolsa Família Benefits (values as of 2010)
Number of Children
Figure 13: Gini Evolution in Brazil
Monthly Benefit by Income Segment
Until 15
years old
From 16 to
17 years old
Until R$70 per
capita
0.590
0
0
R$ 68.00
-
0.580
1
0
R$ 90.00
R$ 22.00
0.570
0.610
0.600
From R$70 to
R$140 per capita
2
0
R$ 112.00
R$ 44.00
0.550
3
0
R$ 134.00
R$ 66.00
0.540
0
1
R$ 101.00
R$ 33.00
1
1
R$ 123.00
R$ 55.00
2
1
R$ 145.00
R$ 77.00
3
1
R$ 167.00
R$ 99.00
0
2
R$ 134.00
R$ 66.00
1
2
R$ 156.00
R$ 88.00
2
2
R$ 178.00
R$ 110.00
3
2
R$ 200.00
R$ 132.00
0.560
0.530
1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: IPEA.
One interesting thing to analyze is the distribution of
Brazil’s income according to income brackets. The
share of total income owned by the richest 1% of the
population is almost the same as the share owned by the
poorest 50%. Moreover, the richest 10% own more than
40% of the country’s income, while the poorest 50%
own only 15%. The graph below makes clear why
nearly 90% of the world is still showing less
concentrated income distribution than Brazil.
Figure 14: Income distribution (2009)
%
100%
41.8%
80%
15.5%
60%
30.7%
40%
12.2%
20%
0%
Richest 1%
Source: IPEA.
10
The main poverty reduction programs
The Bolsa Família program: Created in 2003, Bolsa
Família is nowadays the largest conditional cash
transfer program in the world, serving more than 12
million families, or around 50 million people, in the
country. The program includes the lowest-income social
groups, with household per capita income up to R$140.
Its focus is on initiatives in education, health, hunger
and social developments. The value received by each
family varies between R$22 (basic benefit per child)
and R$200 per month (basic allowance of R$68 for
families with under R$70 in income plus 5 children –
see table below), depending on the family income and
the number and the age of their children. The basic
benefit of R$68 is paid to families with income of up to
R$70 per capita, even if they have no children.
Follow ing 9%
Follow ing 40%
Poorest 50%
Total
Source: Ministerio do Desenvolvimento Social e Combate a Fome.
The Bolsa Família Program is a conditional cash
transfer program, which means that to receive the
benefit the families must fulfill certain conditions
imposed by the government, such as immunization
monitoring and school attendance. Children between 6
and 15 years of age must be properly enrolled at school
and attending at least 85% of the classes. If the family
disobeys any condition five consecutive times, its
benefit is canceled.
The volume of benefits disbursed by the federal
government to support the Bolsa Família programs was
R$3.4 billion in 2003 and R$13.4 billion in 2010, or
0.8% of the GDP, with further growth likely for the next
few years. The program covers all the regions in Brazil
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but is concentrated most heavily in the poorest
territories of the country, especially the Northeast.
Table 9: Distribution of Economic Classes
% of total population
2003
2004
2005
2006
2007
2008
2009
Benefício de Prestação Continuada program (BPC):
Together with Bolsa Família, the BPC is one of the
most important programs of cash transfer in Brazil. BPC
is responsible for assuring one monthly minimum wage,
to the elderly and disabled, who belong to families with
a per capita income under one quarter of the minimum
wage per month. Since its implementation in 1996, the
program has increased the number of recipients,
reaching 3.4 million families in 2009.
Class E
28.1%
25.4%
22.8%
19.3%
18.3%
16.0%
15.3%
Class D
26.7%
27.2%
27.1%
26.3%
25.1%
24.4%
23.6%
Class C
37.6%
39.7%
41.8%
44.9%
46.9%
49.2%
50.4%
Class B
4.0%
4.0%
4.2%
4.7%
5.0%
5.3%
5.5%
Class A
3.6%
3.7%
4.1%
4.7%
4.7%
5.1%
5.1%
The New Middle Class
In Brazil it is very common to use a letter to indicate a
particular socioeconomic segment. Class A refers to the
richest sectors of the population, while class E refers to
the poorest. A household is classified in one or another
economic “class” depending mostly on its total income.
For example, households that are considered class C in
Brazil (middle income) have monthly earnings between
R$1126 and R$4854 a month.
Table 8: Economic Classes: household earnings per month
R$
Class E
Minimum
Maximum
0
705
Class D
705
1126
Class C
1126
4854
Class B
4854
6329
Class A
6329
Source: CPS – FGV.
One of the great transformations that has taken place in
Brazil since 2003 is the formation of a middle class. In
the 1980s and 1990s, it was common to say that Brazil
was a country of extremes, that people were either rich
or poor as the middle class lacked critical mass. Since
then, however, the middle class has been growing and
today constitutes the majority of the Brazilian
population. Indeed, from 2003 to 2009, the middleincome segment (class C) increased by 44%, according
to the Centro de Pesquisas Sociais of FGV.
Source: CPS - FGV
Main characteristics of “The New Middle Class”
According to CPS – FGV (see “The New Middle Class:
The Bright Side of the Poor,” coordination by Marcelo
Neri), 35% of the new middle class is composed of
retirees and about 23% of people who are registered
workers. Public sector workers make up 7% of the
middle class, while people in the informal market makes
up about 18.6%. The research mentioned above
indicates that in 2009, 33.9% of class C had a computer
with internet connection and 86.2% had a mobile phone.
The middle class has an average of 7.18 years of
education, while 10.5% is in or has been to college. In
terms of basic utility services, 57.8% of class C has
access to sewage and 87.5% benefit from daily garbage
collection. More details are in the table below.
Table 10: Access to Goods and Services of Different Economic
Segments
% of total
Class A+B
Class C
Class D
Class E
Computer with Internet
Access
Mobile Phone
76
34
10
7
96
86
77
63
Average years of
schooling
College (Post Secondary) Education
Sewage
12
7
5
5
48
10
2
2
72
58
40
31
Daily Garbage Collection
92
87
77
64
Laundry Machine
86
53
25
16
Refrigerator
100
97
93
80
Television
100
98
96
91
Freezer
36
18
8
6
Source: CPS – FGV.
Security
Security in Brazil has been an important theme, mainly
because the country is about to host two mega sporting
events that will draw a great number of tourists. The
worries about security are perfectly justified when we
look to the country’s background. In the last few years
alone, two important events called the authorities’
11
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attention to the security situation: the PCC attack in
2006 in São Paulo and the recent “war” against drug
trafficking in Rio de Janeiro.
According to the World Economic Forum (2009), Brazil
figures among the countries with the worst security
indexes in the world. By all indicators, the country is
poorly ranked and below the world average. Within 133
countries, Brazil was ranked 89th in reliability of police
services, 111th in organized crime and 118th in business
costs of crime and violence.
Security investments: As can be seen in the figure
below, public security investment has evolved
significantly since 2000. In 10 years, investments
increased by almost 350% and were expected to reach
R$3.4 billion at the end of 2010.
Figure 17: Evolution of Public Security Investments
R$ Billion
4.0
3.4
3.5
3.0
2.5
Figure 15: Homicide Rate per 100,000 People (2009)
48.0
35.0 34.0
40.0
1.7
1.4
1.3
1.2
0.9
0.4
Singapore
5.0
Australia
5.5
Germany
Peru
Russia
Brazil
Mexico
Colombia
South Africa
Venezuela
0.0
UK
11.0
10.0
Hungary
15.0 14.9
20.0
US
25.2
30.0
Chile
50.0
Argentina
60.0
Source: J.P. Morgan. * Brazil data as of 2007.
In 2010, estimates show that there were around
470,000 prisoners in Brazil. According to a study by
the University of Rio de Janeiro (UERJ) and based on
information from the Justice Ministry, from 2000 to
2007 the number of prisoners in Brazil increased by
more than 80%, from 232,755 in 2000 to 422,590 in
2007. The deficit in the penitentiary system is also
increasing. In 2007 the Brazilian penitentiary system
was short room for 117,000 prisoners, generating an
enormous problem of overcrowding in the prisons.
0.9
1.0
1.1
1.2
2002
2003
2004
2005
2008
2009
1.4
0.5
0.0
2000
2001
2006
2007
2010f
Source: Ministerio da Justiça.
The number of personnel in the police is growing but
not at the same pace as the population. In 2003 there
was one security enforcement person for every 310
inhabitants. This number increased to 1 for 315 in 2007.
The security personnel contingent was almost 600,000
people in 2007, including civil and military police and
firefighters, up 5.3% from 2003. The civil police are
responsible for investigating crimes such as murder,
kidnapping, etc. The military police make sure that
order is maintained by patrolling the streets, bringing
suspects to the police station, etc. In addition to those,
the federal police is also an arm of the security services,
responsible for federal crime issues such as arms and
drug smuggling, border control, crimes against the
financial system, etc. The federal police force is also
growing. In 2009, it reached 14,136, being 11,346
police officers and 2,790 administrative posts. This
represents an increase of 51% compared to 2003.
Figure 18: Federal Police Personnel
Units
16000
12000
10000
110,000
116,844
8000
103,433
90,000
6000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
90,360
60,714
62,293
50,000
2003
2004
Source: Ministerio da Justiça.
12
1.0
1.2
0.8
14000
Figure 16: Penitentiary System Deficit
70,000
1.5
2.5
2.0
2.0
The figure below registers the number of homicides per
100,000 inhabitants. Once more, Brazil figures among
the countries with the worst statistics. The homicide rate
has been steadily declining, but it is still above 20
homicides per 100,000 people, placing the country in
the top 20 by homicide rate.
2.5
Source: Mapa de Controle de Lotação SLM/DRH/CRH/DGP.
2005
2006
2007
Regarding the penitentiary system, according to the
justice ministry, in 2003-2009, a total of R$1.02 billion
was invested in the construction of 97 prisons,
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expansion of 14 and refurbishment of 23. 12% of this
amount was invested in new security equipment. But
once again, it is important to highlight that the
investments are not accompanying the increasing
number of prisoners, since the deficit of vacancies in the
penitentiaries has only widened.
Tourism
Despite all its natural beauty and its huge and
diversified territory, Brazil is not among the 30 most
visited countries in the world. One of the reasons for the
low international demand could be the distance between
Brazil and core tourism centers. In addition, issues such
as safety and security, lack of infrastructure and skilled
labor also contribute to low tourism penetration in the
country. Lately, one would have to think that the strong
BRL has been an inhibitor of tourism in Brazil. Still,
even with the low numbers of international tourists in
Brazil, the country’s assessment is positive: 92% of
tourists who come to Brazil leave intending to come
back (according to Embratur).
The situation of tourism in Brazil has gradually
improved. From 2002 until 2008, the flow of tourists to
Brazil increased by 33.6%. In the same period, the
growth of international tourism in the world was 31%.
The country had 4.8 million visitors in 2009, ranking as
the fourth-largest tourist destination in the Americas and
the main destination in South America.
Figure 19: Tourist Arrivals in Brazil
Million
6
5.36
4.79
5
4
3.78
5.02
5.03
5.05
4.8
2006
2007
2008
2009
4.13
3
2
1
0
2002
2003
2004
2005
Source: Ministério do Turismo.
while Bahia (on the Northeast cost) is the preferred
destination for domestic tourists, especially during
Carnival. São Paulo is the business and financial center
receiving the most of the people who come to Brazil for
business reasons or commercial events. Among the
most popular destinations are also the Amazon rain
forest, the Pantanal in the Midwest region and the
country’s capital, Brasilia, famous for its complex and
innovative architecture.
Figure 20: Main Travel Destinations
Amazônia
Northeast Coast
Brasilia
Pantanal
Rio de Janeiro
São Paulo - Business
Source: IBGE; J.P. Morgan.
Brazil is ranked 45th in the overall tourism & travel
competitiveness index and 5th among American
countries, behind Canada, the US, Barbados and Costa
Rica. Since 2007 the country has improved 14 places,
and the outlook is positive, mainly due to the World
Cup (2014) and Olympic Games (2016), which should
boost tourism in the region. The most competitive
countries in terms of tourism are Switzerland, Austria
and Germany, holding the first, second and third
positions, respectively, for three years in a row.
The greatest part of foreigner tourists visiting Brazil in
2008 came from South America (41.0%) – mainly from
Argentina and Chile. Europeans represented 35.2%,
coming especially from Italy and Germany, and North
Americans account for 15.2% of the international
tourism in Brazil.
Below we see Brazil’s main regions in terms of tourism.
Rio de Janeiro is the foreigner’s favorite destination
13
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Latin America Equity Research
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Table 11: Travel & Tourism Competitiveness Index
Switzerland
2007
2008
2009
1º
1º
1º
Categories
Overall Index
Regulatory framework
Rank
45
Austria
2º
2º
2º
Germany
3º
3º
3º
Policy rules and regulations
France
12º
10º
4º
Environmental sustaintability
33
Canada
7º
9º
5º
Safety and security
130
95
80
94
Spain
15º
5º
6º
Health and hygiene
Sweden
17º
8º
7º
Prioritization of travel and tourism
US
5º
7º
8º
Australia
13º
4º
9º
Air transport infrastructure
46
Singapore
8º
16º
10º
Ground transport infrastructure
110
Brazil
59º
49º
45º
Tourism infrastructure
45
ICT infrastructure
60
Price competitiveness in T&T industry
91
Source: World Economic Forum.
The overall index is the result of a combination of three
subindexes: (1) regulatory framework, (2) business
environment and infrastructure, and (3) human cultural
and natural resources. Brazil’s overall classification is
marked by extreme results, sometimes positive but
sometimes extremely negative.
Competitive advantages: The country is ranked 2nd
out of all the countries for its natural resources and 14th
for its cultural resources, with a great portion of
protected land area and the most diverse fauna in the
world.
Competitive disadvantages: Unfortunately, in terms
infrastructure Brazil remains underdeveloped, with the
quality of roads, ports, railroads and air transport ranked
110th, 123rd, 86th and 101st, respectively. Safety and
security continue to be of serious concern, with Brazil
ranked 130th out of 133 countries. Another key point is
the lack of price competitiveness, attributed in part to
the extent and effect of taxation, in terms of which
Brazil is classified the worst in the world (133rd).
14
Table 12: T&T Competitiveness Index Breakdown (2009)
Business environment and infrastructure
Human, cultural and natural resources
84
69
4
Human resources
55
Affinity for travel & tourism
108
Natural resources
2
Cultural resources
14
Source: World Economic Forum.
Competitiveness
Brazil ranked 56th out of 133 countries in the 2010
World
Economic
Forum
(WEF)
Global
Competitiveness Index. Since 2007 the country has
started to see its competitiveness improving, and
compared to the 2009 ranking, Brazil is up 8 places.
Switzerland leads the ranking as the most competitive
economy in the world, followed by the US, which fell
one position due to the financial crisis. Among LatAm
countries only Chile, occupying the 30th position, is
ahead of Brazil.
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Table 13: Global Competitiveness Index (GCI) – 2009-2010
Rank
Country
Change (Comparing to
2008)
1
Switzerland
2
US
+1
-1
3
Singapore
+2
4
Sweden
0
5
Denamark
-2
7
Germany
0
8
Japan
+1
13
UK
-1
16
France
0
29
China
+1
30
Chile
-2
When it comes to business sophistication (32nd) and
innovation (43rd) Brazil scores better than average.
Brazil is also the 10th-largest market in the world,
which is certainly one of the main competitive strengths
of the country. Regarding financial market
sophistication (51st), Brazil showed good bank
soundness (10th) and was also well ranked in regulation
of security exchanges (10th).
Despite the efforts made by the country and the
improvements of the last two decades, the World
Economic Forum still considers Brazil a poorly
developed country in terms of macroeconomic stability.
In 2008 Brazil was ranked 122nd and in 2009 improved
13 positions, ranking 109th out of 133 countries.
45
South Africa
0
48
Italy
+1
Table 14: Brazil’s classification breakdown
49
India
+1
Indicator
rank/133
56
Brazil
+8
Overall Index
56
60
Mexico
0
Basic Requirements
91
63
Russia
-12
Institutions
93
65
Uruguay
+10
Infrastructure
74
85
Argentina
+3
Macroeconomic stability
109
Source: World Economic Forum.
Health and primary education
Efficient Enhances
The overall index is composed of 3 subindexes: a) basic
requirements, b) efficiency, c) innovation and
sophistication. Analyzing the breakdown it can be
clearly noted that Brazil’s shortcomings are
concentrated in basic requirements. In all items of this
category the country scores worse than the world
average. The institutional environment (93rd),
macroeconomic stability (109th) and the efficiency of
the labor market (80th) continue to be poorly assessed.
The education system at all levels remains in serious
need of upgrading; in fact, the quality of Brazilian
primary education occupies the 119th position among
133 countries.
Another important matter that is still pushing Brazil’s
overall index down is taxation. Brazil is known as one
of the countries with the most complicated tax systems
in the world. The World Economic Forum shows that
the extent and effect of taxation was ranked at the
133rd position, which means, the worst in the world.
79
42
Higher education and training
58
Goods market efficiency
99
Labor market efficiency
80
Financial market sophistication
51
Technological readiness
46
Market size
Innovation and Sophistication Factors
10
38
Business sophistication
32
Innovation
43
Source: World Economic Forum.
The survey also highlights the most problematic factors
for doing business. In Brazil almost 20% of the
respondents pointed to tax regulation as the largest
constraint for doing business. In second place came tax
rates (18.5%), followed by restrictive labor regulation
(14%)
Also poorly ranked were items correlated with
bureaucracy, which compromised market efficiency.
The number of procedures required to start a business
was ranked 126th and time required to start a business
was ranked 128th.
15
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Figure 21: The most problematic factors in doing business
Table 16: 2010 Nominal GDP
%
US$ Billion, estimated
Country
Tax regulations
Tax rates
Restrictiv e labor regulations
Inefficient gov ernment bureaucracy
Access to financing
Inadequate suply of infrastructure
Corruption
Inadequately educated w orkforce
Policy instability
Inflation
0
2
4
6
8
10
12
14
16
18
20
Source: World Economic Forum.
Regarding the infrastructure pillar a lot of improvement
is likely to be seen, especially for a country that is
scheduled to host two mega sporting events (the World
Cup in 2014 and the Olympic Games in 2016). Brazil is
poorly developed in all infrastructure categories. A
particular concern is quality of ports (127th), roads
(106th) and air transportation (89th). A movement
toward upgrading and extending networks can already
be seen, but a lot should be done to reach a competitive
standard. Brazil’s low rank at 74th puts the country
behind not only the Latin American but also the BRIC
regional average.
Table 15: Infrastructure breakdown
Infrastructure
rank/133
Quality of overall infrastructure
81
Quality of roads
106
Quality of railroad infrastructure
86
Quality of port infrastructure
127
Quality of air transport infrastructure
89
Avaliable seat kilometers
12
Quality of electricity supply
55
Telephone lines
61
Source: World Economic Forum.
Economic Activity
GDP
According to the IMF, the Brazilian economy is the
eighth largest in the world by nominal GDP, the
second largest in the Western hemisphere (behind the
US) and the largest in Latin America. In 2009 the
country’s nominal GDP reached US$1.57 trillion, or
R$3.1 trillion. The prospects for the Brazilian economy
are positive, and in 2011 the country should surpass
Italy to become the 7th-largest economy in the world.
16
Nominal GDP
1
US
2
China
14,624.2
5,745.1
3
Japan
5,390.9
4
Germany
3,305.9
5
France
2,555.4
6
UK
2,258.6
7
Italy
2,036.7
8
Brazil
2,023.5
9
Canada
1,563.6
10
Russia
1,476.9
11
India
1,430.0
12
Spain
1,374.8
13
Australia
1,219.7
14
Mexico
1,004.0
15
Korea
986.256
Source: IMF.
In 2009, real GDP reached -0.6%, interrupting a
sequence of robust growth (average of 4.8% from 2004
to 2008). The negative result was mostly a consequence
of the 2008 crisis. Still, Brazil has shown significant
powers of recovery, and GDP grew by 7.5% in 2010,
the strongest in almost two decades. For 2011, J.P.
Morgan forecasts that GDP will reach 4.0%. Our
economists also assume that Brazilian potential growth
is around 4.0%, which is higher than Latin America
average at 3.6%.
The performance of the economy in the last 15 years
can be divided into two main periods. First came the
Fernando Henrique Cardoso administration (1995-2002)
and second, the Lula administration (2003-2010). Both
presidents stayed in the post for eight years, or two
consecutive mandates.
In the first period, the country was passing through
several adjustments, in order to stabilize the economy
and regain international credibility. As a Finance
Minister, even before his first mandate (1995-1998),
Fernando Henrique Cardoso created and implemented
the Real Plan, finally controlling the hyperinflation that
had characterized Brazil for the better part of the past 15
years. His administration also conducted several
structural reforms, including a deeper privatization
initiative of state-owned companies. Cardoso’s second
mandate (1998-2002) was marked by several crises,
starting with Russia, culminating in the BRL
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devaluation of January 1999, the energy rationing of
2001 and the great instability caused by uncertainties
related to Luis Inácio Lula da Silva’s (Lula) election in
2002. It was during this time that fiscal policy was taken
more seriously, and the economic team of the time
implemented the so called macroeconomic “tripod” that
is in place right now: a floating exchange rate, fiscal
responsibility and the inflation-targeting regime.
Average growth during the Cardoso years was modest,
averaging 2.3% per year.
Compared to that of other Latin America countries,
Brazilian growth has not been that strong. From 2003 to
2009 Latin America countries have grown on average
4.6%, while in the same period, Brazilian average has
reached only 3.5%. Indeed, Brazil had one of the worst
performances, only ahead of Paraguay and Mexico. In
the period mentioned the country with the strongest
growth was Argentina (7.4%), followed by Peru (6.2%).
Figure 24: Latin America GDP
Average Growth 2003-2009
8
7
6
5
4
3
2
1
0
7.4
6.2
5.8
5.3
4.6
4.6
4.3
3.8
3.5
3.3
Mexico
Paraguay
Brazil
Chile
Bolivia
Ecuador
Colombia
Uruguay
Venezuela
Peru
1.7
Argentina
In the second period, with the economy stabilized, the
country had concrete opportunities to grow. During
President Lula’s administration, the average growth was
4.0% per year and if not for the 2008 crisis, this number
could have been higher. The economic success of the
Lula administration was in great part due to the
maintenance of the economic stability pillars
implemented during the Cardoso years.
Source: IMF.
Figure 22: Brazilian GDP Growth
% oya
Lula's Administration
12.0
FHC's Administration
9.0
Av erage: 2.3%
Av erage: 4.0%
6.0
3.0
0.0
-3.0
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
GDP breakdown
2010 – Growth per sector: With growth of 7.5% in
2010, the best since 1986, all sectors registered hefty
growth rates that were helped by easy comparisons. On
the supply side, the highlight was mineral extraction,
with a gain of 15.7%. Other activities that registered
double-digit growth were manufacturing, civil
construction, commerce and finance.
Table 17: Real GDP Growth – Supply Side
Source: IBGE.
Y/Y % Change
Despite stronger economic growth in the last few years,
Brazil has been growing below the emerging market
average: Asia, led by China and its constant doubledigit growth rates, is mainly responsible for Brazil’s
difficult comparisons. From 2004 to 2008, Brazil’s
average GDP growth was 4.8%, while the emerging
market average was 7.3%.
Figure 23: Economic Growth: Brazil vs. EM vs. G-7
% oya
7.5
5.5
3.5
5.7
7.5
7.3
2.9 3.2
8.2
4.0
2.4
6.1
2.6
5.2
7.5 7.1
6.0
6.4
2.5
2.5
2.0
-0.1
-0.5
-0.6
-2.5
-4.5
2004
2005
2006
2007
Brazil
-3.5
2009
2008
EM
G-7
2010*
2009
Agriculture
6.1%
-4.6%
6.5%
Industry
4.1%
-6.4%
10.1%
Mineral Extraction
3.5%
-1.1%
15.7%
Manufacturing
3.0%
-8.2%
9.7%
Civil Construction
7.9%
-6.3%
11.6%
2011*
2010
7.8%
Utilities
4.5%
-2.6%
Total Services
4.9%
2.2%
5.4%
Commerce
6.1%
-1.8%
10.7%
Transportation
7.0%
-2.5%
8.9%
Information Services
8.8%
3.8%
3.8%
12.6%
7.1%
10.7%
Financial Activities
4.0
2.1
1.5
2008
Other Services
4.3%
3.5%
3.6%
Real Estate Rental
1.8%
1.9%
1.7%
Health & Education
0.9%
3.3%
2.3%
GDP
5.2%
-0.6%
7.5%
Source: IBGE.
Source: IMF; IBGE.
17
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
More important, on the demand side, growth of fixed
capital formation (investment) was the highlight, with
gains of 22% in 2010 helping to add to the share of
investment in the overall economy. Still, we note that
household consumption has also been a very strong
force behind GDP expansion, gaining 7% in 2010. A
strong economy combined with a strong exchange rate
led to a 36% increase in imports, while exports gained
on the back of rising commodity prices. For 2011, the
economy is expected to decelerate to 4.0%, but
household consumption is still robust, with expected
gains of 5.8%. Although investments will decelerate,
forecast gains of 9.3% are healthy considering the very
strong base of comparison. Note that J.P. Morgan
forecasts that the balance of external transactions will
be halved, coming from a deficit of 2.8% in 2010 to a
deficit of 1.4% in 2011.
Table 18: Real GDP Growth – Demand Side
Y/Y % Change
1995 - 2006
2008
2009
2010
2011f
GDP at market prices
2.6
5.2
-0.6
7.5
4
Household
Consumption
Government
Consumption
Gross Fixed Capital
Formation
Exports
2.6
3.8
4.2
7.1
5.8
1.9
4.1
3.9
3.4
3.3
1.6
9.1
-10.3
22.5
9.3
7.7
15.3
-10.2
11.7
6.7
Imports
5.1
13.3
-11.5
36.6
15.6
Net Exports
-1.8
1.4
-2.8
-1.4
Domestic Absortion
6.9
-2.1
10.3
5.4
FX is reducing the share of exports, which is around
11% of GDP while imports are slightly more (12%).
Figure 25: GDP Components by Expenditure (Demand Side)
% of total GDP (2010)
80%
60.6%
60%
40%
21.2%
18.4%
20%
11.20%
0.80%
0%
-20%
Household
Gov ernment
Fix ed Capital
Consumption
Consumption
Formation
Ex ports
-12.1%
Imports
Inv entory
Change
Source: IBGE.
On the supply side of GDP, among the productive
sectors, the highlight has been services. The sector
accounts for 57.5% of GDP, with health & education
(14%) and commerce (10%) the most representative
kinds of service (a category entitled “other services” has
a 12.6% share). Industry comes second, at 22.9% of
GDP, with manufacturing (13.4%) the most important
activity, followed by civil construction (4.5%). Taxes
account for around 15% of GDP, and agriculture has the
smallest participation, representing only 5% of GDP.
Figure 26: GDP Components by Sector (Supply Side)
% of total GDP, average of the last 4 quarters until 3Q2010
Agriculture - 5%
Tax es - 15%
Source: J.P. Morgan Economics.
GDP composition: Looking at GDP composition
(weight), household consumption is the main
component on the demand side. This is not news, as in
the last two decades household consumption has been
responsible for around 60% of the country’s GDP.
Government consumption is the second most
representative component, accounting for more than
20% of GDP. Fixed capital formation in Brazil has been
the subject of important discussions. Investments have
been accounting for around 18% of GDP, which is a
modest number, especially compared to other
countries’. On the external accounts side, there is
significant variation in terms of export and import
contributions. Exports were very weak in the period of
the fixed exchange rate, accounting for about 8% of
GDP, while imports at that time were hovering around
9.5% of GDP. This relationship was reversed when the
BRL was devalued in 2001. Exports started to recover
and got a share of about 15% of GDP. Lately, the strong
18
Industry - 22%
Serv ices - 58%
Source: IBGE.
Per capita GDP
Per capita GDP reached R$19K in 2009, or US$10.8K.
This represented an important increase from the levels
observed in 2009, as a result both of higher nominal
growth (15.5%) and of a 12% appreciation of the
exchange rate.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 27: GDP per Capita
USD and BRL
18000
15000
12000
9000
6000
3472
4849 5209 5320 5077
3000
3665
3477 3766 3186 2861 3097
4812
5867
7283
10814
8706 8348
kilometer and is responsible for one third of the
country’s GDP, or over R$1 trillion in 2008. The state’s
economy is very diversified, with the important
presence of the following activities: sugar, oranges,
coffee, autos, metals, airplane construction (it is the
headquarter of Embraer), financial services, among
others.
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
In USD
In BRL
Table 19: Real GDP Growth per Region
%oya
2006
Source: Banco Central do Brasil.
Regional GDP
Brazil’s GDP has a particular characteristic: more than a
half of it is concentrated in the Southeast region (56%),
where São Paulo, Rio de Janeiro and Minas Gerais are
located. Despite occupying only 10.8% of Brazil’s
territory, the region hosts a great part of the country’s
economic activity. The level of industrialization in the
Southeast can be compared to that of some developed
countries, and the region also has the most advanced
agriculture in Brazil. Furthermore, it boasts the largest
transportation fleet, the most schools, the best hospitals
and medical care, among others.
Figure 28: Regional Participation in Brazilian GDP (2008)
%
North 5%
2007
2008
North
4.7%
3.8%
4.8%
Northeast
4.8%
4.8%
5.5%
Southeast
4.0%
6.3%
5.6%
South
3.2%
6.4%
3.4%
Midwest
2.8%
6.8%
6.0%
Brazil
4.0%
6.1%
5.1%
Source: IBGE.
Investments
In 2010, gross fixed capital formation in Brazil was
18.4% of GDP, confirming once more the weak profile
of the country’s investment. As seen in the figure
below, Brazil had the third-lowest fixed investment
level in EM as of 2009. Compared to the other BRIC
economies, Brazil is again the laggard, behind China,
India and Russia, with 44.8%, 34.5% and 22.7%,
respectively.
Northeast 13%
Figure 29: Emerging Markets Gross Fixed Capital Formation
Southeast 56%
South 17%
% of GDP (As of 2009)
50.0
44.8
34.5
40.0
Midw est 9%
30.0
20.0
27.8 25.2
24.5 23.9 23.2 22.7 21.5
19.8 19.4 19.3 18.7
16.6 14.9
13.7
São Paulo, Brazil’s engine: When it comes to economy
and industry, São Paulo is the most important state in
Brazil. With more than 40 million inhabitants, the state
is not only the most populous in the country but also the
richest. It has more than 156 inhabitants per square
Turkey
Philippines
Chile
Brazil
Egypt
Poland
Czech.Republic
Russia
Malaysia
Colombia
Peru
Mexico
India
China
Indonesia
Conversely, the region responsible for the lowest share
of GDP is the North. Although it has the largest territory
extension (if it was a country it would be the seventhlargest country in the world), it has the lowest
population density, which means that a great part of the
territory is unoccupied. Its economic activity is limited,
and tourism is an important source of the region’s
income.
0.0
South.Africa
10.0
Source: IBGE.
Source: World Bank.
During the military period, the investment/GDP ratio
used to be higher than the current level, mainly due to
industrialization and heavy public sector investment,
which put a burden on Brazil’s fiscal accounts. The
macroeconomic instability of the 1980s and part of the
1990s curbed productive investment from the private
sector at the same time that the public sector capability
to invest was constrained by fiscal concerns. Today, the
federal government is once more focused on raising
Brazil’s investment ratio.
19
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 30: Gross Fixed Capital Formation in Brazil
Figure 32: Public Investment as a % of GDP
% of GDP
%
27
3.5
3.0
25
2.5
2.0
1.5
1.0
23
21
19
0.5
0.0
17
15
1970
1973
1976
PAC
1.9
1.4
2.0
1.0
1.0
1.0
1.1
1.1
0.5
0.5
0.6
0.7
0.9
1.0
1.2
0.3
2003
2004
2005
2006
2007
2008
2009
2010f
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Federal Gov ernment
Public Companies
Source: World Bank.
Source: 10º Balanço do PAC.
The low investment ratio can also be observed in the
high levels of capacity at which the economy operates.
Except for the 2008 crisis period, when the country’s
industry went on a sudden stop, utilization has been
operating close to full capacity since 2006.
According to PAC’s last release (December 2010)
investments already executed (but not concluded) have
totaled R$619.0 billion, or 94.1% of the promised
amount for 2007-2010. If we consider only the finished
(delivered) investments, the result is equivalent to
R$444.0 billion, or 67.6% of the estimated original
amount.
Figure 31: Capacity Utilization (% of total installed capacity)
%
Table 20: PAC Investments
90.0
R$ billion
Sector
85.0
Total Estimated
Total Concluded
%
75.0
Logistics and Utilities
427.8
225.2
52.6
70.0
Housing and Sewage
228.7
218.8
95.7
Total
657.4
444.0
67.5
80.0
65.0
60.0
Jan-80 Jan-83
Jan-86 Jan-89
Jan-92 Jan-95 Jan-98
Jan-01 Jan-04
Jan-07 Jan-10
Source: 11º Balanço do PAC.
Source: FGV.
PAC
The Programa de Aceleração do Crescimento – PAC –
is a federal government program launched in 2007,
aiming to accelerate the country’s economic growth
through investments in infrastructure, such as housing,
transportation, utilities and sanitation. At the time of
launching, the government forecast more than R$650
billion in investments between 2007 and 2010.
Regarding the origin of the money, the estimates were
that 45% would come from state-owned companies,
40% from the private sector and 15% from the national
budget. Some of the coordinators of the program’s first
phase were current President Dilma Rousseff (Chief of
Staff at the time) and current Planning Minister Miriam
Belchior.
20
PAC 2: The second phase of the growth acceleration
program was launched in March 2010, and the
government’s original estimates were for investments of
around R$1.5 trillion in 6 different areas: PAC Cidade
Melhor (investments in sanitation, paving, urban
mobility), PAC Comunidade Cidadã (investments in
nurseries, pre-schools, community police station and
health), PAC Minha Casa, Minha Vida (the government
housing program), PAC Água e Luz para Todos (water
and electricity for all), PAC Transportes (transportation
investments – roads, railroads, ports and airports) and
PAC Energia (investments in oil, natural gas, renewable
energy and electricity transmission and generation).
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 21: PAC 2 Investment Estimates
R$ billion
Preliminary Estimates
Figure 33: Mortgages as a % of total credit
%
2011-2014
After 2014
Total
PAC Cidade Melhor
57.1
-
57.1
PAC Comunidade Cidadã
23.0
-
23.0
PAC Minha Casa, Minha Vida
278.2
-
278.2
6.50%
5.50%
PAC Água e Luz para Todos
30.6
-
30.6
PAC Transportes
104.5
4.5
109.0
PAC Energia
461.6
626.9
1088.5
Total
955.0
631.4
1586.4
8.50%
7.50%
4.50%
Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10
Source: Banco Central do Brasil.
Source: Federal government.
Minha Casa, Minha Vida (MCMV)
Minha Casa, Minha Vida (Portuguese for my house, my
life) is a federal government program which aims to
facilitate access to housing for lower-income families
and, consequently, to increase the possibility of these
families owning their own homes by also granting
mortgage subsidies. Created in 2009, the first phase of
the program had the goal to construct in two years
(2009 and 2010) 1 million properties directed to
families with income below 10 minimum wages per
month. According to Caixa, MCMV reached its goal in
terms of number of units, contracting over 1 million
units by the end of 2010. Of these, 57% were directed to
families with income under 3 minimum wages.
The table below shows the balance of the program
through the end of 2010. Analyzed by income segment,
the program had a more efficient evolution among the
families earning up to 3 minimum wages (MW), with
more than 100% of the proposed units contracted.
However, in large cities, the target for contracts with the
population under 3 MW was not met, with this shortfall
compensated by the smaller municipalities.
Table 22: MCMV Breakdown
Income Segment
Up to 3 MW
Proposed Units
Contracted Units
%
400,000
574,874
57.2
from 3 to 6 MW
400,000
284,079
28.3
from 6 to 10 MW
200,000
146,075
14.5
1,000,000
1,005,028
100.0
Total
Source: Caixa Economica Federal.
The MCMV program aims to increase mortgages,
adjusting the loan’s installments and the initial down
payment to families’ payment capacity. The resources
are subsidized by the Union (i.e., the federal
government) and FGTS, the workers’ guarantee fund.
Historically, mortgages in Brazil have been pretty low,
representing only around 7% of total credit and 3% of
GDP at this point. The figure below shows that since the
implementation of the MCMV program, credit directed
to mortgages increased, coming from 5.2% of total
credit in the beginning of 2009 to 8.1% at the end of
2010, and it is still rising in 2011. Indeed, this is the
credit category that has grown the most in Brazil, 55.5%
in 2010 alone, followed closely by auto loans.
Minha Casa, Minha Vida 2: The second phase of
MCMV was officially announced at the end of March
2010 as part of the PAC 2 program. Although details are
still pending, the program predicts the construction of 2
million houses in 2011-2014. 60% of the houses, or 1.2
million units, are destined for families with income
below 3 MW. Another 30% are for families with
income from 3 to 6 MW, and the remaining 10% are for
families with incomes of 6 to 10 MW. One of the
changes introduced in the second phase of MCMV is
that the price ceiling for units that qualify for MCMV
was raised.
Table 23: Ceiling Price for Units under Minha Casa Minha Vida
R$ Thousands
MCMV1
MCMV2
% change
Sao Paulo
130
170
30.8%
Other Capitals
100
150
50.0%
Cities with Population over 250K
80
130
62.5%
Cities with Population over 50K
80
100
25.0%
Others
80
80
0.0%
Source: J.P. Morgan.
21
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Controversy surrounded the program in early 2011 as
the government announced a budget cut of R$50 billion,
which, among other things, cut the projected resources
for Minha Casa Minha Vida in 2011. The total budget
for MCMV in 2011 had been R$12.7 billion, but it was
reduced by R$5 billion. Still, the R$7.6 billion budget
for 2011 is R$1 billion higher than the amount budgeted
for 2010. When the program was launched (1Q 2010) it
was established that the overall budget through 2014
was going to be over R$70 billion.
World Cup 2014, Olympic Games 2016
and other investments
In a few years Brazil will host two mega sporting
events: the Soccer World Cup in 2014 and the Olympic
Games in 2016. Being the host country of a mega
sporting event is a huge challenge, demanding massive
investments from both the private and public sectors.
Why is Brazil interested in hosting two mega
sporting events? For Brazil the candidacy meant
visibility and international recognition for all the
economic progress made in the last decade, in the same
way that the Olympic Games of 2008 were a stamp of
approval for China. The arguments in favor of the
events include job creation, increase in the flow of
tourism, urban revitalization, investments in
infrastructure and more foreign investment. Still, studies
show that the effects of a mega sporting event on the
host country’s economy are controversial. Some believe
that the long-term effects are not that significant and
that the expenditures associated with the investments do
not bring the expected returns (e.g., Greece). But for
most analysts this kind of event suggests significant
opportunities to accelerate the country’s economic and
social development.
The amount of investments and their destinations are
still somewhat nebulous for both events. The
government has the challenge to divide its resources
among sports infrastructure, urban mobility, ports,
airports, hotels, security, telecommunication and the
health system. The projects are not 100% defined, and
although there are forecasts, the final cost of the events
is not at all clear, much less whether it will be met. All
in all, the estimate is that the World Cup will demand
government investments of R$17 billion, with
additional resources coming from the private sector.
22
Table 24: Government Investment Plan – World Cup
R$ Million
Host City
Loans
(Caixa/
BNDES)
1,323.3
Investment
Total
% of
Total
1,033.4
2,356.7
10.0
Brasilía - DF
761.0
1,096.7
1,857.7
7.9
Cuiabá - MT
784.7
238.2
1,022.9
4.3
Curitiba - PR
465.6
124.8
703.4
3.0
Fortaleza - CE
814.4
756.0
1,570.4
6.7
Manaus - AM
1,175.0
1,293.7
2,468.7
10.5
Natal - RN
611.5
780.2
1,391.7
5.9
Porto Alegre - RS
456.2
382.3
968.5
4.1
Recife - PE
1,045.1
238.1
1,283.2
5.4
Rio de Janeiro - RJ
1,590.0
1,621.3
3,211.3
13.6
Salvador - BA
941.8
298.7
1,240.5
5.3
São Paulo - SP
1,482.0
3,924.6
5,496.6
23.3
Total
11,450.6
11,788.0
23,571.6
100.0
Belo Horizonte - MG
Source: Portal da Transparência.
The World Cup in Brazil is going to take place in 12
different capitals (listed above), located in Brazil’s five
regions, demanding an efficient transportation
infrastructure, among other things. The country plans to
spend R$11.4 billion on transportation and R$5.7 billion
on stadiums. Regarding the stadiums, none existing
meets FIFA standards, meaning that they will either be
built from scratch (Sao Paulo, for example) or undergo
extensive renovations (Rio de Janeiro). Resources for
stadiums are around US$2.7 billion.
Table 25: World Cup Investments (Public and Private)
Sector
Urban Mobility
US$4.4 Billion
Stadiums
US$2.7 Billion
Hotels
US$556 Million
Airports
US$3.1 Billion
Ports
US$441 Million
TOTAL
US$13.2 billion
Source: Government estimates.
The Summer Olympic Games in 2016 are going to
take place only in Rio de Janeiro, thus concentrating
expenditures in one city only. Despite all the
investments made for the World Cup, the city will
receive an additional R$12 billion from the public
sector to finance investments in some strategic areas.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Initially the government is planning to focus on the
transportation sector, directing 60% of the available
funding to this industry. Accommodations, another
critical sector, will receive R$2.6 billion, or 20% of the
government’s projected total investment.
Table 26: Public Sector Investments Plan – Olympic Games
Sector
Investment
(R$ million)
%
Accommodations
2,590.50
20.69
Sport Facilities
1,518.40
12.13
Security
471.9
3.77
Technology
477.5
3.81
Transportation
7,460.00
59.59
Total
12,518.30
100
Source: Portal da Transparência.
After all investments and expenditures made by the
private and public sectors, the big question mark is: how
to take advantage and enjoy all the new infrastructure
that is going to be built in Brazil. If the intention is to
build a legacy, one must consider the use of the
facilities after the event. The country needs to develop
infrastructure projects thinking about their economic
viability for the future. In this vein, the Pan American
Games in Rio de Janeiro in 2007 are not a good
example. After the event, some sports facilities were
underutilized and abandoned. The event was initially
budgeted at R$500 million, but at the end of the day it
ended up costing R$3.3 billion, according to the Federal
Auditing Court (TCU – Tribunal de Contas da União)
Figure 34: High Speed Train Total Costs by Sector
%
Civ il Works
Ex propriation and Socialev ironmental Measures
11.3
Sy stems and Equipaments
Acquisition
71.1
Undercarriage
Source: BNDES.
There are some international consortiums interested in
the project – French, Spanish, Korean and Japanese –
but the bidding process keeps being postponed due to
lack of definition in terms of financing. In addition, one
great concern is the environmental issue, since the train
would pass through some complex regions and would
require certain special environmental approvals.
Pre-salt: Brazil oil production was 2.1 million boe/d in
2010. Petrobras now wants to increase this production
to 3 million boe/d by 2014 (of which 241k boe/d will
come from the pre-salt areas) and to 4 million boe/d by
2020 (1,078k boe/d from pre-salt).
Figure 35: Petrobras Domestic Oil and Gas Production
Thousands of barrels/day
6000
5000
1109
4000
623
3000
2000
1000
High-speed train: Aiming to supply the super demand
faced mainly by air transport, the government is
proposing the construction of a high-speed train
between Rio and São Paulo. Along a route 511km long,
the train should pass through 38 municipalities in the
states of São Paulo and Rio de Janeiro. The trip should
take 1h33 minutes (nonstop at speeds up to 350km/h.
The estimated costs of the investments are very high,
reaching R$34 billion (according to a study made by the
BNDES).
7.8
9.8
251
265
274
277
273
321
316
384
252
1500
1540
1493
1684
1778
1792
1855
1971
2100
2002
2003
2004
2005
2006
2008
2009
2010E 2014F
2980
3950
0
2007
Oil
2020F
Gas
Source: Plano Estratégico Petrobras 2020.
For the production increase, Petrobras has established a
capex plan of US$118.8 billion in E&P alone for the
period between 2010 and 2014. Of this, US$33 billion
will go to pre-salt areas and US$75.2 billion to post-salt.
The capex would include exploration, development with
production and infrastructure.
23
Latin America Equity Research
18 April 2011
224
100
118.8
53.0%
Petrochemical
5.1
2.3%
Corporate
2.8
1.3%
RTC - Refining, Transportation, and
Commercialization
Distribution
73.6
32.9%
12.0%
2.5
1.1%
7.0%
G&E - Gas and Energy
17.8
7.9%
2.0%
Biofuel
3.5
1.6%
Figure 36: Supply-vs-Demand Forecast by EPE
In avg TW, alternative sources include: Biomass, wind and small hydro
plants
Source: EPE and J.P. Morgan.
According to EPE, the sector will demand R$134 billion
in new investments between 2010 and 2019. This is
only considering projects that were not yet sold and
should be available for future auctions. R$77 billion go
to hydro generation, R$31 billion to alternative energy
sources and R$26 billion to transmission. Note that this
capex estimate does not include the three large hydro
plants in the Amazon basin (Belo Monte, Santo Antonio
and Jirau), which together should require around R$50
billion.
Industry
Industrial activity in Brazil represents around 23%
of the country’s nominal GDP. Looking at its
evolution, it can be noted that the share of industrial
GDP has been declining over the past few years, with a
peak of almost 26% in 2004. This decline can be mostly
attributed to a decline in manufacturing activity. It is not
a coincidence that this turnaround is happening at the
same time that China’s penetration in Brazil is growing
-3.0%
2009
2007
-8.0%
2005
Electricity: Large investments are planned for the
electricity sector in Brazil over the next few years. EPE
– Brazil’s Energy Research Company – forecasts that
electricity consumption will grow roughly in line with
GDP. Therefore, if no additional energy is supplied,
Brazil energy grid risks shortfalls as soon as this year.
% oya
2003
Source: Plano Estratégico Petrobras 2020.
Figure 37: Industrial GDP
2001
E&P - Exploration and Production
24
and that the BRL has been appreciating. Still, despite a
loss in share, industrial GDP had a very strong
performance in 2010, especially in 1H.
1993
Total Capex
% of total
1999
US$ bil
1997
Table 27: Petrobras Capex 2010-2014 – Distribution by Area
1995
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Source: IBGE.
Industrial activity in Brazil is pretty much concentrated
in the Southeast region, mainly in the state of São
Paulo. The region is an industrial center marked by
diversity and production volume. The industry in the
Southeast is technologically more sophisticated than in
the other regions and thus attracts a lot of multinational
companies, mainly because of its more specialized labor
market and its strong consumer market. In the South,
industry has an important linkage to agricultural
production. The region is also an important producer of
intermediate
goods,
complementing
Southeast
production. The Northeast industry is more focused on
agribusiness. The region has been evolving lately but
still suffers from the South-Southeast competition. The
industrial activity in the North and Midwest is
unimpressive compared to that of the other regions, but
investment programs are aiming to improve it.
In 2010, industrial production increased by 10.4% in
Brazil, but coming from a very low base, as industry
contracted 7.4% in 2009. The 2010 result is the
strongest since 1986, but most of the gains were in 1H
(16.2% versus 5.6% in 2H). During 2H, industrial
production disappointed, and it is widely thought that
some of the weakness is due to export-intensive sectors,
which have been hampered by the strong exchange rate.
Also, a reverse import substitution might be taking
place, as the strong FX make import products more
attractive than domestic ones amid an environment of
strong demand.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 38: Industrial Production
extremely high levels of production. In the same period,
production of nondurable goods stayed practically
unchanged, with only moderate oscillations.
% oya
20%
15%
10%
5%
Figure 40: Durable vs. Nondurable Goods Production
0%
% oya
-5%
-10%
60%
-15%
-20%
Jan-03
40%
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
20%
0%
Source: IBGE.
-20%
The industrial sectors that stood out in 2010 were
vehicles, machinery and equipments, and basic
metallurgy, increasing by 24.2%, 24.3% and 17.4%,
respectively. The sector that underperformed most was
tobacco, decreasing production 8% in 2010.
Capital goods: The capital goods industry did
extremely well in 2010, increasing by 21%. This
industry was the most affected during the crisis but was
also the one with the strongest recovery.
Figure 39: Industrial Production by Category
% oya
30
20.8
20
11.4
10.5
10.3
5.2
10
Oct-05
Jul-06
Apr-07
Durable Goods
Jan-08
Oct-08
Jul-09
Apr-10
Non-Durable Goods
Source: IBGE.
Consumption
Consumption has been a compelling story in Brazil
in the last few years. The intensive migration of lowerincome Brazilians to the middle-income segments
brought to the market more than 30 million potential
consumers who are able to buy things that were out of
their consumption universe before, especially as they
have access to credit. In 2010, retail sales gained 10.9%,
ahead of the 5.9% registered in 2009.
Figure 41: Retail Sales
% oya, 3MMA, nsa
0
-10
-20
-40%
Jan-05
-17.4
Capital Goods
-8.8
Intermediate Goods
-6.4
-7.4
Total Industry
2009
-1.5
14.0%
Consumer
Semi and Non-
12.0%
Durables
Durables
10.0%
2010
8.0%
6.0%
Source: IBGE.
4.0%
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jul-05
Jan-06
Jul-04
Jan-05
Jan-04
2.0%
Consumer goods: We can differentiate the consumer
goods production into two main groups: durable goods,
and nondurable goods. The figure below shows that
durable goods react more aggressively to the economic
scenario. When the economy is strong, consumption of
durable goods soon starts to boom, encouraged by
attractive credit conditions and high levels of consumer
confidence. On the other hand, when the economy is
passing through a recession period, the production and
the consumption of durable goods are strongly affected
once
consumers
prioritize
necessary
goods
(staples/nondurable goods) over durable goods.
Source: IBGE.
The positive consumption environment is marked by a
low unemployment rate and a constant increase in real
wages, which have boosted consumer confidence.
Indeed, the consumer confidence index reached record
levels in 2010.
This was pretty much what happened in the last three
years. The economic crisis decelerated the production of
durable goods, but the country’s recovery and the robust
environment stimulated the sector, which reached
25
Emy Shayo Cherman
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Latin America Equity Research
18 April 2011
Figure 42: Consumer Confidence NSA
Figure 44: Household Ownership
% of Household
125.0
120.0
115.0
110.0
105.0
100.0
Sep-10
Jan-10
May-10
Sep-09
Jan-09
May-09
Sep-08
Jan-08
May-08
Sep-07
Jan-07
May-07
Sep-06
May-06
Jan-06
Sep-05
95.0
Freezer
Internet Access
Computer
Laundry
Water Filter
Telephone
Radio
Refrigerator
Telev ision
Ov en
Electric Energy
0
Source: FGV.
10
20
30
40
50
60
70
80
90
100
Source: PNAD 2008.
The consumption of durable goods is booming,
stimulated by the facilities offered by the credit market.
The figure below shows the commerce activity indicator
for furniture, appliance, electronics and computers,
which is the basket most positively affected by this
consumption boom. The evolution of consumption is
clear, since the index more than tripled in ten years.
Figure 43: Consumption of Furniture, Appliance, Electronics
and Computers Index
Annual Average, volume
400
333.3
350
300
249.6
2005
2006
2007
2008
2009
2010
Source: Serasa Experian.
Brasil has one of the largest consumer markets in the
world, ranked 9th out of 133 countries by the World
Economic Forum.The top five markets by size are the
US, China, Japan, India and Germany. Brazil has the
largest domestic market in Latin America.
The household ownership of consumer goods is
improving, and in 2008 almost 100% of the population
had electric energy and 95% had a television. The
penetration of personal computers in Brazil is still low,
but this number is likely to increase rapidly in the next
years as computers become more accessible to the
lower-income segments. In 2002 computer penetration
was 14.2%, but it had jumped to 31% by 2008.
4.7
4
2.9
2
1.9
1.7
1.7
1.7
1.6
1.5
1.2
US
2004
6.9
Italy
2003
0
8
7
6
5
4
3
2
1
0
Spain
2002
50
UK
2001
100
France
2000
Figure 45: Inhabitants per Vehicle (2008)
137.8
Japan
114.7
Germany
99.4
Poland
96.3
South Korea
100.0
Mexico
200
201.0
Argentina
180.9
Brazil
250
150
365.4
295.6
In 2009/2010 there was a very strong advance in the
automobile market. In order to stimulate the domestic
market after the 2008 crisis, the government reduced the
Industrialized Product Tax – the IPI – thus decreasing
auto prices and increasing consumption a great deal.
The tax incentive ended in 1Q 2010, but even so, auto
sales continued to grow, reaching an all-time record in
2010 of over 3 million units. However, even with the
recent good performance, Brazil is still a laggard in
terms of vehicles per capita. There are 6.9 inhabitants
per vehicle in Brazil, while in Mexico there are 4, and in
the US there is almost one vehicle per person.
Source: Anfavea.
Consumption allocation: According to a survey
conducted by IBGE, called Pesquisa do Orçamento
Familiar (POF), the most representative item in the
consumption basket of an average family in Brazil is
housing. On average 35.9% of total consumption is
destined for housing, which encompasses rent, furniture,
appliances, water, gas, electricity and taxes. The second
main item is food, composing 19.8% of total
consumption, followed by transportation, responsible
for 19.6% of consumption expenses. These three main
items correspond to 75% of total consumption.
The consumption breakdown points to some social
weakness that can be observed every day in Brazil.
Expenses for education correspond on average to only
3% of total consumption, while in Mexico, for example,
26
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18 April 2011
this ratio jumps to 9%. The greatest problem in Brazil is
the magnitude of the expenses associated with primary
necessity items, composing 75% of an ordinary family’s
income and leaving only 25% for other expenses.
of the activity exercised; (2) the payroll survey, known
as CAGED, is released by the labor ministry and shows
how many people were hired and fired in the formal
labor market.
Table 28: Consumer Spending Breakdown as a % of Total
Household Consumption (2008)
The household survey
The unemployment rate in Brazil has improved
significantly, especially during the year of 2010. The
rate was at 5.3% in December 2010, a record-low mark,
leading some economists to argue that the country has
already reached full employment.
5.5
Transportation
19.6
Hygiene and Personal Care
2.4
Health Care
7.2
Education
3.0
Culture
2.0
8.0
Smoke
0.5
7.0
Personal Services
1.1
6.0
Other
2.9
Figure 47: Unemployment Rate
%, until YE2010
11.0
10.0
9.0
Sep-10
May-10
Jan-10
Sep-09
Jan-09
May-09
Jan-08
Sep-08
Source: POF – IBGE.
May-08
Jan-06
5.0
Sep-07
35.9
Clothing
May-07
Housing
Jan-07
19.8
Sep-06
%
Food
May-06
%
Items
Source: IBGE.
Also, it is interesting to note that consumption is
allocated differently among the regions. The poorer the
region, the higher the share of food consumption in the
total expenditure basket, as resources are scarcer.. In the
North, for example, food consumption represents 25.8%
while in the Midwest this percentage is 17.7% of total
household consumption.
Figure 46: Consumption Allocation by Region (2008)
%
100%
80%
60%
40%
24.7
24.1
24.8
19.6
16.5
18.2
33.6
32.8
19.8
25.8
24.2
18.3
18.5
17.7
Brazil
North
Northeast
Southeast
South
Midw est
35.9
20%
0%
Food
Housing
24.6
23.2
19.5
21.9
21.2
37.2
35
37.9
25
Transportation
Others
Source: POF – IBGE.
Despite the decrease in the unemployment rate, there is
a concerning issue that is becoming more apparent
lately: the lack of skilled labor. The demand for skilled
labor is increasing, and the society has not been able to
meet companies’ needs. Trying to solve this problem,
corporates are creating training programs inside their
own plants to qualify future employees. This is a longterm issue, and its only solution is constant
improvements in the education system, which is still
very precarious in Brazil.
Another important development in terms of the labor
market is the increasing share of formal employees in
the workforce. In 2010 more than 50% of Brazilians
were registered workers. On the other hand the share of
people who work informally is decreasing.
Figure 48: Composition of Labor by Type of Job
%
60.0
Labor
50.0
In 2010 the labor market in Brazil had a very
positive performance, perhaps one of the best in the
world. In Brazil there are two main job surveys: (1) the
household survey is conducted by the IBGE and is a
general survey that includes anyone over 10 years of
age who has worked in the reference week, independent
30.0
51.6
44.8
40.0
21.7
20.0
17.5
19.0
18.1
5.0
10.0
4.5
9.4
8.3
0.0
Formal Workers
Informal Workers
Self employ ed
Dec-05
Employ er
Others
Dec-10
Source: IBGE.
27
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18 April 2011
CAGED
The CAGED survey records the total number of payroll
additions and subtractions on a monthly basis. This is an
important thermometer for the market, once the high
number of net hires is correlated to the good
performance of economic activity. For example, in 2010
more than 2 million new jobs were created. This
number represents an all-time record and more than
double the 2009 level.
extremely significant increase in the wage mass, which
reached its strongest performance since the start of the
series, rising by 9% just in 2010.
Figure 51: Real Wage Mass
% oya, 3mma
10.0%
8.0%
6.0%
Figure 49: Net Formal Job Creation (Hires – Fires)
4.0%
Thousands
1,617
1,523
1,254
1,500
658
591
2000
2001
762
645
0
2003
2004
2005
Nov-10
Jun-10
Jan-10
Aug-09
Mar-09
Oct-08
May-08
Jul-07
Dec-07
Feb-07
Apr-06
Sep-06
995
500
2002
Jun-05
Source: IBGE.
1,452
1,229
Nov-05
2,137
2,000
1,000
Jan-05
2.0%
2,500
2006
2007
2008
2009
2010
Source: CAGED.
Minimum wage: Since the implementation of the Real
Plan in 1995, the minimum wage has grown 445%. In
real terms, this is good evolution, considering that in the
same period inflation rose 200%.
Figure 52: Minimum Wage Evolution
The breakdown below shows that new hires in 2010
were more concentrated in the service sector, which was
responsible for 40% of total new job creation.
Commerce had the second-best performance, with 24%
of total hires, followed by manufacturing industry, with
23%. The only category with negative net hires was
agriculture, which lost 25,946 jobs in 2010.
R$ per month
600
500
400
300
200
130 136 151
100 112 120
180 200
240 260
300
350
380
415
465
510
545
100
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Figure 50: Job Creation by Category – 2010
Source: MCM Consultores.
%
Others - 1%
Manufacturing
Industry - 23%
Serv ice
40%
Construction
12%
Commerce - 24%
Source: CAGED.
The effects of the booming labor market in Brazil were
not restricted to unemployment rate and formal job
creation. In 2010 there were also improvements in terms
of real wage and wage mass. Real earnings increased
from R$1,430/month in December 2009 to
R$1,515/month in December 2010, registering an
improvement of 5.9%.
The combination of the improvements in the real wage
and in the number of occupied workers generated an
28
The minimum wage adjustment happens according to a
formula. It stipulates that the minimum wage is
readjusted by the prior-year inflation plus the level of
GDP growth from two years back, if positive. This logic
of readjustment should occur at the beginning of every
year. At the start of 2011, the government decided to
abide by this rule and make it a law that will be in place
until 2015. Despite several complaints from workers’
unions, newly elected President Dilma Rousseff decided
to abide by the minimum wage formula, and the
minimum wage was set at R$545.
What is interesting is that each increase in the minimum
wage immediately triggers a chain of higher
government spending. For 2011, for example, a 1%
increase in minimum wage immediately translates into
an additional R$1.5 billion in government expenditures
per year. This happens because a large set of
government spending is tied to the national minimum
Latin America Equity Research
18 April 2011
Table 29: Inflation-Targeting System
Inflation
History
Target
Tolerance Interval
IPCA %oya
8.0%
6.0% - 10.0%
8.94
2000
6.0%
4.0% - 8.0%
5.97
2001
4.0%
2.0% - 6.0%
7.67
2002
3.5%
1.5% - 5.5%
12.53
2003
3.25%
1.25% - 5.25%
9.3
4.0%
1.5% - 6.5%
3.75%
1.25% - 6.25%
5.5%
3.0% - 8.0%
2004
Inflation performance over the years tells us a lot about
Brazil’s history. Until 1994 the country’s economy
suffered periods of extremely high inflation, which were
only overcome by the introduction of the Real Plan and
the Brazilian Real (R$), the current currency. Nowadays
Brazil works with the inflation-targeting system to keep
inflation under control.
7.6
2005
4.5%
2.0% - 7.0%
5.69
2006
4.5%
2.5% - 6.5%
3.14
4.46
2007
4.5%
2.5% - 6.5%
2008
4.5%
2.5% - 6.5%
5.9
2009
4.5%
2.5% - 6.5%
4.31
2010
4.5%
2.5% - 6.5%
4.91
2011
4.5%
2.5% - 6.5%
-
2012
4.5%
2.5% - 6.5%
-
Source: Banco Central do Brasil. Note: In January 2003, adjusted inflation targets of
8.5% for 2003 and 5.5% for 2004 were established.
The inflation-targeting system seems to be working well
for Brazil. Since 2006 the target has been fixed at 4.5%
with a tolerance interval of 2.0%, meaning that inflation
can hover between 2.5% and 6.5%. Still, it is widely
understood that the central bank objective is to aim at
the center of the target (4.5%) and not elsewhere within
the bands.
Figure 53: Inflation Rate since 2006
%
20
15
10
5
IPCA
Target
max
Jul-10
Jul-09
Jul-08
Jul-07
Jul-06
Jul-05
Jul-04
Jul-03
Jul-02
0
Jul-99
Inflation-targeting system: The inflation-targeting
regime was adopted in 1999, giving to the Central Bank
the responsibility of conducting monetary policy. The
BCB objective is to reach the inflation target. The target
is determined by the National Monetary Council
(CMN), which is composed of the Finance Minister, the
Planning Minister and the Governor of the Central
Bank. The IPCA is the inflation index that benchmarks
the process. The CMN sets not only an inflation target
but also an interval tolerance band for inflation. The
CMN meeting usually takes place in June of each year,
and its members set the target for two years after (for
example, in 2011 the target for 2013 will be set).
Year
1999
Jul-01
wage, which is used as an index for minimum pension
benefits (social security) and as an indirect index for the
spending of a number of social programs.
Jul-00
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min
Source: IBGE; Banco Central do Brasil.
Inflation timeline
1920: Inflation started to be measured in Brazil.
1945: Brazil’s economy reached considerable stability,
with inflation at 3% a year.
1960s: Period of economic growth and industrialization
promoted by President Juscelino Kubitschek. Inflation
rates increased to 90% a year.
29
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1964-1985 (military regime): During the whole
military regime, inflation remained at high levels. The
authorities used to manipulate data in order to keep the
rates low. Hence, data from that period are not reliable.
1986-1994: After the redemocratization Brazil went
through its most turbulent period relative to inflation.
The rate jumped from 72% in 1986 to 1,973% in 1989.
Prices used to rise literally every day. Many economic
plans were introduced (Bresser, Cruzado, Collor, among
others), but all attempts were unsuccessful. The middleincome segment was hardest hit: Wages lost value very
quickly, and in 1990 President Collor confiscated
banks’ savings.
1994-1999: In 1994, then-Finance Minister Fernando
Henrique Cardoso announced the Real Plan, putting in
circulation a new currency and aiming to finally reach
price stabilization. In this period, the inflation rate fell
dramatically, from 916% in 1994 to 22% in 1995, and
the country started to rescue its credibility in the
international scenario. The fixed exchange rate was the
main anchor of price stability, which over time became
extremely costly and unsustainable for the government.
The successful introduction of the Real Plan and lower
inflation led to the election of President Cardoso in
November 1994.
1999-Now: With the floating of the exchange rate in
January 1999, inflation fears rose. The government
acted quickly, increasing taxes, cutting spending and,
more importantly, introducing the inflation-targeting
regime. This regime is in place now and, with the
exception of the period between 2001 and 2003, the
targets have been met.
Indexation: One of the key problems with rising prices
in Brazil is that the economy is still indexed to inflation
to some degree. For example, the formula of minimum
wage readjustment has a price component, the return of
pension funds is inflation plus 6%, rents are indexed to
inflation, and so are utility tariffs and a number of other
contracts. One of Brazil’s key challenges is to de-index
the economy.
Main Inflation Indexes
Brazil is well known for having a myriad of inflation
indexes, many times leading to significant confusion.
There are two families of indexes that are the most
important: the IGPs, collected by Fundação Getulio
30
Vargas (FGV), and the IPCs, collected by Instituto
Brasileiro de Geografia e Estatística (IBGE).
The IPC family (IBGE)
IPCA: The IPCA is today the benchmark consumer
price index of Brazil, mostly because it is the inflation
index used for inflation-targeting purposes by the
Central Bank. The survey of prices usually takes place
during the calendar month and is released before the
10th of the next month. It takes into account costs for
families that earn between one and 40 minimum wages
and that live in 11 metropolitan regions. The IPCA-15
has the same methodology as the IPCA, the only
difference being the price collection date, which is the
15th of the reference month, with the prices reflecting
changes since the 15th of the month before. The IPCA
was 5.9% in 2010 while the IPCA-15 was 5.79%.
Table 30: IPCA Weight per Category and Metropolitan Region
(Dec-2010)
%
Weight per Price Category
Weight per Metropolitan Area
Food and Beverage
23.0
São Paulo
33.1
Housing
13.3
Belo Horizonte
10.8
Household Articles
4.2
Salvador
6.9
Clothing
6.8
Rio de Janeiro
13.7
Transportation
18.9
Porto Alegre
8.9
Healthcare
10.8
Curitiba
7.4
Personal expenses
10.4
Recife
4.1
Education
7.2
Belem
4.2
Communication
5.5
Fortaleza
3.9
Goiania
3.7
Brasilia
3.4
Source: IBGE.
INPC: The INPC has the same methodology as the
IPCA but takes into account households that earn
between one and six minimum wages monthly (instead
of up to 40 minimum wages). Therefore, the weights for
each category are different than the IPCA’s. Food, for
example, has a heavier weight in the INPC calculation
than in the IPCA. The INPC closed 2010 higher than the
IPCA because it has a larger food weighting. While the
INPC rose by 6.4%, the IPCA ended the year at 5.91%.
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Figure 54: IPCA vs. INPC
= 66%). It is in the IPA that one can measure the price
pressure emanating from commodity prices. It is also
the IPA that captures changes in the exchange rate, as
many commodities that are part of the index are priced
in USD. The IPA-10 gained 13.7% in 2010 on higher
commodity prices (especially agriculture) after
declining by 4.4% in 2009.
oya%
15%
12%
9%
6%
3%
0%
1999
2000
2001
2002
2003
2004
2005
INPC
2006
2007
2008
2009
2010
IPCA
Source: MCM Consultores.
The IGP family
The IGP family is composed of three main indexes:
the IGP-DI, the IGP-M and the IGP-10. All of them
have the same composition, the only differences being
the collection and release dates. The IGP-M has two
previews before the final monthly number is released. It
is the most common FGV index because it is the one
used to readjust contracts – for example, rents.
Table 31: IGP Price Index Calendar
Index
IGP-M
IGP-10
IGP-DI
Collection Date
From the 21st of the previous
month to the 20th of the current
month
From the 11th of the previous
month to the 10th of the current
month
Calendar month
Release Date
Around the 30th of each
month, with two earlier
previews
Around the 20th of each
month
Around the 10th of each
month
Source: FGV.
The IPC (consumer prices) surveys households that
earn between one and 33 minimum wages in 12 major
capital cities. It classifies products in seven categories
(food, housing, clothing, health/personal expenses,
education/recreation, transportation, others). The IPC
increased by 6.1% from January to December 2010.
The INCC (construction costs) takes into account
construction costs and subdivides the index into labor
costs and materials/services. The INCC increased by
7.6% in 2010.
IPCA vs. IGP-M
Over time, the IGP-M and the IPCA tend to
converge. Still, major changes between both indexes
happen at times of commodity price pressure (which is
stronger in wholesale prices than in retail) and at times
of wide FX variation. Note in the chart below that the
IGP-M surpassed by far the IPCA in 1999, 2002, 2008,
and 2010, times when the BRL and/or commodity
prices oscillated most.
Figure 56: IPCA vs. IGP-M
The IGPs have an interesting composition: 60% of
the index is composed of wholesale prices (IPA), 30%
of the index is consumer prices (IPC) and the remaining
10% covers construction costs (INCC).
% oya
23.0%
18.0%
13.0%
8.0%
Figure 55: IGP-M and Its Components
3.0%
% oya
-2.0%
1999
2000
2001
41.0%
2002
2003
2004
IPCA
2005
2006
2007
2008
2009
2010
IGP-M
31.0%
Source: MCM Consultores.
21.0%
11.0%
Central Bank and Monetary Policy
1.0%
-9.0%
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
IPA
Agriculture
Jul-09
Jan-10
Jul-10
Industry
Source: MCM Consultores.
The IPA (wholesale prices) is the closest matrix that
Brazil has for producer prices (PPI). It can be classified
by origin of the product (agriculture = 29%, industrial =
71%) or by its destiny (consumption = 34%, production
The Central Bank in Brazil was created in 1964 and is
the main monetary authority in the country. Since its
creation, the central bank of Brazil has had more
governors than years of existence. Remaining more than
a year as the governor of the central bank was a
challenge due to problems related to economic stability
and publicly perceived credibility. Former Governor
Henrique Meirelles was the one who remained the
31
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Latin America Equity Research
18 April 2011
longest in the post: He was governor during the eight
years of Lula’s mandate (2003-2008).
Table 33: Recap of recent macro-prudential measures
Date
25-Feb-10
The current governor, chosen by President Dilma
Rousseff, is Alexandre Tombini. He holds a Ph.D. in
economics from University of Illinois and has worked
in the Central Bank since 1998. He pledged to abide by
economic continuity, focused on inflation control and
considerable autonomy for the setting of interest rates.
Central Bank Chairman
Period
Antonio Carlos Lemgruber
Mar-85 to Aug-85
Fernão Bracher
Aug-85 to Feb-87
Francisco Gros
Feb-87 to Apr-87
Lício de Faria
Apr-87 to May-87
Fernando Milliet
May-87 to Mar-88
Elmo Camões
Mar-88 to Jun-89
Valdico Bucchi
Jun-89 to Mar-90
Ibrahim Eris
Mar-90 to May-91
Francisco Gros
May-91 to Nov-92
Gustavo Loyola
Nov-92 to Mar-93
Paulo Cesar Ximenes
Mat-93 to Sep-93
Pedro Malan
Sep-93 to Dec-94
Gustavo Franco
Dec-94 to Jan-95
Brazil's President
1-Dec-10
Announced a 15% minimum payment for credit card bills
1-Dec-10
Increase in time deposits RR to 20% and additional RR for both
demand and time deposits to 12%
Increase in capital requirements on long-term consumer loans
1-Dec-10
29-Mar-11
6-Apr-11
8-Apr-11
José Sarney
Fernando Collor
Itamar Franco
Persio Arida
Jan-95 to Jun-95
Gustavo Loyola
Jun-95 to Aug-97
Gustavo Franco
Aug-97 to Mar-99
Armínio Fraga
Mar-99 to Jan-03
Henrique Meirelles
Jan-03 to Jan-11
Lula
Alexandre Tombini
Jan-11 to -
Dilma Rousseff
Fernando Henrique
Source: Brazil Central Bank.
It is important to note that the current central bank has
been using hybrid instruments of monetary policy to try
to contain rising inflation. The so-called (and now
famous) macro-prudential policies are aimed mostly to
cool down credit markets so that demand is also
contained. Today, most regulatory measures adopted by
the central bank are known as macro-prudential
measures, whether they are aimed at monetary policy or
at FX policy.
32
28-Jun-10
Increase in time deposits RR to 15.0% from 13.5% and
additional RR to 8.0% for both demand and time deposits
Increase in demand deposits RR to 46% from 42%
28-Mar-11
Table 32: Brazil Central Bank Chairmen since 1985
Description
IOF tax on credit card expenditures abroad were increased to
6.38%, from 2.38%
The government introduced a 6% IOF tax on external loans
shorter than 1 year
Extension of the 6% IOF tax on external loans for issuances
maturing in up to two years
IOF tax on consumer credit raised to 3.0% (from 1.5%)
Source: J.P. Morgan Economics.
BCB independence/autonomy: The Central Bank in
Brazil is not independent from the government and is in
fact a kind of sub-arm of the Treasury Ministry.
However, since the Cardoso years, the central bank
enjoys de facto operational autonomy, having the
freedom to decide on interest rates without having to
answer to political pressure. This autonomy has given
credibility to the institution and, therefore, to the
interest rate decisions of the past few years, at least in
the great majority of cases. Having said that, it is
important to note that the BCB’s autonomy has been
questioned lately as markets are unsure if the monetary
authority will indeed take the bitter medicine to allow
inflation to converge with the targets or if it will tolerate
inflation higher than the center of the target.
The COPOM: As mentioned in the inflation section,
Brazil operates under an inflation-targeting system, and
it is the responsibility of the central bank to set up an
interest rate that leads to the convergence of inflation to
the set targets. Interest rates are set by the Monetary
Policy Committee – COPOM – which was established
in 1996 with the objective to conduct monetary policy.
There are monetary policy meetings every six weeks for
a total of eight meetings a year. The COPOM has eight
voting members who decide on interest rates: The
Chairman of the central bank, the directors of monetary
policy, economic policy, special studies, norms and
regulation, international affairs, surveillance and
regulation, and administration. If there is a tie in the
vote, it is up to the Chairman to break it.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 57: Selic Rate vs. Inflation yoy Growth
%
26
23
16%
14%
Selic Rate
12%
20
Inflation yoy grow th
17
10%
8%
14
6%
11
4%
8
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
2%
Source: BCB and MCM Consultores.
Exchange Rate Policy
In January 1999 the government finally allowed the
BRL to float. This meant that the Central Bank was no
longer responsible for sustaining the exchange rate in
the pre-established limits, which in 1998 had led to a
depletion of about US$50 billion in international
reserves.
Central bank’s role on the FX: When the floating
exchange rate was introduced in 1999, the Central Bank
was supposed to intervene only occasionally and in a
limited way. But since 2004 the BC has done
interventions almost daily, acting as a dollar buyer or
seller, depending on the FX trend at the time. Lately, the
Central Bank has also been using regulatory barriers
(mostly taxation), aiming to control FX inflow into
Brazil.
Since the introduction of the floating exchange system
in 1999, the economy has passed through different
periods, leading to significant volatility in the BRL,
especially in times of crisis.
2002/03: Brazil was facing a severe confidence crisis
triggered by uncertainties regarding the presidential
election. The main running candidates were Luis Inácio
Lula da Silva (PT) and José Serra (PSDB). The market
was concerned that Lula, the opposition candidate,
would win the elections and make good on the populist
themes that marked his previous electoral attempts.
Markets were unsure if Lula would follow the economic
policies in place during the Cardoso administration and
if he would fulfill the commitments with the public
debt. In this period the dollar came close to R$/US$4,
the highest value since the implementation of the BRL.
2008: The most serious global economic crisis since the
Great Depression of 1929 generated a global confidence
crisis. The collective uncertainties led foreign capital to
leave Brazil, searching for what it hoped were safer
havens, thereby causing BRL weakness.
2010/11 – “FX war”: A world of negative real interest
rates and plenty of liquidity led to very high inflows
into Brazil, inflows attracted by strong economic
recovery post the crisis and by high interest rates. The
currency strengthened and led Finance Minister Guido
Mantega to declare in 2010 that Brazil was in a
currency war against other nations. The main concern of
the authorities is avoiding the de-industrialization of the
country, which would be caused by a lack of
competitiveness of the Brazilian manufacturing industry
in light of the strong exchange rate.
Figure 59: Real Exchange Rate
160
140
120
Figure 58: Exchange Rate
100
R$/US$
80
3.8
Inplementation of the
President Lula
3.3
Floatinting Ex gchange
Election
2.8
rate regime
Global Credit
Crisis
60
Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Source: Banco Central do Brasil.
2.3
1.8
1.3
0.8
Jan-95
Jul-96 Jan-98
Jul-99 Jan-01
Jul-02
Jan-04
Jul-05
Jan-07
Jul-08 Jan-10
Source: Bloomberg.
1999: The introduction of the floating exchange regime
led to a significant depreciation in the BRL, taking it
from R$/US$1.2 in December 1998 to R$/US$2.05 in
January 1999, a depreciation at almost 70% in just one
month.
FX controls
The strengthening currency led the government to
implement a series of measures to avoid the overappreciation of the FX, starting in October 2009. FX
controls are not new to Brazil, and they were introduced
in the recent past upon the advent of the Real Plan in
1994. Then, the objective of capital controls was not to
put additional pressure on the pegged exchange rate in a
context of a rising current account deficit. The most
commonly used instrument was the IOF (tax on
33
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
financial operation), which was increased or lowered
several times during the 1990s depending on whether
the government was aiming to attract or dissuade
foreign portfolio flow.
Figure 60: Interest Rate by Country (end of 2010)
%
Brazil
Indonisia
India
Turkey
China
Hungary
South.Africa
Australia
Chile
Poland
Russia
Thailand
South.Korea
EU
Sweden
UK
Czech.Repuclic
US
Japan
12
10.75
10
6.5
6.5
6.25
8
5.5 5.5 5.56
6
3.5 4.0
2.5 2.75 3.0
4
2.0
0.75 1.0 1.25
2 0.05 0.125 0.5
0
External Sector
Exports and imports in Brazil have risen
dramatically in the last decades but especially since
2003. Until the 1990s the government was the main
promoter of economic growth, keeping the economy
closed for purchases in the external market. Imports
were restricted by pricing and non-pricing barriers and
also by exchange rate controls. After 1990, the barriers
were gradually eliminated and the exchange rate
appreciated. Thenceforth, external commerce increased
significantly, and Brazil started to be an important
player in the international scenario, mainly as a
commodity exporter.
Source: J.P. Morgan.
Figure 61: Trade Current (Exports + Imports)
Table 34: Recent History of Brazil’s IOF on Securities
Date
Measure
17-Mar-08
1.5% only on fixed income
23-Oct-08
Reduced to zero
19-Oct-09
2% on fixed income and equities
5-Oct-10
4% on fixed income; 2% maintained for equities
19-Oct-10
6% on fixed income; 2% maintained for equities
Source: J.P. Morgan.
34
US$ Billion
500.00
400.00
300.00
200.00
100.00
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0.00
1990
Recently, the government has started to use the IOF
more often. Objectives differed, with the 2008 IOF hike
aimed at boosting tax revenues, which were depleted by
the end of the CPMF tax. From 2009 onward, the clear
objective of taxation was to reduce the volume of
exchange rate inflows into Brazil. In October of that
year, the government announced a 2% tax (IOF) on all
foreign purchases of Brazilian securities (equity and
fixed income). The currency responded to the measure,
but during 2010, appreciation forces were in place once
more and in October 2010, the government announced
that the IOF tax for foreign purchases of fixed income
instruments would increase from 2% to 6%. There were
other measures adopted, for example the increase in the
limit of dollars that the Treasury is allowed to buy in the
open market and also permission granted for the
Brazilian Sovereign Wealth Fund to purchase FX. In
2011, the central bank announced that reserve
requirements would rise from 0% to 60% on USD short
positions held by local institutions. It also imposed a 6%
IOF tax on external corporate bonds and notes with
maturities of less than 360 days.
Source: MDIC
Since Brazil opened its doors to the international market
in the early 1990s, deficits in the trade balance were
observed just 6 times (out of 20). Between 1995 and
1999, when the Real Plan was in place, the BRL was
strong against the dollar, encouraging imports over
exports. Since 1999, after the implementation of the
floating exchange rate, trade balance results started to
get better, and from 2001 on the balance presented a
surplus. The increase in commodity prices observed
since the end of 2002 was a very important factor
behind the increase in Brazilian exports. On average (in
1990-2010) Brazil has had a trade surplus of US$14.9
billion, and in 2010 the trade surplus was US$20.3
billion. The government aim is to maintain the trade
surplus at current levels at the very least, though
consensus expects it to fall by half in 2011.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 62: Trade Balance
Figure 64: Brazil’s Export Composition by Category (2010)
US$ Billion
%
Others - 2%
50
Semi-Manufactured
40
14%
30
Commodity
20
45%
10
0
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-10
Manufactured
39%
Source: MDIC
Source: MDIC.
Exports
In 2010 Brazil exports reached US$201.9 billion, and
in 2009 the country was the 23rd-largest exporter
economy in the world. The main export products are
iron ore (14.3%), soy (8.4%) and crude oil (8.0%). As
we can see in the table below, nine of the 11 most
representative products in Brazil’s export basket are
commodities, enforcing once more the Brazilian
identification with this category of product. The only
non-commodity products that are main exports are autos
and airplanes.
Compared to other countries in Latin America,
Brazil can be considered a relatively closed economy,
with exports/GDP of only 11.2% in 2010, pretty much
the same level as in 2009. Looking to the main Latin
economies, Brazil is the one with the lowest
exports/GDP ratio. In Mexico exports represent 28% of
GDP, in Chile 38% and in Argentina 21%. The good
news, therefore, is that Brazil’s GDP ends up being
relatively insulated from international crises, as we saw
in 2008-2009.
Figure 63: Total Exports as a % of GDP (2009)
%
50.0
46.5
40.0
38.1
35.7
27.8
30.0
26.5
23.6
21.4
20.0
Table 35: Main Brazilian Exports (2010)
%
Products
% of Total in 2010
Iron Ore
14.32
Soy (all products)
8.40
Oil
18.3
16.3
11.3
Crude Cane Sugar
8
4.61
Brazil
Colombia
Venezuela
Argentina
Peru
Uruguay
Mexico
2.57
Bolivia
2.87
Coffee
Chile
Poultry
0.0
Paraguay
10.0
Source: World Bank.
Despite attempts of diversification, Brazil is still one of
the greatest commodity exporters in the world. Indeed,
the participation of commodities in Brazil export basket
is increasing and reached its peak in 2010, when 45% of
total exports were composed of commodities, not
counting those products that are industrialized but have
commodities as the main input. If one considers
industrialized products that are mostly made of
commodities, the participation of commodities rises to
about 60% of total exports. Manufactured goods, which
were responsible for about 60% of exports in 2000,
declined to 39% in 2010. Semi-manufactured products
remained practically unchanged in the last two decades
and are responsible for around 14% of total exports.
Pulp
2.35
Passenger Autos
2.19
Airplanes
1.97
Beef
1.91
Sugar
1.71
Others
49.10
Source: MDIC.
The same happens when we look to the main export
companies. The great majority of the companies listed
below are commodities exporters. Indeed, only Embraer
(rated N by JPM aerospace & defense analyst Joseph
Nadol) is purely a manufactured products exporter. The
other nine companies have at least one part of their
exports focused on commodities. What is also
interesting to note is the export concentration around
Vale (rated OW by JPM Latam metals & mining analyst
Rodolfo de Angele) and Petrobras (rated N by JPM
Latam oil & gas analyst Sergio Torres). Together, these
35
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
two companies are responsible for more than 20% of
total Brazil exports.
the second-largest importer in terms of volume, second
only to Mexico.
Table 36: Top 10 Exports Companies in Brazil (2010)
Figure 65: Brazilian Monthly Imports
%
Main Companies
US$ Billion
% Total Exports
11.91
Petrobras
9.01
13.0
Bunge Alimentos
2.13
9.0
Embraer
2.06
5.0
Samarco Mineração
1.59
Cargill Agricola
1.50
ADM do Brasil
1.30
Braskem
1.22
Sadia
1.13
Brasil Foods
1.05
1.0
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Source: MDIC
Source: MDIC.
Brazil’s largest trade partner is China, with 15.2%
of total export in 2010. In 2009 China overtook the
first position from the US, and that situation prevailed
in 2010. China is not only holding its first position but
also is likely to increase its participation in the next
years. Among Latin America countries, Argentina
appears as an important trade partner, taking 9.2% of
Brazilian exports.
Brazilian imports are well diversified in terms of
country of origin. Imports come mainly from the US
(14.9%), China (14.1%) and Argentina (7.9%). The
European Union as whole is responsible for almost 22%
of total Brazil imports.
Table 38: Origin of Brazilian Imports
%
2008
2009
2010
Country
% of Total
1
1
1
US
14.9
2
2
2
China
14.1
3
3
3
Argentina
7.9
6.9
4
4
4
Germany
Table 37: Destination of Brazilian Exports (2010)
7
6
5
South Korea
4.6
%
5
5
6
Japan
3.8
2008
2009
2010
% of Total
6
7
7
Nigeria
3.3
3
1
1
China
Country
15.2
9
8
8
Italy
2.7
1
2
2
US
9.6
8
9
9
France
2.6
2
3
3
Argentina
9.2
11
14
10
India
2.3
4
4
4
Netherlands
5.1
5
5
5
Germany
6
6
6
Japan
3.5
15
7
7
United Kingdom
2.3
8
16
8
Chile
2.1
9
11
9
Italy
2.1
10
13
10
Russia
2.1
4
Source: MDIC.
Imports
Since Brazil started to combine strong economic growth
with a strong exchange rate, imports started to rise. In
2010 Brazil imports reached US$181.6 billion, and in
2009 the country had the 24th-largest volume of imports
in the world. Among Latin America countries, Brazil is
36
17.0
Vale
Source: MDIC.
In early 2011, China is poised to overcome the US as
the number one source of Brazilian imports. China’s
participation in imports in 2000 was about 2%, rising to
14.1% at the end of 2010.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 66: Imports from China
Figure 68: Current Account
% of Brazil total imports
% of GDP
15
10.5
12
11.6
12.5
14.1
1.0
0.0
8.8
9
-2.0
4.5
-3.0
-4.0
Jan-10
Jan-09
Jan-08
2010
Jan-07
2009
Jan-06
2008
Jan-05
2007
Jan-04
2006
Jan-03
2005
Jan-02
2004
Jan-01
2003
Jan-00
2002
Jan-99
2001
Jan-98
2000
Jan-97
-5.0
0
Jan-96
3
2.4
2.2
3.3
-1.0
7.3
5.9
6
2.0
Source: MDIC.
Source: Banco Central do Brasil.
Brazilian imports’ main feature is the high
concentration of manufactured goods. In 2010, 86.9%
of total imports were industrialized products and 13.1%
were commodities. Specifically, the main imported
items were crude oil (5.6%), passenger vehicles (4.7%)
and medicine (3.1%).
There are two main triggers that led to an increase in the
current account deficit over the last few years. First is
the fact that the trade balance has been shrinking, from
US$40 billion in 2007 to US$20 billion in 2010.
Second, the service deficit has widened significantly
over the past few years, rising from around US$13
billion in 2007 to close to US$28 billion in 2010.
Among Brazilian regions, the Southeast is the
destination of more than half of imports, with almost
40% going to São Paulo. The South appears in second
place, taking 22%. The other 3 regions have a smaller
participation in imports, with the Northeast responsible
for 10%, the North for 7% and the Midwest for 6%.
Figure 67: Imports Destination by Regions (2010)
%
Figure 69: Service Account Deficit Rising
R$ Thousand
0
-5000
-10000
-15000
-20000
-25000
-30000
-35000
Dec-95
Midw est - 6%
North - 7%
Northeast - 10%
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Source: Banco Central do Brasil.
Southeast - 56%
South - 22%
Source: MDIC.
External Accounts
Current account: Brazil’s current account deficit in
2010 was 2.3% of GDP, which means an imbalance
of US$47.5 billion. After a significant period of current
account surplus (June 2003-December 2007), the
country started a new cycle of deficit in 2008. The
goods news is that FDI and portfolio inflows have been
enough so far to finance the external gap.
37
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 39: Current Account by Country
% of GDP
Country
2010
2011E
investing heavily in Brazil on their own count. It is
important to note that the reporting of country of origin
in terms of FDI can be misleading, as the central bank
takes into account only the country where the funds
originated. However, perhaps one country had resources
deposited in a third country and sent the money to
Brazil from there. One good example is probably China,
which appears with only US$392 million in investment,
even though it bought stakes at some Brazilian
companies (notably Sinopec bought 40% of Repsol’s
capital for US$7 billion, and Sinochem purchased 40%
of Peregrino’s oil field for US$1.7 billion). Sobeet, a
Brazilian NGO, estimates that Chinese FDI into Brazil
reached US$17 billion, but this data point doesn’t
appear in the BCB numbers, perhaps because the capital
for payment was sent via other countries, thus not
appearing in the BCB statistics.
2012E
China
5.2
5.7
6.3
Germany
5.3
5.1
4.6
Russia
4.9
5.6
3.9
Japan
2.8
3.1
2.3
Argentina
0.9
0.1
-0.5
Mexico
-0.5
-0.9
-1.1
Chile
1.9
0.5
-1.3
UK
-1.1
-2.2
-2.0
France
-2.1
-2.8
-2.7
US
-3.2
-3.2
-2.8
Brazil
-2.3
-2.6
-3.0
India
-3.2
-3.7
-3.8
Spain
-5.5
-5.2
-4.8
Greece
-10.4
-8.2
-7.1
Turkey
-6.5
-8.0
-8.2
Portugal
-9.9
-8.7
-8.5
Figure 71: Participation of Key Countries in Brazilian FDI
% of total FDI, 2010
Lux emburg
Source: IMF.
16%
Foreign direct investment (FDI): FDI reached US$48.5
billion in 2010, beating its previous all-time record.
For the first few months of 2010 FDI flows were weak,
disappointing the expectations. However, over the last
few months, volume started to improve quickly,
especially in December, when the flow reached
US$15.4 billion, or 32% of total 2010 volume.
The record volume reached in 2010 consolidated the
cycle of increases in FDI, started in 2005 and
interrupted only in 2009, by the economic crisis.
Figure 70: Annual Brazilian FDI
US$ Billion
40.0
28.9 28.6
30.0
20.0
48.46
45.1
50.0
35.6
32.8
19.0
10.8
25.9
22.5
18.1
16.6
15.1
18.8
10.1
10.0
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Banco Central do Brasil.
According to central bank data, the country sending the
most direct investments to Brazil in 2010 was
Luxembourg, responsible for almost 16% of total FDI,
followed by the Netherlands and Switzerland. Clearly,
these do not sound like countries that have been
38
Others
Netherlands - 14%
40%
Sw itzerland
12%
France - 7%
USA - 12%
Source: Banco Central do Brasil.
Looking at a sectoral breakdown for FDI inflows,
industry was the main investment destination, with
36.8% of total FDI, followed closely by agriculture and
mineral extraction (34.5%). In nominal terms,
agricultural and mineral extraction increased by almost
300% oya in 2010, due to a great increase in oil and gas
extraction and in iron ore extraction. It is interesting to
note that services, which was the leading FDI category
in both 2008 and 2009, fell to third place, with only
28.7% of total share. Indeed, in 2010 (Jan to Nov),
services were responsible for 28.7% of FDI inflows,
chief among them investments in commerce (ex-autos),
and financial activities.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 40: FDI Distribution per Sector
Figure 72: Foreign Portfolio Investment in Brazil
% of Total
US$ Billion
Sector
Agriculture and Mineral Extraction
Extraction of Oil and Natural Gas
Metallic Mineral Extraction
100%
% of Total FDI
2009
2010
14.5
34.5
0%
8.4
18.9
-50%
4.1
12.7
42.6
36.8
4.9
14.1
Metallurgy
4.9
14.1
Coke, oil derivates, biofuel
11.8
6.7
Industry
Chemical Products
Services
9.1
21.9
50%
42.9
28.7
Commerce (ex-autos)
7.3
4.8
Financial Services
9.1
3.5
Utilities
3.1
2.2
Source: Banco Central do Brasil.
Portfolio investment: Foreign portfolio net flows
accumulated US$67.8 billion in 2010, which is not only
47% higher than in 2009 but also a record high. Both
equity and fixed income presented good performance.
• Total equity flows (primary and secondary market,
local and ADR) reached US$37.7 billion, being
responsible for 55.6% of total foreign portfolio flow.
Equity investments were pretty much the same as in
2009, but with one great difference. While in 2009 a
great part of flows were destined to the secondary
market, in 2010 it was mostly in the primary market.
Indeed, according to Bovespa, foreign portfolio
inflows in the secondary market were only around
US$3 billion in 2010.
• On the fixed income side, results were extremely
robust, especially before October 2010, when the
government decided to raise the IOF tax for foreign
investments in fixed income from 2% to 6%. One
way or another, fixed income net flows reached
US$30.1 billion in 2010, the highest in history for
the period and almost three times higher than the
inflow observed in the same period in 2009. We
note that fixed income flows have decelerated a
great deal since the imposition of the higher IOF and
remained at low levels in 1Q 2011.
26.2
30.1
37.1
6.8
37.7
-7.6
-100%
2007
2008
2009
Equities
2010
Fix ed Income
Source: Banco Central do Brasil. Note: 2010 data are January to November.
International reserves: Brazilian international
reserves reached US$288.6 billion at the end of 2010,
increasing more than 20% relative to the previous year.
Indeed, reserves have risen very sharply in 2011 so far,
reaching close to US$320 billion at the start of April, an
11% rise from the close of 2010. From 2002 to 2010 the
volume of international reserves increased by almost
700%.
Figure 73: Brazil International Reserves
US$ Billion
350
288.6
300
239.1
250
179.5
200
150
100
50
37.5
48.9
52.5
53.3
2002
2003
2004
2005
192.9
85.2
0
2006
2007
2008
2009
2010
Source: IMF.
In the last few years, Brazil became one of the countries
with the highest level of nominal international reserves
in the world. Actually, Brazil has the highest reserves
among Latam countries and is also among the countries
with the highest reserves in the world.
Figure 74: International Reserves by Country (end of 1Q11)
US$ billion
China
Japan
Russia
Taiw an
Brazil
India
South Korea
Hong.Kong
Mex ico
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
Source: IMF except for China and Taiwan (Bloomberg). China data are for YE2010.
39
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
External Debt
Fiscal Policy
In 2009, external debt in Brazil reached US$350.4
billion, or 19.3% of GDP. Comparing to other LatAm
countries, we observe a contradictory result: Brazil has,
at the same time, the highest volume of debt and the
lowest external debt/GDP ratio. Still, external debt
increased by 26.8% oya 2010. If intercompany loans are
excluded, Brazilian external debt reaches US$271.1
billion.
Table 41: External Debt in Latin America (2010 estimate)
Total External Debt
(US$ Billion)
% of Short
term*
as a % of GDP
Brazil
352.0
16.2%
9.6%
Mexico
199.2
22.3%
18.4%
Chile
85.7
25.2%
39.3%
Colombia
57.0
7.7%
19.7%
Peru
38.5
17.4%
24.1%
Argentina
145.2
22.7%
41.1%
Venezuela
82.1
20.3%
39.0%
Source: J.P. Morgan; Brazil data are from Banco Central do Brasil and IBGE.
The profile of the Brazilian external debt has changed
significantly since the 1980s. Before, the public sector
was the greatest debtor (in 1985, for example, it was
responsible for about 82% of total external debt).
Nowadays, the non-financial public sector accounts for
about 30% of total external debt. In 2010, the public
sector was expected to pay about US$6 billion in
interest payments on external debt.
Table 42: Registered External Debt Stock – By Debtor
As of December 2010
Figure 75: Federal Government Revenues and Outlays
% of GDP, 12 month rolling
22%
20%
18%
16%
14%
Dec-97
Jun-99
Dec-00
Jun-02
Dec-03
Net Rev enues (net of trasnfers)
Jun-05
Dec-06
Jun-08
Dec-09
Total Ex penditures (ex -interest pay ments)
Source: MCM Consultores Associados.
US$ Billion
% of Total
Medium and Long Term Debt
199.5
62.4%
Non-financial public sector
82.8
25.9
The Annual Budget
Financial Public Sector
17.3
5.4%
Private Sector
99.3
31.1%
Short Term Debt
25.0
7.8%
Total External Debt (A)
224.5
70.2%
Intercompany Loans (B)
95.1
29.8%
C = (A + B)
319.6
100.0%
In the first half of each year, the Ministry of Planning
and Budget prepares a document with the main macro
forecasts that are to guide the budgetary process. It then
presents a version to Congress, which amends it and
puts it to vote. The interesting part of the budgetary
process is that what is approved is not necessarily what
will be implemented. The Brazilian budget is not fixed.
Instead, every two months the Finance Ministry makes
an assessment of how revenues are coming out in
relation to the planned expenditures and adjusts the
budget accordingly. However, as mentioned above, the
flexibility for cuts is only on items related to
discretionary spending. For 2011, for example, only
10.4% of the budget is for discretionary spending.
Source: Banco Central do Brasil.
In February 2008 the Central Bank announced that, for
the first time in history, Brazil had enough resources to
cover its external debt. This means that international
reserves were higher than total public external debt,
making the country a net external creditor.
40
This is the Achilles’ heel of the Brazilian macro story.
Fiscal accounts are perhaps the last frontier in
consolidating macro stability. The Brazilian government
taxes too much in order to pay for public spending,
which in its large majority is geared to the payment of
civil servant wages, social security and interest
payments. This is problematic because, without a
revamping of the public administration, only a fraction
of the yearly budget related to discretionary spending
can be used to adjust fiscal policy. The lack of structural
reforms to address issues such as social security and the
earmarking of a great deal of budgetary expenses has
led to a continuous increase in tax collection as a
percentage of GDP. There is a consensus in Brazil that
fiscal policy needs to be addressed so that interest rates
can be structurally lower. The government’s position on
this issue is not often clear, but in the beginning of
2011, President Dilma Rousseff announced a budget cut
of R$50 billion, aiming to attain a primary surplus
target of around 3% of GDP in 2011.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 43: Breakdown of Expenses of the Brazilian 2011 Budget
but it excludes expenses from Petrobras, Eletrobras,
some infrastructure investments, among other things.
% of total budget (preliminary budget version)
Mandatory Expenditures
89.7%
Debt Amortization
40.4%
Figure 76: Primary Surplus
Social Security
17.1%
Wages and Social Programs
9.5%
% of GDP, 12 month rolling, new methodology (excludes Petrobras and
Eletrobras)
Interest Payments
8.8%
5.0%
Transfers to States and Municipalities
8.4%
4.0%
Other Financial Expenses
3.8%
3.0%
Other Mandatory Expenses
1.5%
2.0%
Contingency Reserve
0.3%
1.0%
Discretionary Spending
10.4%
of which
Health
30%
Education
13%
Bolsa Familia (Family Grant)
7%
PAC Program (infrastructure)
22%
Others
28%
Source: Ministry of Planning and Budget.
Fiscal Indicators
Fiscal data for Brazil started to be consolidated in a
comprehensive manner in the 1990s. Markets tend to
focus on the primary surplus results, as this is the main
fiscal target that the government pursues. Also, the
primary surplus (revenues minus expenses excluding
interest payments) allows for a better evaluation of how
the government expenses are evolving. Still, there is a
rising emphasis on the nominal data as an overall
balanced budget is seen by many as a pillar to economic
stability in Brazil.
Primary surplus: The primary surplus gained
importance in the late 1990s, when Brazil signed a
rescue program with the IMF. The primary surplus
became the main fiscal target and to this day, the
government sets its fiscal goals in the annual budget by
fixing a primary surplus target. In the late 1990s the
target was relatively modest, at around 2-2.5% of GDP,
but later it was brought up. In January 2003, when
former President Lula took office, Finance Minister
Antonio Palocci implemented a new round of fiscal
correction, further increasing the primary surplus target
to 4.5% of GDP. Since then, especially in the last
couple of years, the target was brought down and its
methodology revised a number of times. Today, the
primary surplus target for 2011 is set at R$180 billion
for the consolidated public sector (around 3% of GDP),
0.0%
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Source: Banco Central do Brasil.
Nominal deficit: The nominal deficit might be today a
clearer way to track Brazil’s fiscal performance as it
tends to be a better reflection of the overall fiscal status
of the country. The nominal deficit reached its best
point at the end of 2008, at -1% of GDP. The advent of
the 2008 crisis led the government to open its coffers
and provoked an increase in the nominal deficit, which
closed 2010 at -2.9% of GDP.
Figure 77: Nominal Deficit
% of GDP, 12 month rolling
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Source: Banco Central do Brasil.
Interest payments: Interest payments have been
steadily declining in Brazil as interest rates are lowered.
In the past, interest payments reached almost 10% of
GDP, at a time when part of the debt was linked to the
exchange rate and it devalued. Today, lower interest
rates and a better debt profile (more fixed-rate debt than
before) have allowed interest payments to hover
between 5% and 5.5% of GDP over the last two years.
41
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 78: Interest Payments
Figure 80: Net Public Sector Debt Split into Internal and External
Debt
% of GDP, 12 month rolling
% of GDP
10.0%
9.0%
65.0
8.0%
45.0
7.0%
25.0
6.0%
5.0
5.0%
4.0%
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
-15.0
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Internal Debt
Source: Banco Central do Brasil.
Dec-06
Dec-07
Dec-08
Dec-09
Ex ternal Debt
Source: Banco Central do Brasil.
Public Sector Debt
Over the past few years there has been a revamping of
the profile of the Brazilian public sector debt. Perhaps
the worst point was observed in 2002/2003, when the
debt-to-GDP ratio reached over 60%, as a great deal of
the debt was denominated in foreign currency at a time
when the BRL suffered an important devaluation. Since
then, overall debt has been declining, and now it is
stabilizing around 40% of GDP.
Figure 79: Net Public Sector Debt
% of GDP, new methodology excluding Petrobras and Eletrobras
• The level of floating-rate debt linked to the Selic
declined significantly, while fixed-rate and inflationlinked debt increased.
• The level of FX-linked debt was greatly reduced,
which makes Brazil less vulnerable to exchange rate
variations.
65.0
Table 44: Composition of the Stock of Public Debt
60.0
% of Public Debt (after foreign exchange swap)
2002
2004
2006
55.0
50.0
45.0
40.0
35.0
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Source: Banco Central do Brasil.
One of the main reasons behind the decline in the net
public sector debt is that Brazil went from being a net
external debtor to a net external creditor. First, the
government bought back a significant amount of
external debt, even taking out of circulation the “C”
bond, which was the Brazilian benchmark debt
instrument for most of the 1990s. Also, higher reserves
have netted out the remaining external debt that Brazil
still holds (the level of reserves is greater than that of
external debt), turning Brazil into a net external creditor
and contributing to a reduction in the overall level of net
public sector debt. This doesn’t mean that Brazil doesn’t
have public sector external debt; just that it has the
matching resources to retire it if needed. Indeed, as of
December 2010, Brazil held around US$100 billion in
public sector external debt.
42
Internal (domestic/local) debt: Even though the level
of domestic debt remained pretty constant for much of
the last decade, important changes took place in the
internal debt profile.
2008
2010
Prefixed
13.7
20.1
36.1
32.2
37.9
Price Index
12.5
14.9
22.5
29.3
28.1
Selic
46.2
52.4
40.2
33.6
32.5
FX
37.0
9.9
-1.1
3.3
0.6
TR and Others
2.1
2.7
2.2
1.6
0.9
Source: Banco Central do Brasil.
The average maturity of the overall domestic debt held
by the public has increased from around 27 months at
the end of 1999 to about 40 months at the end of 2010.
Even though there is significant shorting of maturities
around crisis periods, the overall evolution continues to
be one of extending maturities. Note that inflationlinked instruments have longer maturities, reaching 77
months on average and being the instruments that
contributed most to the lengthening of the average
maturity for total debt. Average maturity for fixed-rate
instruments (LTN) is around 17.9 months.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 81: Average Maturity of Brazil’s Public Sector Local Debt
Months
45
40
category, citing that fiscal consolidation combined with
a healthy GDP growth would continue to improve the
country’s debt profile.
Table 45: Investment Grade
35
S&P
Fitch
Moody's
30
25
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
2003
B+
B+
B2
2004
BBBBB1
2005
BBBBBa3
2006
BB
BB
Ba2
2007
BB+
BB+
Ba1
2008
BBBBBBBa1
2009
BBBBBBBaa3
2010
BBBBBBBaa3
2011
BBBBBB
Baa3
Source: Ministério da Fazenda Note: Shaded area is investment grade rating.
Source: Banco Central do Brasil.
Tax System
Although the great majority of local Brazilian debt is
owned by Brazilians, foreigners are increasing their
participation, which reached 10.6% in December 2010
of total outstanding debt held by the public, up from 5%
in December 2008 and 7.1% in December 2009.
Foreigners owned mostly instruments at the long end of
the curve.
Brazil is known as one of the countries with the most
complicated and expensive tax systems in the world.
The main reason for this is that Brazil has many taxes,
of which several are indirect and cascading, functioning
in a system without unified legislation at any
government level. The precarious tax system is blamed
for inhibiting business activity and, consequently,
harming economic and social development.
Gross debt: Gross debt is simply the stock of
outstanding government debt of all institutions in the
general government, with no deductions for the
financial assets that the government holds (for example,
international reserves). Gross debt in Brazil is
significantly larger than net debt, currently at 58% of
GDP, or 18 p.p. higher than net debt.
Table 46: Complexities of the Brazilian Tax System
Figure 82: Net Debt vs. Gross Debt
- At the state level, 27 different legislations (one for each), different rates and
criteria
- Two taxes on business profits
% of GDP
Main Complexities
- Different taxes are levied on the same product
- Six indirect taxes on goods and services. Most countries have one or two
- Constantly changing legislation
- At the federal level, four taxes and three tax systems
75.0
- High bureaucratic costs
65.0
- Disputes with the tax authority
55.0
Source: "Tax Reform," Brasilia, D.F., February 28, 2008.
45.0
35.0
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Net Debt
Dec-06
Dec-07
Dec-08
Dec-09
Gross Debt
Source: Banco Central do Brasil.
Sovereign Credit Ratings
Until 2006 the core rating agencies rated the
investments in Brazilian public debt securities as
speculative. In 2007, the less-known R&I rating agency
was the first to recognize Brazil’s investment grade. But
the upgrade was only fully recognized by the market in
April 2008, when Standard & Poor’s gave Brazil a
BBB- rating, meaning that the country was joining the
select group of countries with investment grade. The
last agency to announce Brazilian investment grade was
Moody’s, in September 2009. In March 2011, Fitch
Ratings upgraded Brazil within the investment grade
Tax collection in Brazil has been rising nonstop since
1997/98. At that time, the Brazilian government
promoted a fiscal shock in the economy, trying to
counteract the effects of the Asian crisis that were fast
making their way into Brazil. President Cardoso’s
government increased taxes and tried to cut spending.
However, it was successful only in the first goal. Total
tax collection in Brazil increased from 25% of the GDP
in the mid-’90s to about 35% in 2009. On the other
hand, expenses at the federal level increased from 15%
of GDP in 2001 to 19% of GDP in 2010.
43
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 83: Total taxation as a % GDP
Figure 85: Tax Burden by Jurisdiction
% of GDP
%
36
34
Collor
32
Itamar
Sarney
30
Total Federal Tax es - 69.5%
28
Total State Tax es - 26%
26
Total Municipal Tax es - 4.6%
FHC 2
24
Lula 1
Lula 2
FHC 1
22
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
20
Source: Instituto Brasileiro de Planejamento Tributário.
Source: Instituto Brasileiro de Planejamento Tributário.
Not only are taxes high in Brazi, they are also among
the highest in the world. A study by the Instituto
Brasileiro de Planejamento Tributário indicates that if
Brazil were an OECD member, it would have the 14thhighest taxes among members.
Figure 84: Brazil Ranks 14 within Countries with the Highest
Tax/GDP Ratio (2009)
% of GDP
50
48.2
46.4
43.5
43.2
43.1
42.8
41.9
41
39.1
40
37.9
37.5
37
34.8
34.5
30
20
10
Brazil
Republic
Czech
Germany
Luxemburgh
Slovenia
Hungary
Norway
France
Austria
Finland
Belgium
Italy
Sweden
0
Denmark
Bottom line: The problems surrounding the Brazilian
tax system have been diagnosed for a long time, and
over the last ten years different administrations have
tried to approve a tax reform. Because of the political
complexities involved in this endeavor, the government
usually chooses to change taxes in line with its own
interests, promoting bits-and-pieces changes in the
legislation that end up complicating the system even
more. Taxes in Brazil end up crowding out private
sector entrepreneurship.
Source: OECD and Instituto Brasileiro de Planejamento Tributário.
Tax distribution
During the period of the military regime, fiscal policy in
Brazil was completely centralized. States suffered
limitations on their taxation powers and became highly
dependent on the federal government. With the 1988
Constitution came the reformulation of the tax system,
aiming to increase the level of fiscal autonomy of the
states and municipalities. The reformulation did not
work well. It consolidated public sector imbalances due
to the disorganized evolution of the process. New taxes
were created and the old ones were revised upward.
Main taxes
An ordinary Brazilian is subjected to several taxes and
may not know where all the money is going. The
complexity of the system makes its comprehension a
difficult task. Below are listed some of the most known
taxes divided by the jurisdiction responsible for its
collection. A brief explanation of the taxes with highest
participation in the country’s overall revenues follows.
Table 47: Main taxes charged in Brazil
Federal Taxes
Tax on Imported Goods (II)
Tax on Manufactured Goods (IPI)
Income Tax (IR)
Tax on Financial Transaction (IOF)
Rural Land Tax (ITR)
Natonal Institute of Social Security (INSS)
Contribution for Social Security Financing (COFINS)
Length of Service Guarantee Fund (FGTS)
Integration Program employees-company (PIS/PASEP)
Nowadays, the country is still under the same fiscal
regime, created in 1988, and a tax reform has become a
primary necessity. In terms of centralization, the federal
government is still responsible for more than two thirds
of the collections, leaving 26% of the total for the states
and less than 5% to municipalities.
State Taxes
On the Circulation of Goods and Services (ICMS)
On Property of Vehicles (IPVA)
Municipality Taxes
On Property and Urban Land (IPVA)
Tax on any Kind of Service (ISS)
Source: Instituto Brasileiro de Planejamento Tributário.
44
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
ICMS: This is the tax on the circulation of goods and
services. It is a state tax and thus there are 27 different
legislations (one for each state). Every manufacturer,
distributor, retailer or provider of almost every type of
merchandise or service pays the state ICMS and passes
the cost along to the consumer. ICMS in Brazil is
basically a hidden tax, meaning that the tax is embedded
in the product price. Therefore most Brazilians are
unaware of how much the ICMS actually costs them.
INSS (Social Security): Both employers and employees
are subject to social security contributions. The
employee contribution depends on level of income, and
varies from 8.0% to 11% of the gross wage. There is
also a limit of contribution (R$405), meaning that even
if the employee earns more than R$3,689.66 he/she can
not contribute more than the limit. Generally, the
employer contributes 20% of the gross salary of the
employee (22.5% in the financial sector), even if the
wage is greater than the limit.
Table 48: INSS Contribution by Income Level
Wage Range
the person does not own real estate. Nowadays, the
FGTS is one of the most important sources of real estate
credit. It is also a key component of the BNDES’s
yearly financing.
COFINS: This is a federal tax charged on a company’s
gross receipts and destined to finance social security.
The current COFINS rate is 7.6%, but in 2004 the
government implemented changes to this tax, making it
non-cumulative, that is, the tax is paid only once during
the production of an item or service.
Corporate income tax: Companies in general pay 15%
of taxes on profits, plus an additional 10% if profits are
above R$240K per year. Companies that have sales of
less than R$48 million in a calendar year qualify for the
calculation of income taxes over estimated profits
(rather than observed). In this case, rates differ for
different activities, ranging from 8% for cargo
transportation and 32% for services in general.
Figure 86: Most Representative Taxes in Brazil
% of total wage
Until R$ 1,106.90
8%
From R$ 1,106.91 to R$ 1,844.83
9%
From R$ 1,844.84 to R$ 3,689.66
11%
% of total collection
ICMS - 21%
Others - 27%
Contribution Limit: R$ 405.86
FGTS - 5%
Source: Social Security Ministry.
Personal income tax: All personal income earned in
Brazil is subject to federal income tax. The country has
a progressive taxation system under which individuals
are taxed up to a maximum of 27.5% of their income.
Brazilian taxpayers must present an annual income tax
declaration, to be delivered by the last day of April each
year.
Table 49: Income Tax Contribution by Income Level for 2011
Annual Income
Tax Ratio
Up to R$17.989,80
Exempt
From R$17.989,81 to R$26.961,00
7.50%
From R$26.961,01 to R$35.948,40
15%
From R$35.948,41 to R$44.918,28
22.50%
Above R$44.918,28
27.50%
Source: Treasury Ministry.
FGTS (Length of Service Guarantee Fund): Under the
FGTS employers make a deposit of 8% of a worker’s
wage in the Caixa Economica Federal. The balance is
released to the worker if he/she is fired or under certain
special conditions, for example, for home purchase if
INSS - 18%
COFINS - 11%
IR - 18%
Source: Instituto Brasileiro de Planejamento Tributário.
Taxes on security investments: In a nutshell, locals pay
15% capital gains tax on equities and no tax on
dividends. For fixed income investments, the tax rate
depend on how long the investment lasts: for fixed
income investments of under 6 months, the tax is
22.5%, and it falls to 15% for investment of 2 years or
more. Foreigners in general are exempted from capital
gains and dividend taxes in Brazil, unless they come
from countries that do not tax income or tax income
lower than 20%. In those cases, investors do incur 15%
capital gain taxes on stocks. Foreigners investing in
fixed income instruments are exempted from capital
gains taxes. In October 2009, the government
introduced a 2% IOF tax on foreign purchases of
Brazilian equities and fixed income instruments. In
October 2010, the IOF tax for fixed income was
increased to 6%.
45
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Credit
Credit has been booming in Brazil since 2004, when
interest rates finally started to come down to more
mundane levels. There are three key issues that may
explain the historical low level of credit penetration in
Brazil. First, high interest rates acted as inhibitors of
credit, since its high cost was not accessible for
individuals and companies. Second, banks didn’t need
to go into the credit business as it was very profitable to
finance the government debt, considering the high rates
of return. Finally, it was only in 2004 that it was clear
that the Brazil economy had stabilized on a sustainable
path, allowing for more jobs, higher wages and,
therefore, more credit affordability.
Despite the sharp rise, credit continues to grow: On a
year-on-year basis, total credit has been presenting
double-digit increases since 2004. The economic crisis
of 2008/2009 slowed credit growth, but since then, it
has picked up again, especially consumer credit. The
growth rate is likely to decelerate in 2011 as interest
rates increase and the economy slows down, but doubledigit growth is still expected (banks’ general guidance
for loan growth hovers between 15% and 18%).
Figure 89: Total Credit Growth
%oya
35.0%
30.0%
25.0%
20.0%
15.0%
%
50
45
40
35
30
25
Oct-10
Apr-09
Jan-10
Jul-08
Oct-07
Jan-07
Jul-05
Apr-06
Oct-04
Jan-04
Apr-03
Jul-02
20
Oct-01
Jul-10
Jul-09
Jan-10
Jul-08
Jan-09
Jul-07
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
Jul-04
Jan-05
Jul-03
Jan-04
Jul-02
5.0%
Source: Banco Central do Brasil.
Consumer credit was mainly responsible for the rise in
the credit/GDP ratio. In 1995, credit to consumers
represented less than 10% of total credit, and nowadays
this ratio is near 35%. This evolution is supported by a
good macro environment and shows the rising power of
the consumer, which now faces less bureaucracy than
before to get a loan. Moreover, there are more credit
instruments, matching different consumer profiles and
offering conditions equivalent to the capacity to pay.
Figure 87: Credit as a % of GDP
Jan-01
10.0%
Jan-03
In 2004 total credit represented 25% of the GDP and in
December 2010 this ratio had jumped to over 46% of
GDP The advent of credit has been a key factor
propelling domestic demand as a key GDP growth
component.
Figure 90: Credit to Individuals
% of total credit
Source: Banco do Brasil.
35.0%
Comparing to Latam countries, at the end of 2009
Brazil had the second-highest credit/GDP ratio, behind
only Chile, with 71.2% of GDP.
30.0%
25.0%
20.0%
15.0%
10.0%
Figure 88: Credit as a % of GDP by Country (in 2009)
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Source: Banco Central do Brasil.
45.0
Chile
Brazil
37.1
Peru
35.2
Colombia
34.4
Latin
America
Source: Inter-America Development Bank.
46
Jan-98
71.2
Jan-97
Jan-95
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Jan-96
5.0%
%
26.5
23.4
23.4
16.2
Ecuador Argentina Venezuela Mex ico
Breakdown of total credit: Below is the distribution of
credit in Brazil. The improvements in the consumer
portion of total credit emphasized before have generated
a reconfiguration in the credit breakdown. The
industrial sector was the most affected – it represented
almost 30% of the credit in 2001 and now accounts for
22%. It is important to remember that although some
sectors have lost participation in the total credit picture,
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
this does not mean that the nominal amount of credit
decreased, as total credit in the country has practically
doubled over the last few years, reaching R$1.1 trillion
in 2010. 10% of total credit is destined for the
commercial sector, 7% for the rural sector and only 4%
for the public sector.
Figure 91: Total Credit Destination by Debtor
%
Others - 17%
Public Sector - 4%
Industrial Sector
In terms of corporate loans (non-earmarked), more than
55% of the total goes to finance working capital.
Non-performing loans: Consumer NPLs have not
increased despite the rise in credit. Following the 2008
crisis, consumer NPLs rose but by mid-2009 had started
to decline and continued to do so into 2010. This trend
wasn’t repeated for corporate, as NPLs in that segment
came from a very low base. NPLs (over 90 days’ nonpayment) are hovering around 6% for consumers and
3.5% for corporate.
22%
Figure 93: Non-performing Loans
% of total loans (YE2010)
Commercial Sector
10%
Indiv iduals - 32%
9.0
Housing - 8%
Rural Sector - 7%
4.0
3.5
8.0
3.0
7.0
Source: Banco Central do Brasil.
2.5
2.0
6.0
Breakdown of consumer credit: The breakdown of
credit to individuals also evolved in an interesting
manner. One of the key factors that allowed for a sharp
expansion of this segment was the creation of the
payroll loan, extended to retirees, civil servants and
formal sector workers. Banks like payroll loans as they
can discount installment payments straight from the
employee/retiree paycheck. The figure below shows that
almost 50% of consumer credit is for personal loans, of
which payroll loans are a great part. Second comes auto
financing, responsible for 33% of total non-earmarked
consumer credit in Brazil. Note that mortgages are at
the end of the line with only 1.7% of total consumer
credit. Even though mortgage accounts for about 8% of
total credit in Brazil, most comes from earmarked
resources at Caixa Economica Federal, and only a small
fraction from banks. Still, this is the consumer credit
category that has grown the most, with a 60% increase
over the last 12 months (as of Dec 2010).
Figure 92: Breakdown of Consumer Credit per Credit Type
1.0
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Consumer NPL (right)
Aug-09
Dec-09
Apr-10
Aug-10
Corporate NPL (left)
Source: Banco Central do Brasil.
Average loan maturity: Other than lower interest rates,
one of the main factors that helped to make loans more
affordable to consumers is the extending of maturities.
At the end of 2010, average maturity for consumer
loans is 550 days, or 100 more days then at the eve of
the credit crunch in September 2008. Average maturity
for corporate loans is lower, at 395 days currently.
Figure 94: Average Maturity for Consumer Credit
Days
600
550
500
450
400
350
300
250
200
Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
% of total non-earmarked credit, Dec 2010
50.0%
1.5
5.0
49.4%
Source: Banco Central do Brasil.
33.0%
40.0%
30.0%
20.0%
7.1%
10.0%
4.3%
2.4%
2.1%
1.7%
Ov erdraft
Consumer
Others
Mortgage
0.0%
Personal
Auto
Credit
Financing
Credit Card
Goods
Financing
Source: Banco Central do Brasil.
Spreads: A key characteristic of the Brazilian banking
sector is that spreads are high. Even though interest
rates fell over the last few years, rates charged for
consumer loans are still extremely high, averaging 40
p.p. annually in 2010. The main factor responsible for
these high rates are banking spreads, currently at over
30 p.p. for consumer loans and 19 p.p. for corporate
loans. Often the government talks about ways to reduce
47
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
banking spreads, but without a clear revamping of the
tax system, the full introduction of a positive credit
bureau and a continued decline in interest rates, spreads
tend to remain at high levels.
As of December 2010, the total debt stock of Brazilian
households was 37.4% of annual income.
Figure 97: Household Debt Stock as a % of Annual Income
%
Figure 95: Average Spreads for Consumer Loans
36.0%
% a.a.
34.0%
37.4%
32.0%
75
Figure 96: Public Sector Credit as a % of Total Credit
%
Oct-10
Jun-10
Oct-09
Feb-10
Jun-09
Oct-08
Feb-09
Jun-08
Oct-07
Household debt service stood at 22.4% as of December
2010. Although this is lower than in the past, the level is
high and largely justified by the interest component
(12.7%) rather than the principal (9.7%).
Figure 98: Total Debt Service as a % of Annual Earnings
%
15%
14%
13%
12%
11%
10%
9%
8%
12.7%
Interest Pay ments
Oct-10
Jun-10
Feb-10
Oct-09
Jun-09
Feb-09
Oct-08
Jun-08
Feb-08
Oct-07
Jun-07
Feb-07
9.7%
Oct-06
Loans from the public sector: Since the advent of the
2008 crisis, public sector financial entities have become
a lot more active in loan concession. As private banks
recoiled, public ones tried to guarantee the pace of
economic growth by granting credit, often at subsidized
rates, when credit was scarce. Today, public sector
credit is responsible for 42% of total credit in the
Brazilian system, levels that are a lot higher than those
of the pre-2008 crisis period. While the government
strategy was successful in preventing a crisis, the policy
of credit stimulus, especially via subsidized rates at the
BNDES, remained in place long after the economic
recovery was at full steam. Some argue that the high
level of public sector credit in Brazil is an impediment
to effective interest rate policy in the country as a great
deal of credit is done at less than the benchmark rate.
Source: Banco Central do Brasil.
Jun-06
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Source: Banco Central do Brasil.
Feb-08
22.0%
25
Jun-07
24.0%
35
Feb-07
26.0%
45
Jun-06
28.0%
55
Oct-06
30.0%
65
Principal
Source: Banco Central do Brasil.
Brazilian Mortgage System
Source: J.P. Morgan’s Brazilian Homebuilders 101 by
Adrian E Huerta and Marcelo Motta (2010 and 2011
editions)
44%
42%
40%
38%
36%
34%
32%
30%
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: Banco Central do Brasil.
Consumer leverage: The credit boom of the last few
years has started to raise questions regarding consumer
leverage. Data to measure this leverage is limited in
Brazil, but recently the central bank developed a series
showing that while the total debt stock of households is
low relative to annual earnings, the debt service is high.
48
Historically, mortgages in Brazil have always presented
a weak performance. Getting credit to finance a house
used to be a big challenge, and only a few could have
their own house. Since 2006, and mainly after the
implementation of the Minha Casa Minha Vida
program, mortgages started to increase and in
November 2010 registered their highest level: 3.7% of
GDP.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 99: Mortgages as % of GDP
SBPE: Traditionally, the SBPE has encompassed all
public- and private-sector banks except those focused
on the rural segment. In 2009 mortgages from SBPE
amounted to R$56 billion, representing 65% growth vs
2009.
%
4.0
3.5
3.0
2.5
2.0
1.5
Oct-10
Mar-10
Jan-09
Aug-09
Nov-
Jun-08
Apr-07
Sep-06
Jul-05
Feb-06
May-
Dec-04
Oct-03
Mar-03
Jan-02
Aug-02
Jun-01
1.0
Source: J.P. Morgan, estimates, Central Bank.
Despite the evolution in the latest years, mortgages in
Brazil have been pretty weak if compared to other
countries’. In 2008, Brazil figured among the countries
with the lowest mortgages-to-GDP ratio, registering
only 2.6%. Brazil’s ratio is behind its main Latam
peers’ and also most of the emerging countries.
Figure 100: Mortgages by Country
as a % of GDP
Turkey
Argentina
Venezuela
Peru
Indonesia
Brazil
Poland
India
Bolivia
Mexico
Colombia
Chile
Thailand
Korea
France
South Africa
Japan
Malaysia
Germany
UK
US
80 67.4 66.6
70
60
47.4
50
35.7
28.3
40
24.1 22 20.8
30
15.5 14.8
10 9.8 9.5
20
4.9 4.4 2.6 2.2 2.1 1.7
0.7 0.3
10
0
Banks in the SBPE have to devote 65% of savings
deposits, which are remunerated at “Tax Referential”
(TR) plus 6.17% a year, to mortgages. Of the 65%, 80%
has to be lent at no more than TR + 12% a year and the
remaining 20% can be allocated in mortgages at market
rates. However, banks are allowed to comply with this
requirement through a variety of regulatory facilities. If
banks have a shortfall in their directed lending
requirement, they are penalized with a lower return on
the shortfall amount (TR flat vs. the TR + 6.17% that
they have to pay on the savings deposit).
FGTS: Provides funding through compulsory savings
from
employees.
Originally
conceived
as
unemployment insurance, it is now used for a variety of
purposes, including providing support to workers who
are terminally ill, helping workers purchase a house,
providing financial assistance for employees who are
laid off and, more recently, infrastructure investments.
Employees contribute from 8% to 11% of their salary,
depending on the income segment (deposited at Caixa
Economica Federal, the main user of the assets) to the
fund every month. The money at FGTS yields TR + 3%
a year.
Source: Warnock and Warnock (2008).
There are two main sources of funding in Brazil, saving
accounts or SBPEs (Sistema Brasileiro de Poupança e
Emprestimo) and the FGTS (Fundo de Garantia do
Tempo de Serviço, the Brazilian public pension fund to
which all Brazilian employees make mandatory
contributions).
SFH: Sistema Financeiro de Habitação (Housing
Financial System) was created in 1964 to develop the
mortgage market in Brazil. Its main sources of funding
are savings deposits in the financial system, including
deposits at government-owned CEF, which is the main
vehicle for directed mortgage lending in the country,
with a market share of 70% in 2009, as well as another
22 private and public financial institutions. The
participating banks comprise the Sistema Brasileiro de
Poupança e Emprestimo or SBPE (Brazilian Saving and
Loan System). The other source of funding for SFH is
employees’ payment to FGTS.
Changes in FGTS: Over the last years we saw several
changes in how employees can use their FGTS
resources. One of the most relevant for the housing
market was the increase of the maximum housing price
that can be purchased withdrawing FGTS balance, to
R$500,000 from R$350,000 previously. Another
positive change for the housing market was the
permission to use the FGTS on consortium bids and
debt amortization; another measure under study by
Brazilian Congress is the possibility of a father or
mother using FGTS to buy an apartment for a daughter
or son.
49
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 101: FGTS + SBPE Total Mortgage Disbursements
Figure 103: BNDES Disbursement
R$ Billion
R$ Billion
60
49.7
40
10
5.8
4.9
5.5
6.0
6.9
2000
2001
2002
2003
2004
16.3
10.3
50
2005
FGTS
2006
2007
2008
2009
Figure 102: BNDES Participation in Credit Rose after 2008 Crisis
22%
10%
21%
9%
20%
8%
19%
7%
18%
%of t otal credit (lef t)
Feb-11
Oct-10
Dec-10
Aug-10
Apr-10
Jun-10
Feb-10
Oct-09
Dec-09
Aug-09
Apr-09
Jun-09
Feb-09
Oct-08
5%
Dec-08
6%
16%
Aug-08
17%
Apr-08
23.4 25.7
38.2 35.1
40
Source: BNDES.
Since its creation in 1952, the Banco Nacional do
Desenvolvimento Econômico e Social – BNDES – has
performed different strategic roles in propelling the
cause of Brazilian development. In the 1970s, it was a
key enabler of the capital goods industry and an enabler
of the import substitution model. The bank was a lender
to companies at times of distress during the 1980s’
successive crises. In the 1990s, the BNDES had a key
role in the privatization process, and now the BNDES is
back to the role it first performed of funding the
country’s industry and infrastructure, but with a scope
and with a funding that are unprecedented. Today the
BNDES is responsible for 21% of the credit in Brazil, or
9.2% of GDP.
Jun-08
20
64.9
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
BNDES
Feb-08
19.1 21.3
47.1 52.3
0
SBPE
Source: CBIC and CEF.
Dec-07
92.2
100
0
%of GDP (rigth)
Source: Banco Central do Brasil.
The BNDES credit expansion is evident when looking
at disbursement data. In 2009, BNDES disbursements
increased by 46% relative to 2008. In 2010, loans
increased even more, reaching R$168 billion (22.5%),
including R$25 billion that the bank invested in the
Petrobras capitalization.
50
168.4
137.4
150
25.2
30
20
200
40.5
50
Of the R$168.4 billion in loans extended in 2010, 47%
went to industry, 31% to infrastructure and 16% to
commerce. The BNDES forecast for total investment
(public and private) in 2010 to 2013 is that it will be
R$859 billion, with industry getting over 60% of total,
largely in terms of the oil & gas sector. The highlight on
the infrastructure front, which is expected to get R$310
billion in investments, is in terms of electric energy,
mostly due to the three large hydroelectric plant
developments in the Amazon basin.
Table 50: BNDES’s Investment Perspectives
R$ bil
2005 - 2008 2010-2013
Industry
344.0
549.0
Oil and Gas
201.0
340.0
Mining
53.0
52.0
Steel
27.0
51.0
Petrochemical
9.0
34.0
Autos
21.0
32.0
Electronic
15.0
21.0
Pulp and Paper
18.0
19.0
Infrastructure
199.0
310.0
Electric Energy
68.0
98.0
Telecom
66.0
67.0
Sewage
22.0
39.0
Railway
16.0
56.0
Highway
23.0
36.0
Ports
5.0
15.0
Total
543.0
859.0
%
74.7
112.8
-3.0
99.4
70.8
37.7
98.9
10.4
55.3
45.6
2.0
76.2
195.5
73.1
217.6
58.2
Growth
% per year
11.8
16.3
-0.6
14.8
11.3
6.6
6.8
2.0
9.2
7.8
0.4
12.0
24.2
11.6
26.0
9.6
Source: BNDES.
Where do the BNDES resources come from?
Nowadays there are two main sources of funding for
BNDES: social contribution tax and the Treasury. The
social contribution taxes used to account for more than
60% of BNDES total funding, but from 2008 its
participation started to decrease. In 2009 the social
contribution funds were responsible for 42.5% of
BNDES total funding. On the other hand the Brazilian
Treasury resources committed to the BNDES have been
increasing by a great deal: to R$130 billion in 2009
from R$37.2 billion in 2008 and R$8.2 billion in 2007.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
In 2009 the Treasury was responsible for 36.7% of total
loans and in 2010 extended another R$80 billion to the
BNDES. Other funding resources include hybrid debt
and equity instruments, provisions, among others. It is
important to note that returns from past loans also
constitute an important funding source.
BNDES and the 2008/09 crisis: In the second half of
2008, the global crisis provoked a sudden stop in the
common credit channels. As in other countries, the
government of former president Lula adopted a
countercyclical strategy to stimulate the economy, and
the BNDES, Banco do Brasil and Caixa Economica
Federal were the main vehicles for implementing it. As
a result, BNDES loans ballooned and, according to the
bank’s officials, are not likely to decline in 2011 from
2010 levels (R$168 billion). Still, there is wide
recognition, even among BNDES officials, that the
private sector will have a more active role in financing
long-term development and that the main catalyst for
that will be lower interest rates.
Figure 104: BNDES vs. Capital Markets
R$ Billion
131.3
110.2
40
61.8
47.1
52.3
128.8
137.4
Sector
R$ bi
% of portfolio
Oil & Gas
42.7
36.0
Mining
26.6
22.5
Electric Energy
14.5
12.2
Food
10.8
9.1
Pulp and Paper
4.6
3.9
Telecom
3.7
3.1
Steel Industry
2.4
2.0
Metallurgy
2.1
1.8
Transportation
1.9
1.6
Consumer Goods
1.5
1.3
Others
7.7
6.5
TOTAL
118.524
100
Source: BNDES.
Capital Markets
According to the World Federation of Exchanges, in
terms of market capitalization, BM&F Bovespa is the
11th-largest stock exchange in the world and the
largest in Latin America.
168.4
186.3
Figure 105: 15 Largest Stock Exchanges in Terms of Market Cap
92.2
US$ Trillion
70.4
64.9
Table 51: Sector Composition of BNDES Equities Portfolio
24.5
17.2 9.3
15.0
13.4
12.0
2.2
1.6
1.6
1.5
1.5
1.4
1.3
1.2
Swiss SE
2.7
Shenzhen SE
2.7
Australian SE
2.9
3.0
Deutsche Börse
3.6
India SE
The BNDES subsidiary, BNDESPar, is responsible for
the bank’s capital market operations, and its main
attribution has to do with the management of a huge
equity portfolio. At the end of 2010, the BNDES equity
portfolio totaled R$118.5 billion, or 22.8% of total
BNDES assets, accounting for 37% of the bank’s net
income for the period. The BNDES equity portfolio is
highly concentrated in the oil and mining sectors due to
its key stakes in Petrobras and Vale.
3.8
BM&FBOVESPA
Source: BNDES.
3.9
6.0
Bombay SE
Primary Offerings Registered at the CVM
Hong Kong
2011
TSX Group
2010
Shanghai SE
2009
0.0
Tokyo SE
2008
London SE
BNDES Loans
2007
US NYSE
2006
NASDAQ OMX
2005
Europe NYSE
9.0
2004
Source: World Federation of Exchanges.
Market cap: The Bovespa market cap reached
US$1.54 trillion in 2010. Since 2002, the Bovespa has
increased its market value dramatically. From 2002 to
2007 Bovespa grew an average 64% per year, coming
from US$124 billion in 2002 to US$1.4 trillion at the
end of 2007. Also interesting to note is the strong
recovery of the Bovespa market cap after the crisis. In
2008 the sum of the market cap of all the companies
listed in the stock exchange fell by 58%, but the
recovery was incredibly fast. Indeed, it took less than a
year for Bovespa to regain its pre-crisis value.
51
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 106: Bovespa Market Cap
Table 53: Bovespa by Sector (Dec 2010)
US$ billion
1,750
1,500
1,250
1,000
750
500
250
0
1,399
723
161
229
1998 1999
226
2000
185
124
2001
234
2002 2003
341
482
2004 2005 2006
1,341
588
2007 2008
2009 2010
Source: BM&F Bovespa.
In Brazil, 55% of the Bovespa market cap is
concentrated in only 10 companies. The main highlight
is Petrobras, which by itself represents almost 15% of
the Bovespa market cap. The second-largest company is
Vale, responsible for almost 11% of the Bovespa’s total
market cap. Still, the largest sector in the Bovespa is
financials. Note that among the 10 largest companies in
the Bovespa, 5 are financial institutions (ITUB4,
BBDC4, BBAS3, SANB11, ITSA4).
Table 52: Brazil’s 10 Largest Companies by Market Cap (Dec
2010)
Company
Sector
Number of
companies
Financials & Insurance
33
5.3%
318.7
20.9%
Oil & Gas
79
12.7%
275.5
18.1%
1,542
Ticker
Market Cap
(in US$ billion)
% of Bovespa
Market Cap
%
Market Cap
(in R$ Billion)
%
Mining
4
0.6%
173.7
11.4%
Others
79
12.7%
143.2
9.4%
Food & Beverage
20
3.2%
130.2
8.5%
Electricity
42
6.7%
113.3
7.4%
Telecom
4
0.6%
69.2
4.5%
Steel & Metallurgy
15
2.4%
67.4
4.4%
Commerce
17
2.7%
45.7
3.0%
Transportation
14
2.2%
41.0
2.7%
Construction
26
4.2%
34.0
2.2%
Chemical
15
2.4%
27.3
1.8%
Software & Data
4
0.6%
23.7
1.6%
Vehicle & Parts
17
2.7%
15.4
1.0%
Pulp & Paper
6
1.0%
14.5
1.0%
Textile
28
4.5%
13.6
0.9%
Industrial Machinery
79
12.7%
9.3
0.6%
Electronics
42
6.7%
6.1
0.4%
Agriculture
20
3.2%
1.7
0.1%
1
Petrobras
PETR4
229.1
14.8%
Nonmetallic Minerals
79
12.7%
1.0
0.1%
2
Vale
VALE5
166.8
10.8%
Source: Economática and J.P. Morgan.
3
ItauUnibanco
ITUB4
96.7
6.2%
4
AmBev
AMBV4
86.9
5.6%
5
Bradesco
BBDC4
67.2
4.3%
6
Banco do Brasil
BBAS3
54.1
3.5%
7
Santander BR
SANB11
52.1
3.4%
8
OGX Petroleo
OGXP3
38.9
2.5%
9
Itausa
ITSA4
36.1
2.3%
10
Sid Nacional
CSNA3
23.4
1.5%
Source: Bloomberg and J.P. Morgan.
The largest sector in the Bovespa, Financials includes
almost 10% of total Bovespa companies and is
responsible for about 24% of Bovespa’s market cap. Oil
& Gas and Mining are the second- and third-largest
sectors in the Bovespa respectively. Though both
sectors do not have a great number of listed companies
in the stock exchange (6 companies each), the market
cap of their few but representative companies are
enough to surpass other sectors’ market value.
The Brazilian stock exchange had 381 companies at
the end of 2010, around 770 listed stocks and other
instruments. The number of companies traded at
Bovespa has been falling: In 1998, there were almost
600 companies listed in the Bovespa, but after that, the
numbers started to decline. This reduction can be
explained mainly due to the increasing number of
mergers and acquisitions. Also, less traditional
companies decided to close capital. The management of
the exchange has a plan to add 200 new companies in
the Bovespa by 2014.
In the period between 2006 and 2009, an average of 645
M&A transactions were announced yearly, an increase
of almost 70% compared to the average observed
between 2002 and 2005. In the 12 months to the end of
March 2011, Brazil registered 466 M&A transactions,
according to Bloomberg.
Bovespa Indexes
Ibovespa: This is the benchmark equity index for
Brazil. The index is composed of a theoretical portfolio,
including around 65 companies, which forms the group
52
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(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
of stocks whose negotiability index added represents
80% of total value negotiated in the Bovespa. Ibovespa
is a cumulative index. Basically its number represents
the present value of a portfolio that began on 2 January
1968, with a starting value of 100. The index is
rebalanced every four months.
Figure 107: Bovespa Index performance
BRL
with highest liquidity in the Bovespa and the IBX-100
of the 100 most liquid companies. The portfolios have
durations of 4 months (Jan-Apr, May-Ago, Sep-Dec)
and are recalculated in the end of each period.
As expected, if we put together both indexes, the
performance of Ibovespa and IBX-50 are very alike, due
to the similarity in their composition and the high
weight of the main companies in both.
80000
Figure 109: IBX50 vs. Ibovespa
70000
80000
12000
60000
IBX-50
Ibovespa
10000
50000
70000
60000
6000
40000
Jan-10
May-09
Jan-08
May-07
Jan-06
Sep-10
50000
30000
Sep-08
8000
Sep-06
40000
2000
Jan-04
Source: BM&F Bovespa.
Ibovespa’s performance has been pretty robust, with the
exception of the crisis period. From January 2006 until
May 2008, the index gained more than 90%, reaching
over 73,000 points. With the crisis, the index suffered a
lot, losing about 50% of its value. But the recovery
came fast and strong.
2010 was not a typical year for the Ibovespa. The index
did not have any significant oscillation, either positive
or negative, trading range bound between 60,000 and
70,000 points. Even after the end of the overhangs that
were weighing on the market most of the year (interest
rate increases, the Petrobras capitalization, the
presidential election, global concerns relating to Europe,
China and the U.S. recovery), the Ibovespa remained
flat and without a specific trend the whole year.
Figure 108: Bovespa Performance in 2010
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
74000
72000
70000
68000
66000
64000
62000
60000
58000
Jan-10
30000
4000
Source: Bloomberg.
IBX-50/ IBX-100: The INX-50 and the IBX-100 are
also benchmark indexes. The companies that compose
these indexes are very similar to those in the Ibovespa.
The main difference is the way the indexes are
calculated. The IBX-50 is composed of 50 companies
20000
10000
Feb-05
Mar-06
May -07
Jun-08
Jul-09
Sep-10
Source: Bloomberg.
Other indexes: Bovespa also provides sector-specific
indexes. This kind of index provides a segmented view
of the stock, measuring the performance of the stocks
issued by the representative companies of each sector.
Today, there is the ITEL (telecom index), the IEE
(electricity index), INDX (industrial sector), ICON
(consumer), IMOB (real estate), and financial (IFNC).
Other relevant indexes have to do more with corporate
governance: The IGC can only be composed of
companies listed on the Bovespa Level 1 or 2 or on the
Novo Mercado segment. The ITAG is the index
composed of companies that offer tagalong rights for
minority shareholders that are higher than 80%, which
is the minimum established by current Brazilian
legislation. Finally, there are indexes for medium cap
(MLCX), which can include companies representing
85% of Bovespa market cap. The other 15% is included
in the small cap index (SMLL).
Corporate governance: Since the turn of the century,
there have been important advances in terms of
corporate governance. The main piece of legislation that
greatly improved capital markets in Brazil was the
Corporate Law approved by Congress in 2001. It
established, among other things, that the number of
preferential shares (PN) cannot be more than 50% of
total shares and that PNs should have at least one of the
following advantages: 1) A dividend that is equal to at
least 25% of net income; 2) A dividend at least 10%
higher than the ordinary shares’ (ON) dividend; 3) In
case of a sale or LBO of the company, tagalong rights
53
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
of 80% and a dividend equal to the ON shares’. The
Corporate Law also stipulates the rules for the
composition of the company’s board, the gathering of
the general and extraordinary assembly, issues
pertaining to offerings and the retirement of shares in
circulation, among other things. While the Corporate
Law is the backbone of equity market rules in Brazil,
the CVM (equivalent to the US SEC) is responsible for
the regulatory framework of Brazilian security markets.
Today in the Bovespa there are three levels of corporate
governance:
Table 54: Summary of Corporate Governance Levels for
Bovespa Companies
Level 1
Free float of 25%
Public offering that prioritizes capital dispersion
Table 55: MSCI Brazil Weighting by Sector
Weightings %
EM
Latam
companies
Consumer Discretionary
4.5
0.7
3.1
11
Homebuilders
2.5
0.4
1.7
1
Retailing
Consumer Staples
Public release of option programs
Level 2
1.5
0.2
1.1
4
8.5
1.4
5.9
9
Food & staples retailing
0.6
0.1
0.4
1
Food beverage & tobacco
6.6
1.1
4.5
6
Personal Products
Energy
Financials
Banks
Diversified Financials
1.3
0.2
0.9
2
24.5
3.9
16.8
5
24.4
3.9
16.8
12
20.5
3.3
14.1
6
2.7
0.4
1.8
2
3.2
0.5
2.2
12
Capital Goods
0.7
0.1
0.5
1
Transportation
6
Industrials
Quarterly financial releases
Public release of shareholder agreements
Number of
Brazil
2.5
0.4
1.7
Merchant Acquirers
1.9
0.3
1.3
3
Materials
23.8
3.8
16.3
15
0.8
0.1
0.5
3
3
Chemicals
Everything in Level 1 plus:
One-year unified mandate for the board
Paper and Forest
1.1
0.2
0.7
Quarterly financial releases in US GAAP
Metals & Mining
21.9
3.5
15.1
9
100% tagalong rights for ON and 70% for PN
Telecom
2.7
0.4
1.2
6
If the company takes itself private, or exits Level 2, it must do a public offering
for the acquisition of 100% of shares in circulation
Participation in the Arbitration Court
Utilities
5.6
0.9
3.8
12
100.0
16.0
68.1
83
Right of vote for preferential shareholders (PN) in some issues, such as M&A
MSCI Brazil
Source: MSCI; J.P. Morgan.
Novo Mercado
Everything in Level 2 plus:
Only one share class (ON – Ordinary)
100% tagalong rights
Board includes at least five members elected by shareholders
Source: BM&F Bovespa.
MSCI
The Brazil MSCI index is composed of 83 companies,
free float market capitalization weighted. With a 16%
weighting in the MSCI Emerging Markets index, Brazil
is the second-largest country in terms of representation,
behind only China with its 17.5% participation.
54
Brazil, along with Russia, is the EM country that has the
most commodity companies (global price taker)
represented in the MSCI, as shown in the table below.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 56: MSCI EM index composition by country: Demand
Classification
MSCI
Emerging
Markets
Free Index
China
India
Domestic
Demand
Global
Capex
12.7
0.5
4
1.4
Global
Consumer
0.2
Figure 110: Foreign Equity Investments in the Bovespa
(Secondary) Market
Global
Price
Takers
Total
4.1
17.5
2
7.4
0.4
2.4
2.4
14.2
0.6
2.8
30.0
1.9
Korea
5.4
Malaysia
2.2
Philippines
0.5
Taiwan
3.2
Thailand
1.1
Asia
31
Czech
Republic
Egypt
0.4
0.4
0.3
0.3
3.9
0.5
1.6
3.1
3.1
0.1
0.6
1.7
7.5
7.3
11.8
57.6
0.2
20.6
20.0
Indonesia
2.5
BRL Billion
11
0.4
7.5
10.0
1.8
0.8
5.9
5.7
1.8
0.0
-10.0
-1.4
-2.2
-4.2
-20.0
-30.0
2000
2001
2002
2003
2004
2005
2006
2007
-24.6
2008
2009
Source: Bloomberg.
Flows into emerging markets: In 2010, emerging
market funds saw a record inflow of over US$84 billion
versus US$64 billion the previous year (up more than
30%). Looking at a proxy for Brazil, the country was
responsible for 4.2% of the total EM flow, compared to
15% in 2009, confirming that the poor flow result of
2010 is probably Brazil-centric.
Hungary
0.2
Morocco
0.2
Poland
1.3
Russia
1.9
South
Africa
Turkey
4.7
1.4
EMEA
10.5
8.6
19.3
Brazil
8.6
7.3
15.8
Stock Exchange Investors' Trading Data
Chile
1.4
0.1
1.5
Japan (1wk lag)
36728
Colombia
0.5
0.2
0.8
South Africa
4739
8988
Mexico
3.7
0.2
0.5
4.4
Brazil**
3534
10028
0.4
0.6
Taiwan
8709
13720
8.5
23.1
Korea
18595
24827
28.9
100
India
28686
17626
Thailand
1923
1141
Indonesia
2331
1385
Philippines
1231
132
Total EM Equity****
84112
64373
Global EM Equity*
55045
29058
LatAm Equity*
1842
8786
EMEA Equity*
6567
2017
Asia ex-Japan Equity*
19609
19108
BRIC Equity*
1049
5404
Japan Equity Funds
-840
-5461
Developed Europe*
-10256
2506
International Equity*
6500
18727
US Equity***
33467
-8290
US Bond***
149347
180622
US Money Market ***
-395262
-466143
0.2
0.1
0.3
1.7
5.3
7.3
2.8
7.5
Table 57: Market Data and Net Foreign Investment
US$ Million
2010 Agg.
US$M
1.5
0.1
Peru
0.2
LatAm
14.3
0.3
Total
55.8
7.9
0.1
7.4
Source: MSCI; J.P. Morgan.
Flow of Funds
Our basic theory is that flows are inversely correlated to
risk. This was pretty much the case in 2010, when
outflows were the rule considering that risk aversion
was high on the back of uncertainties related to
monetary policy tightening in Brazil, the European
sovereign crisis, the increase in interest rates in China
and the spring disappointment with the pace of the US
economy. On top of that, two 2H10 events hovered for
Brazilian equity investors: the capitalization of
Petrobras (September, but first scheduled for 2Q) and
the presidential elections (October). All these overhangs
weighed on the market in 2010, and foreign net inflows
into the Bovespa ended the year at only R$5.75 billion,
down from more than R$20 billion in 2009, a 70%
decline.
2010
2009 Agg.
US$M
17078
Regional & US Mutual Fund Flows
Source: Bloomberg, J.P. Morgan, I:Net, MKK, Lipper FMI, MSCI, Datastream. *EPFR
Global data. ****Total EM Equity includes Global EM, LatAm, EMEA, Asia ex Japan and
BRIC equity funds.
55
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Investor participation in Bovespa: The profile of
investors’ participation in the Bovespa has changed a lot
in the last ten years. The main change was regarding
financial institutions’ role in the Bovespa. At the
beginning of the decade, this group was the main
investor in the Brazilian stock exchange, responsible for
more than one third of total volume. Nowadays, the
group’s participation is only 8% and it no longer figures
among the 3 main groups of investors in the Bovespa,
which are now individuals, institutional and foreign
investors. After 6 consecutive years as the Bovespa’s
main group of investors, foreigners lost their position in
2010, due to the Brazilian economy overhangs that kept
foreign investors far from Bovespa most of the year.
The most representative category in 2010 was the
institutional investor, taking exactly one third of the
volume.
Figure 111: Investor Participation in Total Bovespa Volume
%
40.0%
35.0%
10.0%
5.0%
2000
2001
2002
2003
Indiv iduals
2004
Institutional
2005
2006
2007
2008
Foreign Inv estors
2009
2010
Financial Institutions
Source: BM&F Bovespa.
Bovespa average daily traded volume: Bovespa’s
ADTV has been reaching record levels since 2006 (with
the exception of 2009), and in 2010 the average daily
traded volume reached US$3.7 billion. This means an
increase by 35% compared to 2009 and 18% compared
to 2008. The evolution presented below illustrates the
development and internationalization of the Brazilian
Stock Exchange.
Figure 112: Bovespa Average Daily Traded Volume
US$ Billion
4.00
3.69
3.12
3.50
3.00
2.74
2.55
2.50
2.00
1.12
1.50
0.50
0.36 0.28 0.39
0.77
0.57
0.35 0.41 0.27 0.20 0.27 0.42
0.67
Source: BM&F Bovespa.
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0.00
56
The Brazilian pension fund system: The pension fund
system in Brazil is basically divided into three areas: (1)
Public sector: mandatory social security for public
sector employees; (2) General regime: mandatory
social security for formal sector employees; (3)
Complementary pension: optional, can be closed
(when the worker is associated with a company that
offers a private social security plan) or open (available
to anyone who wishes to participate, independent of the
company for which the person works).
In mid-2010 there were about 370 closed-end pension
plans in Brazil and approximately 2.1 million active
participants actively contributing to the system. The
largest closed-end pension fund was the one of the
Banco do Brasil employees, which is called Previ. Its
AUM accounts for 29% of the industry’s total, or
R$145.6 billion as of September 2010.
Table 58: Top Ten Brazilian Pension Funds
30.0%
25.0%
20.0%
15.0%
1.00
Pension Funds
Fund Name
Entity Associated
AUM in R$ bn
1
PREVI
Banco do Brasil
145.6
2
PETROS
Petrobras
48.0
3
FUNCEF
Caixa Economica Federal
39.5
4
FUNDAÇÃO CESP
Cesp
17.7
5
VALIA
Vale
13.1
6
ITAUBANCO
Banco Itau
11.5
7
SISTEL
Telecom Companies
11.1
8
BANESPREV
Banco Santander
9.5
9
FORLUZ
Cemig
8.6
10
CENTRUS
Banco Central do Brasil
8.2
Source: Abrapp.
As of mid-2010, there was around US$583 billion in
assets under management in Latin America pension
funds. On average, pension funds represent 16%-22%
of Latin America countries’ GDP, with the exception of
Chile, where the ratio of total pension funds to GDP is
comparable to that of developed countries. Regarding
the asset allocation, it can be observed that almost all
the countries in Latin America prefer to allocate a
higher share of the AUM to fixed income. Only 32% of
Latin America AUM is invested in equity.
Latin America Equity Research
18 April 2011
Country
AUM (US$ bi)*
as % of GDP**
Fixed Income
Equity
Brazil
270
16%
62.2%
30.4%
Chile
130
79%
49.2%
46.2%
Colombia
49
21%
55.1%
42.9%
Mexico
101
12%
79.2%
12.9%
Peru
27
21%
44.4%
48.1%
Uruguay
6
18%
99.9%
0.0%
Source: J.P. Morgan. * As of August 2010 excepting Brazil (May 2010) and Colombia
(July 2010). ** 2009 GDP.
Brazilian pension funds had assets under
management equivalent to 15% of GDP as of
September 2010. Pension investments in Brazil over
the last several years have been pretty conservative,
with heavy concentration in fixed income. This makes
perfect sense to us, considering that Brazil had some of
the world’s highest real interest rates for most of the last
two decades. On average, pension fund investment in
equities has been around 32%. The equity percentage of
total AUM at the end of 2009 was about 33.2%,
compared to 56.2% for fixed income. From January to
September 2010 pension fund total AUM reached
R$529 billion, with 31.6% allocated in equity and
60.9% in fixed income. Note that 2.8% of pension fund
AUM are invested in real estate.
Figure 113: Pension Fund Allocation
%
40
Equity
65
Fixed Income
investment is capped at 8%, but investments in real
estate plans fall under another category (structured
products, which include multi-strategy funds), with a
limit of 10%.
Mutual Funds
In 2010 the mutual fund industry had R$1.67 trillion
of AUM, with only 3.5% off-shore. This amount
represents around 47% of the country’s GDP. In Brazil,
there are about 10,083 mutual funds registered, and
more than 10.7 million accounts.
Table 60: Mutual Fund Industry
Relevant Information – Oct/2010
Domestic market
R$1,614.6 billion of AUM
Number of funds
10,083 funds
Number of accounts
10,7 million accounts
Off-shore
R$59.3 billion of AUM and 94 funds
Total
R$1,673.9 billion of AUM
Source: Anbima.
Total AUM has increased steadily since 1994. With the
exception of 2002 and 2008 (both years marked by a
confidence crisis in Brazil), each year presented doubledigit growth from the prior year. In 1994-2010, total
AUM average growth was 27% per year (inflation
adjusted). In 2010 things were not different and in the
year as a whole, total AUM increased by 19.2% in real
terms, reaching R$1.69 trillion as of December.
Figure 114: Mutual Funds’ Total AUM
37
62
34
59
31
56
28
53
1250
50
1000
Apr-10
Feb-10
Oct-09
Dec-09
Aug-09
Apr-09
Jun-09
Feb-09
Oct-08
Dec-08
Aug-08
Apr-08
Jun-08
Feb-08
Dec-07
Dec-05
Dec-03
Dec-01
25
Source: Abrapp.
R$ Billion
1750
1,419
1500
1,160 1,135
750
516
500
250
1,691
940
46
62
221
116 129 147
1996
Asset Breakdown
1995
Table 59: Latin America Private Pension Funds
1994
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
613
739
297 344 355
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
In Brazil there are limitations in terms of security
allocations for pension funds. Recently, the legislation
was changed to allow for a higher limit on equity
investments, with the ceiling raised from 50% to 70%.
Still, it is interesting to note that the previous 50% limit
was never reached, so that the new legislation doesn’t
really make a material difference. Fixed income
investments (public sector debt) in general have no
ceiling, and funds can opt to invest 100% of AUM in
these securities. For investment in private debt (notes,
receivables, etc.), the limit is 20%. Real estate
1997
0
Source: Anbima.
At the end of 2010, the share of total AUM invested in
fixed income funds was 27.2%, with an additional
12.2% invested in overnight rates tied to the Selic (DI).
The second most preferred destination of investors is
multi-strategy funds (mostly hedge funds), accounting
for 24% of total AUM, or R$415 billion. The equity
funds have had a more discreet participation, being
responsible for only 11.3% of investments. This level
57
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
has been maintained since December 2007, when
investments in equities reached a peak of 15.5%.
Politics
Figure 115: AUM Breakdown by Category
The Federal Republic of Brazil is a democratic state,
meaning that its representatives are elected by universal
suffrage, according to the Constitution of 1988. The
executive power is exercised by the president, who is
elected to a four-year term and may be re-elected once.
The legislative power is exercised by the Brazilian
National Congress, composed of two chambers. The
Chamber of Deputies is the lower house and has 513
members elected for four-year terms. Each state’s
representation is determined by its population, with a
minimum of 8 seats and a maximum of 70 seats. The
Federal Senate (upper house) has 81 members elected
for eight-year terms, with elections every four years for,
alternatively, either one-third or two-thirds of the seats.
Each state elects three senators. To be elected president,
governor or mayor in Brazil, the candidates need an
absolute majority, which means they need 50% of the
valid votes plus one vote to carry the election in a single
round. Otherwise the two candidates with the highest
number of votes go to a second round. Still, run-offs for
mayor only take place in localities of over 200,000K
people..
%
OthersShort term - 4%
DI - 12%
4%
Others - 7%
FIDC - 3%
Retirement - 11%
Equities - 11%
Fix ed Income - 27%
Multistrategy - 24%
Source: Anbima.
The figure below shows that the fixed income share of
total AUM has decreased significantly over the years. In
1995, almost 85% of the AUM was allocated in fixed
income funds. At the end of the 1990s started a
devolution process and new fund categories (such as DI
index funds, private equity and off-shore) started to
emerge as investment options.
Figure 116: Fixed Income vs. Equity vs. Multi-Strategy
80.0
60.0
40.0
20.0
Fix ed Income
Multistrategy
Jul-05
Jul-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
Jun-05
0.0
Equity
Source: Anbima.
Comparing mutual fund and pension fund allocations,
we can say that the pension funds have a more
aggressive strategy in terms of equity investments.
While on average 30% of pension funds’ total AUM is
allocated in equities, only 11% of mutual funds’ AUM
is invested in this category. In part, this is because
pension funds were active participants in the
privatizations of the 1990s and thus own important
shares of key Brazilian companies. In addition, mutual
funds have a significant participation in multi-strategy
funds, which may or may not contain a share of equities
in their strategy. As a basis of comparison, in Mexico
both mutual and pension funds have a similar allocation
in equities: between 12% and 16%.
Who votes in Brazil? Voting is considered both a right
and a duty in Brazil. Every citizen between 18 and 70 is
subject to compulsory registration and voting. The new
Constitution in 1988 allowed 16- and 17-year-olds to
vote on a voluntary basis. In 2010, the Brazilian
electorate reached 135 million people, with 43.5%
located in the Southeast region, 27.1% in the Northeast,
14.9% in the South, 7.4% in the North and 7.1% in the
Midwest.
Figure 117: Electorate Divided by Age
%
30.0%
24.1%
25.0%
19.7%
22.6%
20.0%
15.0%
9.9%
5.0%
8.4%
6.5%
10.0%
6.9%
1.8%
0.0%
16-17
18-20
21-24
25-34
35-44
45-59
60-69
More than
70
Source: Tribunal Superior Eleitoral.
Brazil is famous for having one of the most high-tech
and trustworthy electoral systems in world. Electronic
voting was introduced in 1996; and the country became
the first in the world to conduct fully electronic
58
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
elections. The vote count happens quickly, and results
are out shortly after the polls are closed.
Brazil’s Main Political Parties
PMDB: The Brazilian Democratic Movement Party is
the biggest political party in Brazil, although it has
never elected a president in a direct election, with the
entire population able to cast a vote. Launched in 1980,
the PMDB is the successor of the Brazilian Democratic
Movement – MDB – which was the official opposition
party to the military regime. Nowadays the PMDB is
part of the governing coalition, which guarantees it
some key positions in the government. Among its more
famous members are current Vice President Michel
Temer and former presidents Tancredo Neves and
Itamar Franco.
PT: Founded in 1980, the Worker’s Party is considered
one of the most important leftist parties in Latin
America. The party – originally made up of trade
unionists, leftist intellectuals and elements of the
Catholic Church linked to liberation theology – wished,
initially, to put in practice a new form of democratic
socialism. The PT’s main figures are former president
Luis Inácio Lula da Silva, Lula, and his successor,
President Dilma Rousseff. A survey conducted in
December 2009 showed that the PT is the preferred
party of around one quarter of Brazilian voters.
PSDB: The Brazilian Social Democracy Party was
founded in 1988 by dissidents from the PMDB and is
considered a centrist political party. The PSDB grew
faster than any other party in Brazilian history, electing
a president of the Republic just six years after its
creation. The party members are called “tucanos”
because of their mascot, which is a toucan. Currently,
PSDB is the main opposition party. Main
representatives: former president Fernando Henrique
Cardoso, Senator Aécio Neves, São Paulo Governor
Geraldo Alckmin and José Serra, who has been mayor
and governor of São Paulo and ran twice for president
(in 2002 and in 2010).
Brazil’s Presidents
Since the advent of the republic (1889), Brazil has had
36 presidents, including Dilma Rousseff. The Brazilian
republican history is very troubled and only a few
presidents can be considered fully elected by democratic
vote.
Table 61: Brazilian Presidents
President
Period
1
Deodoro da Fonseca
Nov 1889 - Nov 1891
2
Floriano Peixoto
Nov 1891 - Nov 1894
3
Prudente de Morais
Nov 1894 - Nov 1898
4
Campos Sales
Nov 1898 - Nov 1902
5
Rodrigues Alves
Nov 1902 - Nov 1906
6
Afonso Pena
Nov 1906 - Jun 1909
7
Nilo Peçanha
Jun 1909 - Nov 1910
8
Hermes da Fonseca
Nov 1910 - Nov 1914
Nov 1914 - Nov 1918
9
Venceslau Brás
10
Delfim Moreira
Nov 1918 - Jul 1919
11
Epitácio Pessoa
Jul - 1919 - Nov 1922
12
Artur Bernardes
Nov 1922 - Nov 1926
13
Washington Luis
Nov 1926 - Oct 1930
14
Getúlio Vargas
Nov 1930 - Oct 1945
15
José Linhares
Oct 1945 - Jan 1946
16
Eurico Gaspar Dutra
Jan 1946 - Jan 1951
17
Getúlio Vargas
Jan 1951 - Aug 1954
18
Café Filho
Aug 1954 - Nov 1955
19
Carlos Luz
Nov 1955 - Nov 1955
20
Nereu Ramos
Nov 1955 - Jan 1956
21
Juscelino Kubitschek
Jan 1956 - Jan 1961
22
Jânio Quadros
Jan 1961 - Aug 1961
23
Ranieri Mazzilli
Aug 1961- Sep 1961
24
João Goulart
Sep 1961 - Apr 1964
25
Ranieri Mazzilli
Apr 1964 - Apr 1964
26
Castelo Branco
Apr 1964 - Mar 1967
27
Costa e Silva
Mar 1967 - Aug 1969
28
Emilio Medici
Oct 1969 - Mar 1974
29
Ernesto Geisel
Mar 1974 - Mar 1979
30
João Figueiredo
Mar 1979 - Mar 1985
-
Tancredo Neves
31
-
José Sarney
Mar 1985 - Mar 1990
32
Fernando Collor
Mar 1990 - Dec 1992
33
Itamar Franco
Dec 1992 - Jan 1995
34
Fernando Henrique Cardoso
Jan 1995 - Jan 2003
35
Luiz Inácio Lula da Silva
Jan 2003 - Jan 2011
36
Dilma Rousseff
Jan 2011 -
Source: J.P. Morgan.
Below we describe briefly the most famous, popular and
polarizing presidents in Brazil’s history.
Getúlio Vargas: One of the most popular political
figures in Brazil’s history, Mr. Vargas was the country’s
president twice, from 1930 to 1945 and from 1951 until
his suicide in 1954. He is the president who stayed
longest in the post: 18 years in all. Vargas assumed the
59
Latin America Equity Research
18 April 2011
60
Figure 118: Last 5 Presidents’ Popularity
%
80
60
40
José
Sarney
Fernando
Henrique
Collor Itamar
Franco
Lula
20
Source: Datafolha.
Oct-10
Dec-09
Aug-07
Nov-08
Oct-05
Aug-06
Dec-03
May-05
Jul-02
Apr-03
Mar-01
Mar-00
Feb-99
Mar-98
Dec-95
May-97
Dec-94
Dec-93
Jun-91
0
Dec-92
Fernando Collor de Mello: Collor was Brazil’s
president from 1990 to 1992, and the first president
elected by popular vote after the end of the Brazilian
military regime. His government was marked by the
freezing of the population’s banking assets and
corruption accusations that shortened his term. Still,
Collor was responsible for trade liberalization and the
start of privatization. Despite that, he was unable to curb
inflation. During his government, more than 920
thousand jobs were lost and annual inflation climbed to
more than 1,200%. In October 2002 he resigned under
accusations of corruption and influence peddling. After
his resignation, the impeachment trial continued and
Mr. Collor was found guilty and disqualified from
holding elective office for eight years (1992-2002). He
was elected senator in the 2006 elections.
Luis Inácio Lula da Silva: The most popular president
in Brazil’s history ran for the post three times
unsuccessfully before becoming the country’s president
for eight years (2003-2010). He is a founding member
of the Worker’s Party and currently its most important
member. During his government he emphasized social
programs, such as “Bolsa Família” and “Minha Casa,
Minha Vida,” which brought him a lot of popularity. On
the international relations front, his government was
marked by polemical but prominent participation,
including controversial statements on Iran’s nuclear
program. Under his government, the Brazilian economy
performed well and recovered quickly from the
2008/2009 financial crisis. Social indicators also
presented significant improvements: income inequality
decreased and more than 30 million Brazilians migrated
to middle-income segments. After eight years of
government and 85% popularity, he was a key figure in
helping to elect his successor, Dilma Rousseff.
Mar-90
Juscelino Kubitschek (JK): JK had a key role in
Brazil’s industrialization, and his presidency was
marked by political optimism. During his government
(1956-1961), the country went through a period of
relative economic prosperity and political stability. He
launched the famous “Plano de Metas” (Goal Plan) in
order to stimulate the diversification and expansion of
the Brazilian economy. The plan was based on
industrial expansion and integration of the national
territory. His main motto was “Fifty years of progress in
five”, and the time of his government is known as “the
Golden Age.” Mr. Kubitschek’s special achievement
was the construction of a new capital for Brazil away
from the coast, Brasília. (The plan to move the capital
was 100 years old.) But JK was not free from
controversies; his government was also marked by
accusations of corruption, mainly involving the
construction of Brasilia.
Fernando Henrique Cardoso: An accomplished
sociologist, professor and politician, Mr. Cardoso took
command of the country in a difficult period, from 1995
to 2002. He was propelled to the presidential seat
mostly due to the successful implementation of the Real
Plan, which took place under his watch as Finance
Minister. His election was a vote of confidence on the
stability of the Brazilian economy and, especially, on
the end of inflation. He was the first president since
Vargas to be re-elected (indeed it was he who approved
a constitutional amendment allowing re-election). On
the economic front, he deepened the privatization
process and also conducted Brazil through major crises,
including Asia, Russia, the BRL devaluation, the energy
rationing (2001) and the Lula election crisis (2002).
During his government important policies were put in
place such as the inflation-targeting system and the
fiscal responsibility law.
Dec-88
post initially as a provisional president after the 1930
Revolution against the oligarchic and decentralized
confederation of the Old Republic. In 1937 he utilized
fears of Communism to justify a dictatorial regime.
Under the “New State”, Mr. Vargas abolished political
parties, imposed censorship and stimulated nationalism.
In 1945 he was deposed by the military. In his second
government, when he was finally elected by free and
secret vote, Vargas pursued a nationalistic policy,
turning to the country’s natural resources and away
from foreign dependency. Petrobras was created in this
context. Pressured by political adversaries and the
military, who wished his resignation, Vargas shot
himself in August 1954. He is famous as the “the father
of the poor,” mainly because of the improvements he
made in the labor laws.
May-87
Emy Shayo Cherman
(55-11) 3048-6684
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Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
2010 Elections
Dilma Vana Rousseff was Chief of Staff until the end
of March 2010. She had been in cabinet since the
election of President Lula. From January 2003 until
June 2005 she was the Minister of Mines and Energy,
and in this function she implemented the spot energy
auctions, among other landmarks of the electricity
model. She was chosen Chief of Staff following the
resignation of José Dirceu from the post (2005) due to
accusations relating him to the “mensalão” scandal. In
this capacity, Dilma became the right hand of President
Lula and received the nickname of “Mother of the
PAC,” the multiyear, R$600 billion infrastructure
project that was launched in 2007 as the main
investment/growth strategy of the Lula Administration.
Ms. Rousseff was also the president of the board of
directors of Petrobras. She was born in Minas Gerais in
1947 and in the mid-’60s joined the armed resistance
against the military regime. She was a member of farleft guerrilla movements until she was caught and
imprisoned. She stayed in jail for three years (19701973.) Sometime after her release, she took a degree in
economics. In the 1980s she was part of the group that
revived the PDT (Democratic Worker’s Party), the party
of political icons such as former president João Goulart
and Leonel Brizola. In the early ’90s she was the
Secretary of Energy of the state of Rio Grande do Sul,
and in 1998 she joined the PT (Worker’s Party).
Senate: After the 2010 elections, the government
coalition increased its representation in the Senate from
50 representatives to 60. This is almost 75% of the
representation in the Upper House and enough to pass
constitutional amendments with a comfortable margin.
The party that gained the most seats was the PT, which
saw its base expand by 6 representatives. The party that
lost the most was the DEM, which had 15
representatives and is now down to 6. With that, the
current opposition has 20 representatives in the Senate,
down from 30.
Table 62: Senate Composition
Coalition
Opposition
Independent
Party
Prior
PMDB
18
From 2011 On
20
PT
8
14
PTB
6
6
PPS
1
5
PDT
6
4
PR
4
4
PSB
2
3
PCdoB
1
2
PRB
2
1
PSC
1
1
Non Party
1
0
PSDB
14
11
DEM
15
6
PSOL
1
2
PPS
0
1
PV
1
0
PMN
0
1
Source: Arko Advice, J.P. Morgan.
Chamber of Deputies: The government coalition
practically got enough votes to get a constitutional
majority in the Lower House (3/5 of votes). According
to the latest tally, the government coalition got 371 of
the 513 seats in the Lower House. On the other hand,
the opposition elected 111 candidates, or only 21.6% of
representatives. Among those that made considerable
gains in terms of representation the highlight was the
PR party, whose Deputy Tiririca (SP), a candidate who
campaigned as a clown (his official profession) and who
is accused of being illiterate, got 1.3 million votes,
becoming the deputy with the most votes in the country.
Another party that advanced in the elections was the
PSC, a Christian party that is supported by Brazil’s
many evangelical church groups. The PT was the party
that elected the most deputies, followed by its ally, the
PMDB, with 88 and 79 representatives respectively.
The opposition parties suffered some losses: the number
of representatives of the PSDB shrank;(58 down to 53),
and the DEM (former PFL) lost 23% of its former
representation.
61
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 63: Chamber of Deputies Composition
Coalition
Opposition
Independents
Table 64: Governors elected in 2010
Governor
Prior
From 2011 On
PT
79
88
Acre
Tião Viana
PMDB
89
79
Alagoas
Teotônio Vilela Filho
Party
PT
PSDB
PP
40
41
Amapá
Camilo Capiberibe
PSB
PR
43
41
Amazonas
Omar Aziz
PMN
PSB
26
34
Bahia
Jaques Wagner
PT
PDT
23
28
Ceará
Cid Gomes
PSB
PTB
21
20
Distrito Federal
Agnelo Queiroz
PSC
17
17
Espírito Santo
Renato Casagrande
PCdoB
12
15
Goias
Marconi Perillo
PSDB
PRB
8
8
Maranhão
Roseana Sarney
PMDB
PT
PSB
PSDB
58
53
Mato Grosso
Silval Barbosa
PMDB
DEM
56
43
Mato Grosso do Sul
André Puccinelli
PMDB
PPS
15
12
Minas Gerais
Antonio Anastasia
PSDB
PSOL
3
3
Pará
Simão Janete
PSDB
PV
14
16
Paraíba
Ricardo Coutinho
PMN
3
4
Paraná
Beto Richa
PSDB
PSB
PSB
PTdoB
1
3
Pernambuco
Eduardo Campos
PRTB
0
2
Piauí
Wilson Martins
PSB
PRP
0
2
Rio de Janeiro
Sergio Cabral
PMDB
PHS
3
2
Rio Grande do Norte
Rosalba Ciarlini
DEM
PTC
2
1
Rio Grande do Sul
Tarso Genro
PSL
0
1
Rondônia
Confúcio Moura
PMDB
Roraima
Anchieta Júnior
PSDB
Santa Catarina
Raimundo Colombo
DEM
São Paulo
Geraldo Alckmin
PSDB
Source: Arko Advice, J.P. Morgan.
Governors: While the PT and its allied parties were the
winners in the presidential and congressional elections,
on the gubernatorial front the PSDB had a good
showing: it captured eight states, more than any other
party. The opposition as a whole got 10 states, including
important ones such as São Paulo, Minas Gerais, Paraná
and Goiás, corresponding to 55% of the national GDP.
62
State
Party
Sergipe
Marcelo Déda
Tocantins
Siqueira Campos
Source: J.P. Morgan.
PT
PT
PSDB
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Sectors
Oil, Gas & Petrochemicals
By Sergio Torres and team – (1) 212 622-3378
[email protected]
The Oil, Gas and Petrochemical sector is vital for the
Brazilian economy because it is responsible for
supplying all future demand growth for energy and
fuels. Under our definition, the sector includes the Oil
Services and Equipment industry. The Brazilian O&G
sector is expected to become a more material source of
tax revenue through expanded production and of hard
currency by increasing export revenue and attracting
foreign direct investment. For portfolio investors the
sector is also very relevant because it boasts the largest
market value (over $300 billion) and because it can still
generate many new investment vehicles in the future.
Additionally, Brazil constitutes a strategic market for
many of the listed global Oil Majors and global service
+ equipment companies.
We start by describing how the energy matrix in Brazil
is unique in many ways: 1) it serves a population of 190
million; 2) it is highly self sufficient; 3) it is hydropower intensive; 4) it is the largest user of biofuels in
the world (sugarcane based). As shown below. Brazil’s
reliance on natural gas is one of the lowest in the world
while its use of hydro-power is one of the highest.
Figure 119: Brazil’s Energy Matrix 2009
100%
90%
6.6%
5.5%
39.2%
80%
70%
31.9%
1.3%
5.2%
23.8%
6.6%
22.8%
16.5%
27.0%
34.4%
38.4%
0.0%
10.8%
9.6%
6.4%
0.7%
70.6%
53.0%
8.1%
27.0%
40%
30%
20%
2.9%
8.7%
2.5%
1.6%
29.4%
60%
50%
3.6%
1.3%
4.2%
12.6%
52.5%
46.2%
34.8%
30.3%
38.6%
30.5%
33.0%
10%
3.7%
18.6%
Venezuela. Brazil attracted the global spotlight in 2007
when a Petrobras discovery in ultra deep waters was
quantified at 6-8 billion boe of recoverable resources,
representing the world’s largest find since the Kashagan
field in Kazakhstan (~13 billion boe in 2000). Since
then, PBR and other operators, such as Devon,
Anadarko, Exxon, have made sizable discoveries in
Brazilian ultra deep waters in what has been named “the
pre-salt province,” reservoirs with total depth of ~6 km
under water depth of 2.5-3.0 km in the Santos and
Campos basins. Brazil is now considered the southern
vertex of the so-called “Golden Triangle” for deepwater
exploration, comprised of the US Gulf of Mexico, West
Africa and Brazil.
The federal government believes Brazil has a potential
of at least 70 billion boe in yet to be discovered
resources in its pre-salt acreage. After more than 3 years
of appraisal drilling, approximately 1.2 billion boe of
Santos pre-salt oil have been qualified as proved
reserves in the Lula-Cernambi fields (formerly known
as Tupi and Iracema).
Brazil is the globe’s #2 in expected oil production
growth. IEA estimates that Brazil’s oil production
should grow 2.1% yearly from 2009 to 2035, second in
the world only behind Iraq.
Figure 120: Expected Oil Production Growth (CAGR 2009 - 2035)
Canada
Mex ico
Europe
Iran
USA
Russia
Other ME
Africa
S. Arabia
Kazakhstan
Brazil
Iraq
-3.3%
-2.2%
-1.7%
-0.3%
0.0%
0.5%
0.9%
1.0%
1.7%
2.1%
2.1%
3.5%
Source: BP, IEA, J.P. Morgan.
0%
World
Brazil
Colombia
Oil
Argentina
Natural Gas
Mex ico
Coal
Nuclear
United States
Hy dro
Europe &
China
Eurasia
Source: BP Statistical Review of World Energy 2010.
Completing the “Golden Triangle.” Brazil owns
proved hydrocarbon reserves of 15.1 1 billion boe and
daily output of 2.6 million boed, making it the thirdlargest producer in LatAm behind Mexico and
1
2009 data according to BP Statistical Review of World Energy 2010.
To help reach these production estimates, Brazil relies
on 77 oil companies that are authorized to produce oil in
the country. Among them are names such as Shell,
Royal Dutch Shell, Chevron, Exxon, BP and Statoil.
Prolific oil basins are concentrated in the Southwest
of Brazil. The biggest accumulations found in the
country are concentrated in the Brazilian Continental
Platforms of Campos and Santos Basins. The Campos
Basin accounts for ~85% of Brazil’s oil production
63
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
while the Santos Basin contains the most recent giant
discoveries in pre-salt.
Figure 121: Simplified map of Brazilian Basins
Regulatory environment: The federal government
regulates the oil and gas sector. The Brazilian state is
the official owner of all crude oil and natural gas
reserves in Brazil and outsources the exploitation to
third parties, allocating contracts through yearly
licensing rounds. The sector’s regulator is the National
Petroleum Agency (ANP). Another entity is the
National Counsel for Energy Policy (CNPE), which sets
policy guidelines for the sector.
The sizable discoveries in pre-salt led to several
changes in the economic and regulatory environment for
the O&G sector. Among them:
1) Interruption of yearly offshore licensing rounds
(2009);
Cenozoic basins
Continental margin basins
Rifts
2) Introduction of proposals for a new regulatory
regime (2010);
Paleozoic basins
Source: Energy Ministry, J.P. Morgan.
Fuel demand growth requires expansion to refining
capacity. Current refining capacity and fuel demand are
almost balanced at ~2 million kbd. However, oil-based
fuel demand registered a 4.4% CAGR between 2003
and 2009. PBR owns virtually all of the refining
capacity in Brazil. Diesel fuel leads the consumption of
oil derivatives in Brazil, reaching 779 kbd and
representing 36% of total demand. Brazil is a net
importer of diesel, with ~10% of total demand. Gasoline
is the second-largest product, with demand at 297 kbd
but declining. Ethanol has been replacing gasoline
consumption, and its demand size is just as large as that
of gasoline, which has made Brazil a net exporter of
gasoline in recent years. Ethanol serves a fast-growing
market on the back of consumer preference for flex-fuel
cars, which can take 100% ethanol.
Against beliefs, fuel pricing in Brazil is marketbased. Consumer prices of gasoline, ethanol, diesel and
LPG are determined freely by the market. They reflect a
refinery gate price (set by Petrobras), excise and sales
taxes, distribution costs and, in the case of gasoline
(75% gasoline-25% ethanol), they also reflect the cost
of ethanol, which has a deep seasonality. Petrobras
manages the refinery gate price of gasoline for blending,
diesel and LPG. In order to limit the impact of longterm oil price moves in domestic inflation, PBR and the
federal government often coordinate any price hike with
offsetting adjustments to excise taxes.
64
3) Increased M&A activity (2009-2010);
4) Ambitious investment and production goals
from PBR (2009, 2010); and
5) Government’s intention to create a “Brazilian”
oil services and equipment industry.
The new regulatory regime was introduced in 2010.
It applies only to new licenses and it pursues a higher
government take and tighter government steering of the
sector. The most important component is a new
contracting model, named the production-sharing
contract (aka PSA) that would apply to a predetermined
area in the pre-salt and to any acreage deemed strategic.
The current concession model would be valid for
onshore acreage and other non-strategic offshore areas
outside the “Pre-Salt Polygon.”
Table 65: Brazil’s major listed Oil, Gas and Petrochemical
companies
Ticker
Rating
Mkt Cap (US$ Mn)
Petrobras
Company
PETR4
N
232,878
OGX
OGXP3
OW
42,334
HRT
HRTP3
OW
6,576
-
11,400
Braskem
BRKM5
Confab Industrial
CNFB4
NC
1,278
Lupatech
LUPA3
N
426
Panoro Energy
PEN NO
NC
7
Source: J.P. Morgan estimates and Bloomberg as of April 11, 2011.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Metals & Mining
By Rodolfo de Angele and team – (55-11) 3048-3888
[email protected]
The Brazilian Metals & Mining industry was largely
developed during the industrial development programs
(Brazil’s “economic miracle”) of Presidents Vargas and
Kubitschek during the 1940s and 1950s. During the
mid-twentieth century, strategic state steel production
plants were established by the government, and steel
production became synonymous with the drive toward a
more autonomous development model. The sector
remained predominantly state-owned until the 1990s,
and in the process had become highly inefficient. It was
then that the Brazilian federal government embarked on
a privatization drive that began with the change of
control first at Usiminas (1991) and later at Vale (1997).
After privatization, Vale’s core focus was moved to
mining activities, and it sold its holdings in the steel
(Açominas, CSN, CST and Usiminas) and pulp
businesses.
mining company in the world in terms of market
capitalization, and the world’s largest iron ore producer
and exporter. Along the way, while it made efforts to
diversify into other commodities, such as aluminum and
nickel, among others, it remains predominantly an iron
ore producer and accounts for over 75% of Brazil’s iron
production and exports.
Figure 123: Vale’s iron ore output has doubled since 2000 and
accounts for over 75% of Brazil’s output
Million tonnes
350
100%
300
80%
250
60%
200
40%
150
20%
100
0%
2000
2002
2004
2006
Vale Iron Ore Vols (LHS)
2008
% of Brazil Prod.
Source: Vale, AME, J.P. Morgan.
As it stands now, the steel industry in Brazil is 100%
held in private hands, and until recently (before the
recent surge in iron ore and coking coal prices) boasted
one of the lowest-cost productions of steel in the world.
Within the sub-segments, as compared to long steel, the
flat steel category faces relatively more competition
from the presence of greater number of players and the
increasing influence of imports. Finished steel output in
Brazil was 25.8Mt in 2010 (flat steel – 60%; long steel
– 40%) and the main consuming sectors include civil
construction, automotive, capital goods, machines and
equipment, household and commercial appliances.
Figure 124: Brazil is the 8th major crude steel producer - as of
2010
Figure 122: BZ – Main steel-consuming sectors
Mn tons
On the mining side, Vale has continued to gain scale
since privatization and is now the second-largest
Others
Turkey
Ukraine
Brazil
Germany
Source: IABr and J.P. Morgan estimates.
South Korea
Construction
India
29%
Russia
18%
19%
United States
12%
700
600
500
400
300
200
100
0
Japan
Gen Engg &
Mfg
Others
22%
China
Auto Sector
Tubemakers
& CR Units
Brazil’s GDP growth remains robust, and that bodes
well for the consumption of steel. In addition, the
soccer World Cup in 2014 and the Olympic Games in
2016 should create above-normal growth in demand for
steel in the medium term, especially for long steel
products. With a strong outlook for demand, and
proximity to iron ore resources, many domestic and
international players have been investing in the sector,
which we estimate should result in ~7.0% CAGR
growth in Brazil steel production through 2016.
Source: WSA (World Steel Association).
65
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 125: Brazil’s crude steel capacity may reach ~64Mt by
2016
Million tons
70
50
1M t
3M t
1M t
64M
3M
7M
60
4M
42M t
40
30
20
10
A ctual
2011e
2012e
2013e
2014e
2015e
2016e
To tal
Source: Company reports and J.P. Morgan estimates.
However, we are now witnessing a change in the
competitive landscape of the Brazilian steel industry,
especially in the flat steel side, with imports having
established themselves as the fourth key player behind
CSN, Usiminas and CST. In addition, with the entry of
new players like Gerdau and potentially CSA in the
finished steel market, the competition is likely to get
more intense. Thus, the days of historically high
domestic price premium are unlikely to return, in our
view. Finally, with the global steel industry continuing
in overcapacity (73.8% capacity utilization in Dec’10),
Brazil is unlikely to remain isolated from its impact.
Figure 126: Brazilian flat-steel imports have stabilized at high
levels
'000 tonnes
35%
600
With rising profitability, mining activities have come
under regulatory scrutiny across the globe, which is
likely to result in more stringent tax regulations for
mining companies. Brazil is no exception, and the
government is already evaluating a new proposal for
mining regulations which, among other things, includes
potentially higher royalties, defining a time frame for
the exploitation of mining concessions and the
formulation of a regulatory body for closer oversight of
the mining industry. While we view changes in the
mining laws as a given, we believe that these are
unlikely to be as harsh as the market may currently
anticipate. Moreover, the government will be wary of
the disservice it will potentially do if the change in the
mining laws inadvertently hinders, in any way, the
performance of the Brazilian mining industry.
The outlook for the mining industry remains closely
synched with the growth outlook of the emerging world
and of recovering developed economies. The sector is
expected to receive record investment (running into tens
of billions of dollars) over the next 3-5 years, with a
majority of that to be in iron ore.
The following table summarizes the major listed
companies in the Brazilian Metals and Mining sector.
Table 66: Brazil’s major listed Metals & Mining companies
Flat-steel impo rts (LHS)
30%
Impo rts as a % o f A pparent Co nsumptio n
Ticker
Rating
Mkt Cap (US$ Million)
25%
Vale
VALE
OW
172,552
20%
Bradespar
BRAP4
OW
9,726
15%
Met. Gerdau
GOAU4
OW
6,084
10%
Magnesita
MAGG3
OW
1,591
100
5%
Gerdau
GGBR4
N
18,035
-
0%
CSN
CSNA3
UW
24,272
Usiminas
USIM5
UW
15,177
MMX
MMXM3
NR
4,155
Paranapanema
PMAM3
NR
1,084
500
400
300
200
Jan-01
Jul-02 Jan-04
Jul-05
Jan-07
Jul-08
Jan-10
Source: IBS, SECEX, JPMorgan estimates.
Mining industry retained its shine through the thick
and thin of the latter half of last decade, which was
largely possible due to the robust pace of China’s
growth. Brazil continues to be one of the sought-after
sources of high-quality iron ore and contributes roughly
30% of the global seaborne iron ore trade. In addition,
66
with abundant reserves to exploit, the country is
beginning to see proliferation of junior iron ore
producers, and with that, the onset of Chinese/Asian
investments in the sector. Besides iron ore, Brazil also
remains a small producer of aluminum and nickel.
Company
Source: J.P. Morgan estimates and Bloomberg as of April 11, 2011.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Financials
Figure 127: Deposit Market Share
24.7%
By Saul Martinez and team – (1) 212 622-3602
[email protected]
14.4%
14.2%
13.3%
7.7%
Industry Structure
A highly consolidated industry. The five largest banks
control around 68% of loans and 75% of deposits. The
two figures following demonstrate the loan and deposit
market shares of the top five banks in the country. The
level of market concentration is comparable to that of
other banking systems in Latin America.
Banco do Brasil
Caixa Economica
Federal
Itaú Unibanco
Bradesco
Santander Brasil
Source: J.P. Morgan and Central Bank as of September 2010.
Figure 128: Loan Market Share
20.5%
Itaú Unibanco
11.8%
11.0%
10.5%
Bradesco
BNDES
Caixa Economica
Federal
Source: J.P. Morgan and Central Bank as of September 2010.
Financial sector presentation
Credit penetration remains relatively low on a global
basis. In spite of healthy growth in the past decade (see
below), financial sector penetration remains relatively
low. According to data from the IPEA, 39% of Brazilian
families do not have a basic checking account. Of these
families, 40.6% would like to have a basic checking
account. In addition, many small companies still lack
access to consistent and low-cost sources of credit.
Ultimately, these factors, coupled with still relatively
low GDP per capita levels, drive still-low credit
penetration when compared to many countries’. The
figure below shows that, private sector credit as a
percentage of GDP remains well below that of many
countries.
Figure 129: Private credit as a percentage of GDP
250%
194%
200%
128%
150%
98% 90%
56% 51% 51% 49%
100%
41% 36% 34%
27% 25% 21%
14%
50%
na
nt i
ge
Ar
ru
xic
o
Pe
Me
Ri
ca
Am
e ri
ca
El
Sa
lva
do
r
Ni
ca
ra g
ua
Co
lo m
b ia
Gu
at e
ma
la
st a
al
Ce
Co
ntr
il
s
az
u ra
nd
Ho
ma
Br
ile
na
Pa
da
0%
Ch
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
US
Public sector banks have a substantial presence in
the Brazilian market. The federal Treasury owns
controlling stakes in three major banks that operate in
the Brazilian banking system: 1) Banco do Brasil (59%
stake), the country’s largest bank; 2) Caixa Economic
Federal, which has roughly 76% share in mortgage
lending; and 3) the BNDES, a government development
bank committed to providing funding for infrastructure
development. These three banks alone have more than
40% share of the Brazilian credit market.
Banco do Brasil
na
Foreign banks have a relatively limited presence.
With the exception of Santander Brasil, foreign banks
have not become significant players in the Brazilian
banking system. In particular, foreign banks control
19% of system loans, one of the lowest percentages
among major Latin American banking systems. In fact,
policymakers in other major Latin American countries,
notably Mexico, have cited the limited market share of
foreign banks as a reason why the Brazilian banking
system withstood the financial crisis as well as it did
(i.e., when foreign banks pulled back their lending
activity, the impact was not large enough to exacerbate
the negative economic impact of the crisis).
14.1%
Ca
Consolidation in recent years has hastened market
concentration. Since 2008, four sizable mergers have
noticeably increased the level of market concentration.
In particular, the mergers of Santander Brasil and ABN
Banco Real (August 2008), Itau and Unibanco
(November 2008), Banco do Brasil and Banco Nossa
Caixa (November 2008), and Banco do Brasil and
Banco Votorantim (January 2009) have increased the
collective loan market share of the top five banks in the
country to 75% from 52% at the end of 2007.
GDP per capta
Priv ate Credit/ GDP
Source: World Bank Development Indicators.
67
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
However, penetration levels are now high versus
most
Latin
American
financial
sectors.
Notwithstanding the relatively low credit penetration
compared to developed and select emerging economies,
many market participants point to the substantial growth
in financial sector penetration in the past decade as
evidence that growth will likely slow. Total loans in the
Brazilian banking system have grown 18% a year, on
average, since 2002. This growth has been driven by a
multitude of related factors, including strong economic
growth in the past decade (nominal GDP grew, on
average, 10% annually from 2002 to 2010), controlled
inflation, substantial growth in the middle-income
sector, rising disposable income levels, and improved
affordability of credit due to lower rates on loans
(which, in turn, result from greater risk appetites of
banks and a mix shift toward secured consumer credit
such as payroll and auto loans). Ultimately, as shown in
the figure below, credit to GDP in Brazil now only lags
that of Chile among major Latin American banking
systems.
liability durations. In addition, these high real rates
similarly inhibit the development of an asset-backed
securities market.
Figure 130: Total Loans to GDP
Table 67: Brazil’s major listed Financials companies
%
Regulations and policy backdrop
Central Bank is the primary regulator. The National
Monetary Council (Conselho Monetário Nacional, or
CMN) is the primary regulatory entity in the Brazilian
financial system. The CMN is composed of the central
bank president, the finance minister, and the planning
minister. Among its functions, the CMN gives the
central bank authority to establish reserve requirements
and establishes the general directives regulating the
banking and financial markets. However, the central
bank is the primary supervisory entity overseeing the
banking system. Among its primary functions, the
central bank establishes minimum capital and reserve
requirements, approves mergers and acquisitions of
financial institutions and must approve any capital
increases or establishment of branches in Brazil and
abroad.
Company
80%
65%
60%
45%
40%
28%
26%
21%
20%
14%
Ticker
Rating
Mkt Cap (US$ Million)
52,507
Banco do Brasil
BBAS3
N
Santander Brasil
SANB11
OW
44,258
Bradesco
BBDC4
OW
71,702
ItauUnibanco
ITUB4
OW
100,330
Source: J.P. Morgan estimates and Bloomberg as of April 11, 2011.
0%
Chile
Brazil
Peru
Colombia
Mex ico
Argentina
Source: J.P. Morgan and Central Bank.
High interest rates and limited long-term funding
availability inhibit growth of mortgage market.
Government-owned Caixa Economica Federal (CEF) is
the principal vehicle through which the federal
government promotes the financial sector. However, for
private banks, mortgage loans (which are still primarily
to homebuilders to finance construction) represented
only 3-7% of total loans at the end of Q3 2010.
However, we believe the principal impediment remains
the limited availability of long-term funding available to
fund longer-duration mortgages. In essence, while
benchmark interest rates of 11.75% remain well below
historical levels, real rates remain lofty (roughly 6%).
With overnight rates so high, investors with a long-term
horizon (from whom banks could borrow) have little
incentive to provide funding at the longer durations
necessary for banks to more adequately match asset and
68
Homebuilders
By Adrian E. Huerta and team – (52) 81 8152-8720
[email protected]
A secular growth history: The sector has grown
significantly in the past 3 years as a result of bettercapitalized developers and strong mortgage growth
financing. Also, the government implemented an
ambitious housing program in 2009. Over the last 4
years, the sector had more than 22 IPOs and 14 followon offers raising ~R$25bn. In addition Brazil has
positive demographics, with a young population,
resulting in a family formation forecast of more than
35mn new families from 2007 until 2030, translating
into 1.5mn new houses demanded every year on
average, with almost half of this market for lowerincome housing (families earning less than three
minimum wages). According to our calculation, this
demand represents a market size of close to USD70bn
in sales per year. The publicly traded companies
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
launched units worth R$24 bn in 9M10, a 76% increase
vs 9M09 and a 290% increase versus 06. We believe
that the sector could grow by 15-20% a year for the next
2-3 years.
The main source of funding for mortgage loans is the
SPBE (represented by 65% of saving accounts balance
and mainly for the middle- and higher-income
segments) and the FGTS (worker’s guarantee fund, an
8% mandatory contribution from regular employees’
compensation and mainly for lower-income segments).
In 2010, SBPE+FGTS disbursed close to R$75 bn in
new mortgages vs R$50 bn in 09 and only R$8 bn in
2004.
given their premium execution, attractive valuation and
the higher likelihood to surprise with upside potential.
PDG is the largest company in the sector and a
diversified player, acting in all income segments and
with presence in all regions. MRV has the best margins
in the sector and currently is one of the only pure lowerincome players in the market, having the highest
exposure to MCMV. The sector trades at 8.4-9.4x P/E
2011E, representing potential upside of 44-61% to our
Dec-2011 target prices.
Table 68: Brazil’s major listed Homebuilder companies
Ticker
Rating
Cyrela
Company
CYRE3
UW
Mkt Cap (US$ Million)
4,316
Gafisa
GFSA3
N
2,992
2,476
Currently the sector is composed of 17 companies with
a total market cap of more than USD32 bn and trading
close to USD285 mn per day on average. There are also
6 listed Shopping Malls, 2 broker companies and 3
property companies, for a combined market cap of
USD15 bn.
Rossi
RSID3
N
MRV
MVRE3
OW
4,158
PDG
PDGR3
OW
6,740
Rodobens
RDNI3
N
413
Trisul
TRIS3
OW
214
Aliansce
ALSC3
OW
1,235
Recent news flow: Lower-income demand was boosted
in 2009 by the Minha Casa, Minha Vida (MCMV)
program, whereby mortgages rates were reduced by 2-3
pp. Of the 1mn units announced, 40% were for families
earning less than 3 minimum wages (mw) and 20% for
families earning 3-6mw and another 20% for families
earning 6-10mw. Caixa Economica Federal is the public
bank responsible for administering the program. The
home price limit for the MCMV program was recently
raised (R$80K to R$170K) depending on the city’s size.
Source: J.P. Morgan estimates and Bloomberg, as of April 11, 2011.
As of December 2010 the program had approved the
1mn units targeted, though only 300k were actually
delivered. At the beginning of April 2010 the
government announced the second phase of the MCMV
program, in which the government expects to build an
additional 2mn houses by 2014.
Source: J.P. Morgan estimates, company data.
Figure 131: Sector P/E 12 Months
35
Avg 07-Now
30
Avg 09-Now
25
20
15
10
5
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
0
Figure 132: Sector Performance vs. Selic
1,400
15
14
13
12
11
10
9
8
7
6
5
1,200
1,000
800
600
400
200
IMOV index
Selic target
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
0
Dec-07
Sector risks: (1) execution risks delivering the strong
growth seen in the past few years; (2) availability of
mortgage financing in the long term; (3) margin
contraction as a result of higher raw materials and labor
costs; (4) possibly delayed generation of FCF.
Source: J.P. Morgan estimates, company data.
Prospects for the future: We have a positive view on
the sector despite the market concerns mentioned
previously. Short-term momentum has been impacted
by uncertainties regarding macroeconomic policy,
especially the rise in inflation and tighter monetary
policy. Our top picks in the sector are PDG and MRV,
69
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 133: Housing Market by Income Segment
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
31.3
1000
28.8
19.2
763
800
22.0
600
16.0
400
320
275
3-5 mw
5-10 mw
122
46
10-20 mw
> 20 mw
200
0
< 3 mw
Volume (R$ bn)
Units ('000)
Source: J.P. Morgan estimates, company data.
Figure 134: Listed Companies’ Launches
13.2
10.0
6.7
5.5
6.6
7.0
6.6
8.5
5.4
4.7
4.1
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q09
2.2
2.0
1Q07
9.9
9.6
Source: J.P. Morgan estimates, company data.
Figure 135: SBPE + FGTS Financing
FGTS
83.7
SBPE
49.7
40.5
5.8
4.9
5.5
6.0
6.9
10.3
2000
2001
2002
2003
2004
2005
16.3
2006
25.2
2007
2008
2009
Source: J.P. Morgan estimates, company data.
Figure 136: Construction Inflation Breakdown
Materials
Labor
INCC
18%
13%
8%
3%
Source: J.P. Morgan estimates, company data.
70
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
-2%
2010
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Retail
By Andrea Teixeira and team – (212) 622 6735
[email protected]
Figure 137: Brazil Retail Sales
50%
40%
30%
20%
10%
0%
-10%
-20%
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Dec-09
May-10
Sep-10
Retail is still a growth sector in Brazil, as efficient
retailers continue to take share from mom & pops and
benefit from a benign macro landscape. In Brazil,
growth has recently accelerated in apparel and
hardlines.
Furnitures and eletronics
Total Retail Sales
Supermarkets Sales
Apparel & Footw ear
Source: IBGE.
Benign macro landscape long term . . .
Brazilian retailers have been benefiting from three main
drivers: (1) Income distribution, with ~30 million new
people ascending into the middle-income segment. (2)
Mid-single-digit real growth in wage mass. (3) Doubledigit growth in credit availability.
Figure 138: Brazil Consumer Confidence
125.0
120.0
115.0
110.0
105.0
100.0
Highest growth categories are discretionary
The rising middle-income segment has been consuming
items such as electronics and home appliances, items
that it could never afford before (approximately 30
million people have been upgraded from less affluent
income segments since 2003). Government projects
such as “Minha Casa, Minha Vida” have been fostering
construction of new homes and therefore boosting sales
of appliances and electronics. Brazil will host the soccer
World Cup and the Olympic Games in 2014 and 2016
respectively, which are strong purchasing occasions for
electronics, besides the typical GDP boost led by
tourism and infrastructure investments ahead of these
events. Best-in-class retailers are focusing on the
middle-income segment and capitalizing on the
reduction of tax evasion by smaller players who are
being pushed out of business.
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
Mar-08
Nov-07
Jul-07
95.0
Mar-07
. . . despite tightening cycle in the short term
Highest-growth retailers have been boosting sales
through credit. Private label credit cards at lower than
market rates have been a major source of growth. While
we expect rates to go up by 175bp in 2011 (to 12.5%),
credit availability has been improving.
Source: FGV.
Market fragmented. Top 3 food retailers: 40% share
Large retailers have been gaining market share due to
access to cheaper capital. Also, smaller players have
been pressured to professionalize through required IT
systems by the Internal Revenue Service. The tax
evasion crackdown has also limited the competitiveness
of some mom & pops.
Figure 139: Food Retail Market Share (2009)
CBD
14.7%
Carrefour
15.3%
Others
59.1%
Walmart
11.0%
Source: ABRAS.
Consolidation of broadline retailers
CBD has 23% market share of electronics and home
appliance sales in Brazil after the merger of its Globex
and Casas Bahia units. The second-largest competitor is
just a quarter of its size (Maquina de Vendas, which is
also a result of the merger of private companies Ricardo
Eletro and Insinuante.
71
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 140: Hardline Market Share (2008)
Table 69: Brazil’s major listed Retail / Personal Care companies
Company
CBD*
CBD
23%
Lojas Americanas ON
Others
6,235
OW
4,216
N
3,327
6%
Luiza
Guararapes
GUAR3
B2W
BTOW3
N
2,261.
Natura
NATU3
N
12,244
Hypermarcas
HYPE3
N
8,314
Source: J.P. Morgan estimates and Bloomberg, as of April 11, 2011.
Food
Source: Valor Economico.
E-commerce – Scale is key
On-line sales are concentrated between two large
players (B2W and CBD’s dotcom division, GPA.com).
Scale in electronics is key, as more than 40% of sales on
line are concentrated in these items. The need for
working capital is high given that ~85% of sales are on
credit cards.
By Alan Alanis and team – (1) 212 622-3697
[email protected]
Brazil is a protein powerhouse. It is the #1 beef and
poultry exporter in the world. In terms of domestic
production/consumption, it is #2 in beef and #3 in
poultry.
Table 70: Brazil is top ranked within global protein industry
Figure 141: E-commerce Market Share (2008, 2009)
Ranking by volumes
Protein
47%
38%
40%
20%
10,286
OW
Lojas Renner
3%
54%
Mkt Cap (US$ Mn)
N
MV*
as
60%
Rating
PCAR
LAME3 and
LAME4
LREN3
3%
Pernambucan
65%
Ticker
8%
40%
13%
Exports
Production
Consumption
Beef
#1
#2
#2
Poultry
#1
#3
#3
Pork
#4
#4
#5
Source: USDA (2011E).
0%
B2W
GPA.com
2008
Others
2009
Source: CBD.
Among publicly traded Brazilian retailers, most recent
IPOs were concentrated among apparel retailers. The
largest market capitalization is CBD, which derives
50% of its sale from food, and the rest mostly from
electronics, home appliances and furniture. There is no
major department store chain in Brazil, after a highly
inflationary period in the ’80s and early ’90s pushed
most of these companies out of business.
72
The basic ingredients for this leadership are vast land &
water supplies. Plus, it helps that Brazil is the #4 corn
and soy producer globally. But in our view, the true
differentiating elements are globally ambitious familyrun businesses with straightforward access to equity and
debt capital markets as well as preferential government
financing via the country’s national development bank
(BNDES).
Focus shifting to Brazil’s profitable domestic
market. Exports have been the main driver for sales
volume growth for the Brazilian protein industry since
the early 2000s. Toward the second half of the decade,
though, a combination of higher domestic prices and a
stronger Real reduced the appeal of aggressively
pursuing export growth. Nowadays export and domestic
volumes grow at par. Companies are increasing efforts
to further process and sell branded protein products
domestically, which simply as value-added products
have better margins than commodity meat exports.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 142: Exports have flattened as % of total production
% of Brazilian protein production exported
Figure 144: Brazil’s pastures to decline ~40 mn hectares by
2030E
Million hectares
35%
30%
25%
20%
15%
10%
5%
0%
48
2010E
62
2030E
2000
2001
2002
2003
2004
2005
Beef
2006
2007
2008
2009
84 5
174
15 7 18
101
135
103
2010E 2011E
Poultry
0
340
Annual Crops
Source: USDA.
Sugarcane
Permanent Crops
Cultiv ated Forests
Pastures
Stock
Source: Brazilian Government Strategic Affairs Secretary.
Poultry is Brazil’s most consumed protein. Global
poultry consumption grew at a 3.4% CAGR in 20002010E, more than 5x faster than the flattish 0.6% pace
of beef. Poultry consumption also increased faster in
Brazil, with a CAGR of 4.7% in 2000-2010E, 2x faster
than the 2.2% of beef. Brazilian per capita poultry
consumption surpassed that of beef in 2007 to its
current 40kg/year. The faster growth pace of poultry can
be attributed to much lower prices per kg vs. beef and to
cultural/health trends that we don’t see reversing.
Figure 143: Brazil to consume 19mn tons of meat in 2011E
% of total volumes
Table 71: Brazil’s major listed Food companies
Ticker
Rating
Mkt Cap (US$ Billion)
Brasil Foods
Company
BRFS3
OW
16,510
JBS
JBSS3
NC
9,522
Marfrig
MRFG3
N
3,524
Minerva
BEEF3
Neutral
0.46
Source: Bloomberg and J.P. Morgan estimates, as of April 11, 2011.
Beverages
By Alan Alanis and team – (1) 212 622-3697
[email protected]
Pork
14%
Poultry
45%
Beef
41%
Total Protein Consumption: 19mn tons ('11e)
Source: USDA (2011E).
Brazil is the world’s 3rd-largest beer market by
volume, after China and the U.S. It consumed 112
million hectoliters in ’09.
Figure 145: World’s Top 8 beer markets by volume, 2009
Million Hectoliters
China
Shifting land usage toward agricultural production
impacts the beef industry. Meatpackers don’t raise
their own cattle. They rely on independent ranchers for
their supply. Land for raising cattle could decline by
22% in the next 20 years, with cattle mainly replaced by
grains and sugar cane. To avoid falling short of supply,
meatpackers must modify how they deal with their
cattle raisers. For instance, by purchasing cattle earlier
and raising it in feedlots (like in the US), by agreeing on
long-term contracts to guarantee the rancher’s returns,
and/or by investing in ranching themselves. Most, if not
all of the options, suggest a higher cost of doing
business for meatpackers.
434
249
US
112
Brazil
105
Russia
92
Germany
64
Mexico
60
Japan
50
UK
0
50
100
150
200
250
300
350
400
450
500
Source: Plato Logic.
Market dominated by AmBev, a subsidiary of
Anheuser-Busch InBev (ABI). AmBev sells +70% of
Brazil’s beer volumes and takes +90% of its profit pool.
AmBev is the result of a merger of companies (Brahma
and Antartica) ten years ago. It later became a
subsidiary of Belgium’s Interbrew, which later changed
names to ImBev and then to ABI, which currently owns
62% of AmBev. Other Brazilian players include
73
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(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Heineken (former Femsa Cerveza) and privately held
companies Petropolis and Schincariol.
Ticker
Rating
Mkt Cap (US$ Billion)
AMBV4
OW
82.4
Source: Bloomberg and J.P. Morgan estimates as of April 11, 2011.
72%
70%
Tobacco
68%
66%
By Alan Alanis and team – (1) 212 622-3697
[email protected]
64%
62%
60%
3Q02
3Q03
3Q04
3Q05
3Q06
3Q07
3Q08
3Q09
3Q10
Source: Company data.
Brazil’s is the 2nd-largest beer profit pool. Thanks to
its market share dominance, a +50% on-premise
consumption culture, and mainly 600ml returnable
presentations, AmBev in Brazil has the world’s highest
EBIT margin across leading brewers.
Figure 147: Beer EBIT margin of leading brewer in top markets,
2009E
Brazil
US
Russia
Mexico
Spain
Brazil smokes less than the world average. Roughly
17% of Brazil’s population smokes cigarettes (22% of
the men, 13% of the women). This figure is quite low
when compared to other developed and emerging
market economies, as shown in the following figure.
Figure 149: Global smoking incidence
80%
70%
61%
60%
40%
22%
20%
31%
23%
Brazil
31%
Russia
India
Men
17%
15%
7%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Source: Plato Logic, company data, J.P. Morgan estimates.
Per capita consumption up almost 20% last decade.
It went from 50 liters in 2000 to the current 59 liters.
The outlook is quite favorable for continued growth as
the Brazilian consumer continues to benefit from higher
wages in real terms and upward economic mobility.
Figure 148: Brazil’s beer per capita to keep gradually improving
Per capita beer consumption (liters)
61
60
59
60
53
50
40
Source: Plato Logic 2009.
Smokers are concentrated in the very lowest income
segments. Out of all smokers in Brazil, 42% are from
households earning less than half the minimum wage
($4k/year).
Figure 150: Smoking is concentrated in Brazil’s lower-income
segments
% of Brazil’s smoking population by income level
50%
42%
40%
30%
24%
21%
20%
13%
0%
81
US
U.S.
10%
80
70
China
Women
Source: IBGE; World Health Organization.
11%
10%
5%
20%
4%
3%
27%
0%
26%
13%
0%
44%
34%
Japan
Germany
China
UK
74
Company
AmBev
Figure 146: AmBev’s Beer Brazil Market Share
90
Table 72: Brazil’s major listed Beverages company
Europe
Mexico
Brazil
Latin America
Less than 1/2 of the
From 1 to 1/2 of the
From 1 to 2
Above 2 minimum
minimum wage
minimum wage
minimum wages
wages
Source: IBGE.
Brazil’s tobacco market is dominated by Souza
Cruz, a subsidiary of British-American-Tobacco
(BAT) for almost 100 years. Souza Cruz was founded
in 1902 and became a 75%-owned BAT subsidiary
shortly in 1914. It has historically paid 100% of its net
income as dividends. It is currently Brazil’s cigarette
leader with 63% market share, almost 5x as large as the
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
#2 player Phillip Morris International (PMI). Illegal
imports that come mainly from Paraguay account for
almost 30% of the Brazilian market.
Figure 153: Federal Excise Tax (IPI) collection
R$ million
50,000
40,000
Figure 151: Souza Cruz market share evolution
30,000
% of Brazilian cigarette market
20,000
64%
62.1%
62%
60%
58.8%
10,000
-
60.9%
60.4%
59.1%
62.9%
62.0%
2000
2001
59.2%
2002
2003
Tobacco
2004
2005
Bev erages
2006
Auto
2007
Imports
2008
2009
Nov '10
Other
Source: Brazilian IRS.
58%
Table 73: Brazil’s major listed Tobacco company
56%
2003
2004
2005
2006
2007
2008
2009
3Q10
Source: Company data.
Souza Cruz
Souza Cruz sales and EPS have grown despite
higher cigarette taxes and lower volumes. This is
thanks to higher prices, better marketing and more
efficiency. It is quite surprising for many to see that
Souza Cruz sales have grown almost at the same pace as
AmBev beer sales during the last decade.
Figure 152: Souza Cruz manages to grow sales and EPS despite
lower volumes
2003=100
250
200
150
100
50
2003
2004
Company
2005
2006
Cigarettes Produced
2007
EPS
2008
2009
Net Revenue
Source: Company data, J.P. Morgan estimates.
Government efforts to curb consumption will
consider the tax and labor impacts. Taxes represent
~3/4 of a cigarette pack’s price in Brazil. About ~50%
of each cigarette pack’s surface is used for cautionary
legends. Smoking in closed facilities is already
prohibited in Brazil’s main states. Such efforts to curb
consumption are most likely to continue. Nonetheless,
the government balances its decisions, taking into
account the importance of the sector from a labor and
tax perspective. The tobacco industry employs ~2.5
million people in Brazil. Federal excise taxes (IPI) from
tobacco brought in US$3.3bn in 2009, 7% of national
collection and 10% more than all beverages combined.
Ticker
Rating
Mkt Cap (US$ Billion)
CRUZ3
Neutral
16.18
Source: Bloomberg and J.P. Morgan estimate as of April 11, 2011.
Agribusiness
By Debbie Bobovnikova and team – (1) 212 622-3489
[email protected]
Farming in Brazil began in the Southern region, which
has a good climate and relatively good soil, making for
easy transition for arriving European immigrants, who
brought with them their old world farming know-how. It
was not until the 1970s that the savannah (Cerrado)
region of central Brazil was proven to be “arable.”
Local government research institute Embrapa
discovered ways to adapt a temperate crop, soya, to the
tropical conditions found in the Cerrado. With that, a
new frontier for agriculture opened up. Many farmers
left their small and profitable (yet increasingly cramped)
farms in the South to seek their fortunes in the “Wild
Wild West.” What they found were ideal climate
conditions (warm weather, plentiful rainfall) but very
poor soil and logistics. Many farmers underestimated
the challenges and found themselves heavily in debt.
Those that survived continued to grow in scale and
adapted to new farming techniques (no tilling, double
cropping, etc.). They also invested heavily in correcting
the soil through lime and fertilizer.
Today, Brazil is one of the top 5 global agricultural
producers in the world, playing a leading role in sugar,
soybeans, beef, orange juice and poultry exports.
Moreover, it is the only tropical climate to have that
honor. It is also one of the most market friendly as
heavy government subsidies and regulations were lifted
in the 1990s (though some subsidized credit and
minimum price auctions remain; the overall
contribution to farmer income is well below that found
75
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
in the US, Europe, Japan, etc.). Furthermore, Brazil is
uniquely positioned to continue expanding its
production due to availability of arable land (which can
double or even triple from the current planted area of
47m ha) and water.
Table 74: Brazil Planted Area Breakdown for Annual Crops
Cotton
2%
Rice
6%
Beans
8%
Corn
27%
Soybean
50%
Wheat
5%
Other
3%
Brazil
100%
Source: Conab.
However, the sector continues to face serious
challenges, namely: (1) access to capital; and (2)
logistics. This leaves farmers, especially those in
frontier regions, heavily dependent on the major trading
companies for inputs, financing and commercialization,
and leaves farmers in a weak bargaining position and
with, often, quite thin profit margins.
The sugar/ethanol sector in Brazil has its roots in the
1970s military dictatorship. The government at that time
rolled out an ethanol distribution network and supported
the rise of ethanol-only vehicles as a way to decrease
dependence on rising global oil prices. In the years that
followed, low oil and sugar prices led to a waning in the
sector and in ethanol vehicle sales. The sector then got a
boost in the 1990s when the government lifted
regulations from the sugar industry and then in 2004
when new flex-fuel vehicles were introduced. Still, the
government continues to play a role in the sector,
setting the minimum ethanol volumes in regular
gasoline (at 20-25%) as well as the CIDE tax, which
impacts the attractiveness of ethanol vs. gasoline at the
pump (in addition to indirectly setting the price of
gasoline itself).
The recent rise in foreign capital and corporate farming
has done little to change these overall challenges given
the sheer magnitude of the sector (large-scale farmers
with hundreds of thousands of hectares under
management represent no more than ~10% of the
planted area in Brazil).
Brazil today is the largest global producer and exporter
of sugar (with 50% market share). The industry has seen
76
large inflows of foreign capital and a buildout of new
capacity to meet growing domestic ethanol demand and
global sugar demand. The majority (~85%) of sugarcane
facilities have the flexibility to produce either sugar or
ethanol from the cane to take advantage of price
discrepancies. The sector is also trying to develop viable
ethanol export markets, though with limited success to
date as the most important market, the US, remains
closed to Brazilian ethanol.
Despite notable M&A activity in recent years, the
domestic sugar/ethanol sector remains quite fragmented,
with the top player controlling just 10% of total supply.
The majority of players are still family owned, though
new foreign players (Indian sugar producers, global
trading companies and oil and gas players) are entering.
Mills have also increasingly turned to producing
cogeneration from leftover cane as a way to boost
profits and bring in steady cash flows to balance out the
volatility of the sugar/ethanol profits. We have also seen
companies partner with fuel distributors in order to gain
access to ethanol distribution at the pump.
Figure 154: Sugarcane: Increasingly a Domestic Story
x
1,400
1,200
1,000
800
600
400
200
10/11E 11/12
12/13
Domestic Sugar
13/14
14/15
15/16
Domestic Ethanol
16/17
17/18
18/19
Ex port Sugar
19/20
20/21
Ex port Ethanol
Source: J.P. Morgan.
Corporate farming should continue to grow in Brazil
and move further into frontier areas. The MAPITO
(Maranhao, Piaui, Tocantins states) area should see the
most rapid rate of growth, albeit from a small base.
Environmental regulations are getting more stringent
and at some point will need to be simplified, while
foreign land-ownership laws have recently been
resurrected and are causing some confusion for existing
players. Slowly, logistics issues will start to be
addressed, with investments in ports, roads and new rail
tracks. For the select few, the capital markets will
increasingly be a source of funding.
The sugar ethanol sector will likewise continue to see
inflows of capital from the private sector, continuing to
fuel M&A. Whether this translates into true
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
consolidation or not depends on the relative speed of
M&A vs. the overall growth of the market (Brazil has
room to triple the area planted with sugarcane).
Revenues will increasingly be diversified as sugarcanebased products will continue to replace hydrocarbonbased ones in new uses such as pharmaceutical,
industrial and cosmetics, and will even be used to
replicate hydrocarbons themselves as building blocks
for the petrochemical sector.
Table 75: Brazil’s major listed Agribusiness companies
Company
Ticker
Rating
Mkt Cap (US$ Million)
SLC Agricola
SLCE3
OW
$1,434
Sao Martinho
SMTO3
OW
$1,708
ALL Logistica
ALLL3
N
$5,678
Cosan
CSAN3
Restricted
$6,207
Source: J.P. Morgan estimates and Bloomberg as of April 11, 2011
Pulp and Paper
By Debbie Bobovnikova and team – (1) 212 622-3489
[email protected]
Brazil is a unique place for pulp production owing to
the combination of favorable climate, land and water
availability and relative political stability, the latter an
important point given 5- to 7-year investment cycles. As
a result, Brazil has become a major player in the global
pulp market, representing ~15% of global trade in pulp.
Pulp and paper exports in turn represent ~15% of
Brazil's exports and account for ~650,000 jobs.
A handful of family-run companies have dominated the
sector in Brazil since the turn of last century. Brazil’s
advantageous climate allowed for rapid tree growth,
with eucalyptus plantations reaching maturity in just 7
years compared to 20-30+ years in traditional pulp
markets (N. America, Europe, etc.). Advances in
forestry yields in the 1970s further improved Brazil’s
cost competitiveness in pulp production, making it one
of the lowest-price producers globally and leading to
Brazil becoming a significant exporter of eucalyptus
pulp. Meanwhile, advances in paper production
technology have allowed for broader use of eucalyptus
grade pulp, which began to replace the traditional
softwood type pulp in tissue, printing and writing and
even boxboard paper manufacturing.
The growth in the domestic paper market has been
unsteady and has resulted in oversupply, which in turn
led to a tough pricing environment. As a result, most of
the investments have focused on growing pulp rather
than paper capacity. Furthermore, rising land prices
have driven pulp projects further from their traditional
coastal regions.
The past two decades saw significant consolidation in
the sector, in both the pulp and printing and writing
paper segments (the corrugated packaging segment
remains quite fragmented). Suzano and Bahia Sul
merged. Ripasa was bought out by Suzano and VCP.
Fibria, the world’s largest market pulp producer, was
created through the merger of Aracruz and VCP. Over
time, Suzano and IP emerged as the key domestic
players in the P&W paper grades while Klabin and
Suzano emerged as the leaders of the domestic
boxboard segment.
The main drivers in the sector recently have been the
emergence of Chinese domestic consumption and the
onset of structural decline in demand in the developed
world.
Also, a stronger BRL has led to increases in domestic
pulp production as well as higher import competition in
the domestic paper segment.
Going forward, we expect Brazil to increasingly focus
on pulp production which takes advantage of favorable
access to raw material. However, we believe paper
production will increasingly be based in China, where
access to raw materials is limited but access to capital is
more readily available.
Table 76: Brazil’s Production Outlook
2010
2020E
% Chg
CAGR
Pulp
mt
14.0
22.0
57%
4.6%
Paper
mt
9.5
12.6
33%
2.9%
m ha
2.2
3.2
45%
3.8%
Planted Area
Source: Bracelpa.
Bracelpa expects Brazil to produce 22mt of pulp by
2020, up from 14mt in 2010, a CAGR of 4.6%. Paper
production should reach 13mt by 2020 compared to
9.5mt in 2010, a CAGR of 2.9%. As a result, planted
forest area should rise to 3.2m ha from 2.2m ha today.
Increasingly, that growth is moving to new regions in
Brazil – away from the traditional coastal areas. This
will require innovative solutions for logistics as well as
further development of eucalyptus plantations to adapt
to the new regions – namely the Northeast, South and
Center-West of Brazil.
77
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 77: Brazil’s major listed Pulp & Paper companies
Company
Ticker
Rating
Mkt Cap (US$ Million)
Fibria
FIBR3
UW
$7,522
Suzano
SUZB5
OW
$4,195
Source: J.P. Morgan estimates and Bloomberg as of April 11, 2011.
Roads
By Fernando Abdalla and team – (55) 11 3048-3463
[email protected]
Brazil has the fourth-largest highway system in the
world, with over 1.7 million kilometers of roads, of
which only about 10% is paved. Highways are the main
means of transportation in the country, both in number
of passengers moved and movement of freight and
goods. It is estimated that annually more than 1.2 billion
people travel on Brazilian highways, compared to 140
million traveling via airline. While the South and
Southeast of Brazil are well connected by paved
highways, the northern region is less so due to the
presence of the Amazon rain forest.
The major Brazilian paved highways are operated by
private players and therefore have toll stations. The
highway system of Sao Paulo is the largest statewide
road transportation system in Brazil, with nearly 35,000
km of roads. About 3% of this system consists of
federal roads, 33% municipal and 63% state. In the mid’90s, the government pushed for privatization of statecontrolled paved highways in a bid to generate extra
revenues.
Currently the three major toll road concessionaires that
are publicly listed are CCR, Ecorodovias and OHL
Brasil.
Figure 155: State and Federal Concessions
SC BA MG ES
4% 1% 3% 0%
RS
11%
Federal
27%
PR
17%
RJ
1%
Source: ANTT and J.P. Morgan.
78
SP
36%
The growth of toll road companies is tied to GDP
growth prospects. Traffic has typically grown from 0.9x
to 1.3x the GDP growth rate, on average, for the three
concessionaires. Overall, strong growth prospects in
Brazilian GDP positions the sector to at least keep pace
with GDP in terms of traffic and revenue growth in the
coming years.
Additionally, given that the toll fares are contractually
adjusted by inflation once per year (IPCA, IGP-M or a
basket of indexes), the toll road companies are seen as
defensive plays in moments of high inflation.
Table 78: Traffic Growth y/y vs. GDP Growth y/y
Year
CCR
OHL
ECO
GDP
2003
1.10%
0.00%
3.70%
1.10%
2004
5.70%
6.20%
4.50%
5.70%
2005
3.20%
2.50%
-0.40%
3.20%
2006
3.80%
2.00%
8.10%
3.80%
2007
5.40%
7.10%
9.20%
5.40%
2008
5.10%
5.50%
2.70%
5.10%
2009
-0.20%
-0.60%
3.00%
-0.20%
2010
12.10%
13.60%
12.00%
7.50%
Accumulated.
41.87%
41.66%
50.95%
36.05%
Source: Company reports and J.P. Morgan.
The privatization of highways in Brazil started in 1995,
with the Brazilian Toll Roads Concession Program and
the auction of Ponte Rio-Niterói, current controlled by
CCR. At that time, because of uncertainties regarding
the macroeconomic environment and the regulatory
framework, the average unleveraged IRR of the projects
was 17%-18% in BRL.
Nevertheless, the federal auctions held in October 2007
were a landmark for the toll road sector. Average
unleveraged IRR in BRL dropped to 8%-9%, reflecting
the consolidated regulatory framework and mainly low
barriers of entry due to the concession model adopted
by the government, which stimulated competition. In
our view, there is room for a slight rebound in the IRR
for upcoming toll road auctions. The government is
transferring the main risks to the private players (as seen
in the latest RodoAnel auction, in which companies
were responsible for displacement and environmentalrelated costs), and higher risks demand higher returns.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 79: IRR of Toll Roads in Brazil
Concession
IRR
Figure 156: Expected Investments in Infrastructure
Company
Year
Ponte Rio-Niterói
17.00%
CCR
1995
NovaDutra
18.00%
CCR
1995
ViaLagos
20.00%
CCR
1996
Caminhos do Mar
19.90%
Ecorodovias
1997
Ecocataratas
16.40%
Ecorodovias
1997
RodoNorte
19.00%
CCR
1997
AutoBAn
20.00%
CCR
1997
Imigrantes
20.60%
Ecorodovias
1998
Ecosul
17.60%
Ecorodovias
1998
BR-116/SP/PR
8.60%
OHL Brasil
2007
BR-381/MG/SP
8.60%
OHL Brasil
2007
BR-116/PR/SC
8.70%
OHL Brasil
2007
BR-116/376 BR-101/SC
8.00%
OHL Brasil
2007
BR-101/RJ
8.00%
OHL Brasil
2007
RodoAnel West
9.00%
CCR
2008
Ecopistas
10.30%
Ecorodovias
2009
Source: Company reports and J.P. Morgan.
Regarding future opportunities, the expected investment
in infrastructure in the country may translate into further
upside for the toll roads. Brazil is expected to face a
strong cycle of investments in infrastructure in the
coming years, mostly because of the government’s PAC
infrastructure program, the 2014 World Cup and the
2016 Olympic Games. The concessions for urban
transportation will likely receive special attention from
the government, with expected investment of roughly
R$85 billion.
R$ Million
Source: BNDES and J.P. Morgan estimates.
In terms of new highway auctions, on the federal front,
the government is expected to host the third round of
federal concession auctions this year, which will be
divided into two phases and should demand total
investment of approximately R$5 billion. The
government is expected to privatize 3,663 kilometers of
roadways spread among the states of Minas Gerais,
Bahia, Espírito Santo, Distrito Federal and Santa
Catarina. In the state of São Paulo, the government is
preparing a concession package surpassing R$5 billion
of investment. The highways to be privatized are the
main connections between the city of São Paulo and the
state’s coast.
Figure 157: Third Round of Federal Concessions
Bahia
Overall, net leverage of Brazil toll road operators (avg.
1.6x for ’11E) is well below that of developed peers
(avg. 4.5x for ’11E). We therefore expect the sector to
lever up in the coming years to face the massive
investment in infrastructure. If we assume a target net
debt/EBITDA of 3x, we calculate that CCR has the
highest cash position (R$3.5 billion) while OHL Brasil
has the lowest (R$0.9 billion).
Goiás
Minas
Gerais
1
Mato Grosso
do Sul
5
2
3
4
São Paulo
Espírito
Santo
Rio de Janeiro
Paraná
6
Santa Catarina
Rio Grande
do Sul
Source: J.P. Morgan and Bloomberg.
79
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 80: Brazil’s major listed Roads companies
Company
Ticker
Rating
Mkt Cap (US$ Million)
CCR
CCRO3
OW
13,490
Ecorodovias
ECOR3
OW
4,773
OHL Brasil
OHLB3
N
2,877.6
Source: J.P. Morgan estimates and Bloomberg, as of April 11, 2011.
Transportation
By Fernando Abdalla and team – (55) 11 3048-3463
[email protected]
Air travel is growing rapidly in Brazil. There are more
than 4,000 airports in the country, with the majority
owned by the government. In 2010, Brazilian airports
handled nearly 138m domestic passengers and nearly
16m international passengers. Cargo hauled via air
using the airports was nearly 1.12m tonnes. São PauloGuarulhos International Airport is the largest airport in
Brazil, with a capacity of 20.5 million passengers. In
2010, it ran to 130% of capacity, ferrying 26.7m
passengers (23% y/y). Congonhas-São Paulo Airport is
the second largest, with capacity of 12m passengers. It
ran to 129% of capacity in 2010 (+13% y/y).
The sector has yet to be brought into private hands,
along the lines of the privatizations/concessions seen in
the roads sector. With the strong growth seen in the past
years and the proximity of sporting events such as the
World Cup in 2014 and the Olympic Games in 2016,
the sector is expected to receive massive investments,
from both the government and private entities.
TAM SA (restricted; covered by JPM airlines analyst
Jamie Baker) and Gol Linhas Aereas Inteligentes SA
(rated OW by Jamie Baker) are the two largest airlines
in Brazil. In 2010, the first had 42.8% market share in
the domestic market while the latter had 39.5%.
Figure 158: Domestic RPK Growth y/y
40%
30%
20%
10%
0%
Jul-10
Oct-10
Apr-10
Jan-10
Jul-09
Oct-09
Apr-09
Jan-09
Jul-08
Oct-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Jan-07
-10%
80
Nearly 15 out of the top 20 busiest airports in Brazil
were running over capacity in 2010. To improve the
quality at airports, given the huge growth in air travel
that we are witnessing, the government needs to put in
more money to upgrade the infrastructure.
Recently, Brazilian Defense Minister Nelson Jobin
indicated that the Brazilian government may sell shares
in its airport authority, known as Infraero, to support the
ongoing growth in traffic and prepare for the 2014
World Cup and 2016 Olympics. Infraero manages 67
airports in Brazil, which together account for 97% of
the air traffic in the country. However, only 10 airports,
according to the government, are profitable.
Table 81: Brazil’s 5 Busiest Airports in 2010
Airport
Passengers (mn)
% Chg y/y
Capacity (mn)
Guarulhos (SP)
26.77
23.20%
20.5
Congonhas (SP)
15.48
13.00%
12
Brasília Intl’ Airport
14.14
15.80%
10
Galeão Intl’ Airport (RJ)
12.22
3.40%
18
7.8
53.10%
3.2
Santos Dumont Airport (RJ)
Source: Infraero data.
São Gonçalo do Amarante, located in the state of Rio
Grande do Norte (Northeast region) and currently under
construction, is likely to be the first airport to be
privatized under Dilma’s administration. The expected
investment at this airport should amount to roughly
R$600m.
We believe airport privatization could be a growth
opportunity for the private players in Brazil, including
the toll road companies. Ecorodovias and OHL Brasil
have already showed interest in investing in airports.
We highlight that CCR is not allowed to invest in
airports as one of its controlling groups already has
airport operations outside Brazil.
50%
Source: ANAC and J.P. Morgan.
The growth in passenger and freight hauled via air is the
main driver of the airports sector. We expect
privatization/concession of airports to be the main
theme in the space in the near future, with the possible
privatization of the airports authority (INFRAERO) to
support the ongoing growth.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Electricity and Water
By Anderson Frey and team – (1-212) 622-6615
[email protected]
Brazil’s electricity sector has gone through a
restructuring in the past 15 years. Power utilities in
Brazil were predominantly state-owned until the late
’90s, when a wave of privatizations kick-started a deep
restructuring. Subsequently, a severe energy rationing in
2001 exposed the need for sector expansion and a new
regulatory framework, which was created and
implemented in the early 2000s, with transparent rules
for tariff setting and energy dealing. The industry was
also subdivided into three separate segments:
generation, transmission and distribution. Currently, the
sector’s ownership is composed of both private and
state players, and utilities usually have subsidiaries
conducting business in all those three segments.
Brazil’s 113GW generation capacity is mostly hydro.
The source accounts for more than 70% of Brazil’s
installed capacity. Thermo sources (i.e., coal, oil and
gas) come in a distant second (26%), which makes the
sector less exposed to commodity prices than most
global counterparts. This is not expected to substantially
change in the future, since the government expansion
plans are focused on both large hydro projects and
renewable sources (wind, biomass and small hydro), to
the detriment of new thermo capacity.
government. Moreover, the government is currently
revising the legislation that will allow (or not) the
renewal of concessions expiring in 2015+. The renewal
terms will be a relevant long-term profitability driver
for the industry.
Power generation provides expansion opportunities
due to strong capacity needs. Electricity demand in
Brazil increased at an annual rate of 4% in 2006-10 and
is expected to grow at slightly more than 1x GDP for
the foreseeable future. This growth should require
capacity increases of around 5GW p.a. and
opportunities for new investment for utilities. The
generation sector is attractive to investors due to its
clear and transparent rules, low exposure to commodity
prices and stable cash flows from long-term regulated
contracts with inflation-hedged prices (the volatility risk
in Brazilian generation related to weather is borne by
final customers and not utilities). However, since the
expansion process is based on new projects selling
energy in auctions, high competition for available assets
has recently allowed very tight returns for investors.
Figure 160: Electricity Demand and GDP Growth in Brazil
In % p.a., estimates from the Brazilian energy research authority
GDP grow th
6.0
5.0
4.9
5.0
4.7
4.0
4.0
3.0
Demand Grow th
4.6
5.0
3.3
2.3
2.0
1.0
Figure 159: Power Generation Capacity Breakdown by Source
Dec 2010, for a total of 113GW
1995-2002
2002-2010
2010-2015E
2015-2020E
Source: EPE.
Other Nuclear
Renew able 2%
1%
Thermo
26%
0.0
Hy dro
71%
Source: ANEEL.
Government’s influence is still a relevant sector
driver. The sector is only partially regulated, and
companies can sell energy either in the regulated (i.e.,
distribution companies, 75% of total demand) or free
markets (i.e., large customers, 25%); but in the
regulated market, cap auction prices are set by the
Electricity distribution and transmission sectors are
fully regulated. These are more mature and stable
industries with high penetration and more limited
growth
opportunities,
especially
distribution.
Companies operate under a regulatory environment with
(i) market-based regulated returns; (ii) periodical tariff
reviews to cover cost inflation and new investments;
and (iii) incentives for productivity gains. The downside
of operating in a transparent regulatory framework in a
fast-developing country is that regulated returns tend to
go down over time (mostly due to lower country risk),
which is already happening in Brazil.
81
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 161: Regulatory WACC for Brazilian Utilities over Time
In %, in real US$ terms
12%
11.3%
10%
9. 1%
9.9%
7.2%
8%
7.2%
6%
4%
2%
0%
Distrib.
Transmis.
Dis trib.
Transm is .
*Distrib.
2003-2007
2005-2009
2007-2010
2009-2 013
2011-2014
Source: ANEEL. *This is still a preliminary number and might change in the near future.
Cost cutting is the most relevant driver and might
lead to industry consolidation. With more limited
growth opportunities vs. generation and declining
regulated returns, cost cutting remains the best way to
improve profitability for regulated businesses in Brazil,
especially in distribution, where the margins are lower.
The next round of tariff resets will start this year, and
we believe that this event might help to accelerate the
consolidation of the distribution industry, as companies
try to look for opportunities to gain synergies and scale
in a sector with still-segmented ownership.
utilities: (1) there is no centralized tariff regulation.
Contrary to power, for which regulation is federal and
applies to the entire country, regulation in water is
developed by cities and/or states and is still in a very
preliminary stage in most cases. Very few companies
have a market-based regulatory framework functioning
and only a few are expected to be implemented in the
next 2 years; (2) most of the sector is still state-owned
and the participation of private capital is still incipient.
This is most likely a reflection of a poor regulatory
environment; and (3) lower penetration rates, especially
of sewage collection and treatment. This should support
a high capex cycle in the sector in the foreseeable
future, as well as high volume growth rates. However,
high capex with no guarantee of regulated returns
through tariffs can be a hazard for long-term
sustainability of the business as companies expand to
poorer areas that might require heavy investment for
little revenues. Overall, the news flow around the
implementation of new state tariff regulations should be
the main stock price driver in the near term.
Table 82: Brazil’s major listed Electricity and Water companies
Company
Each color is a different operator
Ticker
Rating
Market Cap
(US$ Million)
ELETROBRAS (PN)
Figure 162: Map of Distribution Companies in Brazil
Industry
CPFL ENERGIA
CEMIG
TRACTEBEL ENERGIA
G/T/D
ELET6/EBR.B
N
22,076
G/D
CPFE3/CPL
UW
13,465
G/T/D
CMIG4/CIG
restricted
12,191
G
TBLE3
restricted
11,506
COPEL
G/T/D
CPLE6/ELP
OW
7,202
SABESP
W
SBSP3/SBS
N
6,624
CESP
G
CESP6
N
5,948
AES TIETE
G
GETI4
OW
5,730
CTEEP
T
TRPL4
N
5,185
ENERGIAS DO BRASIL
G/D
ENBR3
OW
3,844
LIGHT
G/D
LIGT3
restricted
3,663
D
ELPL4
UW
4,034
NG
CGAS5
UW
3,240
ELETROPAULO
COMGAS
MPX ENERGIA
G
MPXE3
N
3,437
COPASA
W
CSMG3
OW
2,064
CELESC
G/D
CLSC6
UW
1,202
EQUATORIAL ENERGIA
G/D
EQTL3
restricted
898.7
Note: G = generation, T = transmission, D = distribution, W = water, NG – natural gas.
Source: J.P. Morgan.
For water utilities, regulation is what matters most.
The water sector in Brazil currently presents three major
distinct characteristics when compared to power
82
Source: J.P. Morgan estimates; Bloomberg. As of April 11, 2011.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Annex 1: Historical Economic Data and Forecasts
Table 83: Main Economic Indicator – Yearly
Real GDP %
change oya
nsa
Consumer prices IPCA % Dec/Dec
nsa
Wholesales price IGP-M % Dec/Dec
nsa
1995
4.2
22.4
15.2
53.1
53.4
25.3
0.97
0.92
1996
2.7
9.6
9.2
27.1
38.1
26.0
1.04
1.00
1997
3.3
5.2
7.7
24.7
23.7
17.6
1.12
1.08
1998
0.1
1.7
1.8
28.4
27.5
25.3
1.21
1.16
1999
0.8
8.9
20.1
25.1
29.0
18.5
1.79
1.82
2000
4.4
6.0
10.0
17.3
19.5
13.5
1.95
1.82
2001
1.3
7.7
10.4
17.2
16.5
8.8
2.32
2.35
2002
1.9
12.5
25.3
19.2
18.4
9.2
3.53
2.93
2003
1.2
9.3
8.6
16.5
23.0
13.8
2.89
3.08
2004
5.7
7.6
12.4
17.8
16.4
8.2
2.65
2.93
2005
3.2
5.7
1.2
18.0
19.1
12.7
2.34
2.44
2006
4.0
3.1
3.8
13.3
15.1
11.6
2.14
2.17
2007
5.7
4.5
7.8
11.3
12.0
7.2
1.80
1.94
2008
5.1
6.0
9.8
13.75
12.5
6.2
2.40
1.84
2009
-0.2
4.3
-1.7
8.75
9.9
5.4
1.74
2.00
2010*
7.5
5.9
11.1
10.75
10.0
3.9
1.66
1.76
2011*
4.0
6.4
9.5
12.50
12.1
5.4
1.60
1.59
2012*
4.0
5.0
na
12.50
12.5
7.1
1.70
1.66
2013*
4.0
4.5
na
10.00
10.5
5.7
1.90
1.80
2014*
4.0
4.5
na
9.00
9.5
4.8
1.95
1.93
2015*
4.0
4.5
na
8.50
8.5
3.8
2.05
2.04
Source: J.P. Morgan.
Selic nominal
eop % a.r.
Selic nominal
avg % a.r.
Selic real deflated
by IPCA avg. % a.r.
Exchange rate
BRL/US$ eop
Exchange rate
BRL/US$ avg
Note: *J.P. Morgan Forecast, a.r.: annual rate, nsa: none seasonally adjusted, eop: end of the period, avg: average.
83
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 84: Main Economic Indicators – Quarterly
Real GDP %
change oya
nsa
Consumer prices IPCA % oya nsa
Wholesales price IGP-M % oya nsa
Selic nominal
eop % a.r.
Selic nominal
avg % a.r.
Exchange rate
BRL / US$ eop
Exchange rate
BRL / US$ avg
04Q1
5.3
6.8
5.9
16.25
16.4
2.91
2.90
04Q2
7.5
5.5
7.3
16.00
16.0
3.10
3.04
04Q3
5.0
6.9
12.0
16.25
16.1
2.86
2.98
04Q4
5.0
7.2
12.2
17.75
17.2
2.66
2.79
05Q1
3.0
7.4
11.5
19.25
18.7
2.67
2.67
05Q2
3.0
7.8
9.0
19.75
19.7
2.36
2.48
05Q3
3.3
6.2
3.7
19.50
19.7
2.21
2.34
05Q4
3.4
6.1
1.9
18.00
18.5
2.34
2.25
06Q1
4.4
5.5
1.1
16.50
17.0
2.17
2.19
06Q2
1.9
4.3
-0.1
15.25
15.6
2.17
2.18
06Q3
4.7
3.8
2.4
14.25
14.4
2.17
2.17
06Q4
4.8
3.1
3.5
13.25
13.42
2.14
2.15
07Q1
5.1
3.0
3.8
12.75
12.92
2.09
2.11
07Q2
6.4
3.3
4.4
12.00
12.33
1.93
1.98
07Q3
6.1
4.0
4.7
11.25
11.42
1.90
1.91
07Q4
6.7
4.3
6.8
11.25
11.25
1.79
1.78
08Q1
7.2
4.6
8.7
11.25
11.25
1.75
1.73
08Q2
7.3
5.6
11.6
12.25
11.92
1.60
1.64
08Q3
6.4
6.3
13.7
13.75
13.25
1.92
1.71
08Q4
-15.8
6.2
11.3
13.75
13.75
2.40
2.29
09Q1
-7.5
5.8
7.4
11.25
12.25
2.32
2.32
09Q2
7.7
5.2
3.5
9.25
9.92
1.96
2.08
09Q3
10.7
4.4
-0.6
8.75
8.75
1.82
1.87
09Q4
10.2
4.2
-1.5
8.75
8.75
1.74
1.75
10Q1
9.0
4.9
0.5
8.75
8.75
1.78
1.82
10Q2
6.5
5.1
4.1
10.25
9.75
1.79
1.78
10Q3*
1.6
4.6
6.9
10.75
10.75
1.70
1.74
10Q4*
3.0
5.6
10.1
10.75
10.75
1.66
1.69
11Q1
3.7
6.1
11.2
11.75
11.42
1.62
1.67
11Q2
3.5
6.8
10.2
12.25
12.08
1.57
1.60
11Q3*
4.3
7.5
9.8
12.50
12.50
1.58
1.58
11Q4*
4.3
6.5
9.7
12.50
12.50
1.60
1.59
Source: J.P. Morgan.
84
Note: *J.P. Morgan Forecast, a.r.: annual rate, nsa: none seasonally adjusted, eop: end of the period, avg: average.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 85: Debt and Fiscal Indicators
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
Debt Stock
Total External Debt (USD bn)
Sovereign External Debt (USD bn)
Private Sector External Debt (USD bn)
Total External Debt (% GDP)
Total External Debt (% of exports)
Sovereign Gross Domestic Debt (USD billion)
Sovereign Gross Domestic Debt (% GDP)
Sovereign Gross External Debt (% GDP)
Total Gross Sovereign or Public Sector Debt (USD bn)
Total Gross Sovereign or Public Sector Debt (% of GDP)
214.3
89.8
124.6
33.2
333.2
302.0
49.9
13.9
411.8
63.8
209.5
92.8
116.8
37.8
310.8
304.9
54.1
16.7
392.4
70.9
210.6
110.3
100.3
41.8
301.1
239.7
57.4
21.9
399.9
79.3
214.9
119.8
95.1
38.9
258.8
341.6
50.8
21.7
400.7
72.5
201.4
114.7
86.7
30.3
185.8
418.4
51.8
17.3
458.2
69.0
169.5
87.6
81.9
19.2
127.1
540.7
58.8
9.9
606.1
68.7
172.6
76.3
96.3
15.8
110.5
555.5
50.1
7.0
621.6
57.1
193.2
70.2
123.0
14.1
105.6
803.4
53.6
5.1
802.6
58.7
198.3
67.3
131.0
12.0
87.3
689.5
52.6
4.1
936.7
56.7
197.8
77.1
120.7
12.4
109.4
1,068.0
58.5
4.8
1,008.2
63.3
272.2
75.5
196.6
13.2
122.6
1,233.8
56.3
3.7
1,238.5
60.0
336.2
75.4
260.8
14.8
133.7
1,211.6
54.7
3.3
1,319.8
58.0
Sovereign Debt Service
External Debt Service (USD bn)
Amortization (USD bn)
Interest (USD bn)
External Debt Service (% GDP)
Amortization (% GDP)
Interest (% GDP)
Domestic Debt Service (% of GDP)
Amortization (% of GDP)
Interest (% of GDP)
Total Sovereign Debt Service (% GDP)
Sovereign External Debt Service (% of exports)
31.4
17.7
13.7
4.9
2.7
2.1
27.7
23.2
4.5
32.6
48.8
12.3
7.3
5.0
2.2
1.3
0.9
17.5
11.8
5.8
19.8
18.3
15.7
11.2
4.5
3.1
2.2
0.9
20.2
13.4
6.7
23.3
22.5
28.2
22.1
6.1
5.1
4.0
1.1
20.6
14.3
6.3
25.7
34.0
26.0
17.1
8.9
3.9
2.6
1.3
17.3
12.7
4.6
21.3
24.0
47.7
34.1
13.6
5.4
3.9
1.5
20.2
14.5
5.8
25.6
35.7
46.2
21.1
25.1
4.2
1.9
2.3
16.7
12.2
4.5
20.9
29.6
21.0
9.3
11.7
1.5
0.7
0.9
15.8
10.6
5.2
17.4
11.5
6.5
2.4
4.1
0.4
0.1
0.2
14.5
9.3
5.2
14.9
2.9
8.6
4.9
3.7
0.5
0.3
0.2
14.7
9.6
5.1
15.2
4.7
11.5
6.5
5.0
0.6
0.3
0.2
14.7
9.6
5.1
15.3
5.2
9.2
4.7
4.5
0.4
0.2
0.2
14.0
8.2
5.7
14.4
3.7
21.3
4.2
3.9
27.9
5.5
6.0
24.5
6.3
6.1
22.3
8.2
5.5
26.1
8.2
5.2
22.0
8.1
3.4
23.0
10.1
3.0
28.5
8.8
2.7
19.1
9.4
1.7
27.3
12.0
2.5
23.2
10.0
1.6
22.6
11.6
1.5
8.8
8.2
9.2
10.6
9.1
8.8
7.3
4.3
2.1
3.0
2.2
1.9
-3.4
-29.3
3.2
32.5
-3.3
-16.4
3.4
33.8
-4.4
-20.1
3.2
34.6
-4.5
-22.8
2.9
30.2
-2.5
-17.8
3.4
31.9
-3.4
-21.7
3.9
36.6
-3.5
-17.7
3.2
36.9
-2.7
-14.0
3.4
37.3
-1.9
-11.4
3.5
38.2
-3.3
-13.2
2.0
33.1
-2.2
-12.2
3.1
33.3
-2.8
-11.3
3.1
33.8
645.0
3,763.2
4.3
553.8
3,185.2
1.3
504.4
2,867.0
2.6
552.5
3,086.7
1.1
663.7
3,654.8
5.7
881.7
4,793.0
3.2
1,089.4
5,921.2
4.0
1,366.6
7,317.3
6.1
1,651.6
8,737.9
5.2
1,592.7
8,326.6
-0.6
2,064.5
10,665.1
7.7
2,275.9
11,617.8
4.5
Private Sector External Debt Service
Amortization (USD bn)
Interest (USD bn)
Private Sector External Debt Service (% of GDP)
Total External Debt Service (% of GDP)
Fiscal Finances
Headline Fiscal Balance (% of GDP)
Public Sector Borrowing Requirements (% of GDP)
Primary Fiscal Balance (% GDP)
Government revenue (% GDP)
Nominal GDP (USD bn)
GDP Per Capita (USD)
Real GDP growth (% oya)
Source: Central Bank, Finance Ministry and J.P. Morgan as of 3Q 2010.
85
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Annex 2: Brazil Strategy Dashboard
Notes
1.1%
7.4%
-4.7%
6.8%
6.9%
-0.7%
-14.3%
-6.9%
-10.8%
-9.9%
-0.4%
7.4%
-2.0%
27.5%
14.2%
0.2%
-2.9%
0.5%
-4.9%
-6.5%
-2.0%
4.7%
-0.9%
-0.8%
-7.2%
5.7%
Peru
21.1%
-9.2%
-9.3%
-1.4%
2.5%
-8.1%
0.9%
-15.4%
0.6%
3.0%
-14.6%
-1.2%
-8.7%
5.7%
-5.0%
2.7%
3.6%
-18.4%
28.2%
-3.8%
-8.0%
2.1%
-22.4%
-8.5%
-0.1%
1.1%
-21.2%
4.9%
4.8%
-0.5%
Updated as of April 13, 2011
Source: Bloomberg, MSCI.
Local currency movements against the dollar : (+) appreciation/ (-)depreciation
Country and sector cross sections in italic blue have outperformed their indices by more than 2%. Shaded areas have underperformed their indices by more than 2%.
86
-12.8%
Peru
-0.2%
4.1%
1.4%
-1.2%
3.8%
Mexico
Chile
-4.6%
-5.5%
-1.0%
0.7%
-2.2%
-16.1%
-13.4%
Colombia
Brazil
Argentina
America
EMF Latin
-7.1%
1.6%
0.4%
-2.4%
-6.2%
3.4%
Mexico
7.1%
0.9%
26.8%
9.1%
-2.0%
0.7%
8.1%
10.7%
5.8%
8.4%
15.3%
-1.6%
-8.3%
5.6%
Colombia
9.6%
-0.9%
8.8%
2.9%
-4.4%
1.0%
-0.5%
11.6%
0.3%
-3.4%
3.4%
-9.6%
-2.1%
-10.3%
-0.2%
Chile
4.0%
0.0%
11.3%
1.6%
-4.2%
0.0%
-0.3%
3.1%
2.4%
2.9%
2.9%
-5.6%
-4.0%
2.0%
1.2%
-0.6%
0.0%
-1.7%
12.5%
-8.3%
19.1%
8.9%
-0.9%
5.4%
Brazil
4.4%
4.0%
14.0%
14.1%
6.1%
8.0%
12.4%
5.7%
11.7%
12.0%
9.4%
-17.0%
-10.0%
Argentina
4.0%
4.0%
10.2%
3.5%
7.4%
6.8%
2.3%
1.2%
1.7%
1.2%
4.8%
1.3%
12.5%
-8.3%
4.5%
5.7%
-1.1%
America
1.8%
3.0%
10.7%
4.9%
5.7%
4.7%
0.9%
2.8%
5.8%
1.6%
4.4%
-5.8%
3.6%
0.8%
-0.4%
EMF Latin
EMEA
4.4%
-1.6%
19.2%
6.6%
-4.1%
0.7%
0.7%
5.4%
4.0%
4.1%
10.5%
EMEA
5.8%
-0.1%
6.7%
2.0%
-1.0%
-1.6%
-1.3%
9.4%
-0.1%
-1.6%
2.1%
EMF Asia
2.5%
1.4%
8.7%
1.3%
-1.1%
-2.0%
-1.0%
0.7%
2.2%
2.4%
1.9%
EMF Asia
EMF
North America
Europe
2.4%
6.7%
8.6%
7.3%
5.9%
5.8%
8.1%
5.2%
8.7%
10.2%
6.8%
EMF
Consumer Discretionary
Consumer Staples
Energy
Financials
Healthcare
Industrials
Information T echnology
Materials
T elecoms
Utilities
Region / Country
Benchmark
Change vs dollar
3.2%
3.7%
7.9%
0.9%
5.0%
4.0%
-1.5%
2.0%
4.0%
0.3%
2.8%
Europe
YTD Performance
0.2%
4.0%
7.7%
1.8%
4.3%
2.1%
-2.1%
2.4%
5.5%
0.9%
2.5%
North America
Consumer Discretionary
Consumer Staples
Energy
Financials
Healthcare
Industrials
Information T echnology
Materials
T elecoms
Utilities
Region / Country Benchmark
Change vs dollar
Global
Last 3 months
Global
Market Performance: MSCI AC Performance by Regions, Countries and Sectors in USD
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
IBovespa Top 40 Stocks : Consensus Valuation Indicators
Stocks
IBOVESPA
Petrobras Pn
Vale Pna
Ogx Petroleo On
Itauunibanco Pn
Bmf Bovespa On
Petrobras On
Gerdau Pn
Bradesco Pn
Usiminas Pna
Vale On
Banco Brasil On
Pdg Realt
Sider.Nacional On
Itausa Pn
Cielo On Nm
Cyrela Realt On
Gafisa On
Redecard On
Brf Foods On
Mrv On
Fibria On
Mmx Miner On
Cemig Pn
Jbs On
All Amer Lat On
Lojas Renner On
Lojas Americ Pn
Tim Part Pn
Rossi Resid On
Telemar Pn
Bradespar Pn
Companhia Brasl.Distb. Pn
Santander Br Unt
Hypermarcas On
Vivo Pn
Ambev Pn
Eletrobras On
Tam Pn
Ccr Rodovias On
Ecodiesel On
Sector
Energy
Materials
Energy
Financials
Financials
Energy
Materials
Financials
Materials
Materials
Financials
Consumer Discretionary
Materials
Financials
Information Technology
Consumer Discretionary
Consumer Discretionary
Information Technology
Consumer Staples
Consumer Discretionary
Materials
Materials
Utilities
Consumer Staples
Industrials
Consumer Discretionary
Consumer Discretionary
Telecommunication Services
Consumer Discretionary
Telecommunication Services
Materials
Consumer Staples
Financials
Consumer Staples
Telecommunication Services
Consumer Staples
Utilities
Industrials
Industrials
Energy
2010E
11.9
7.9
8.9
NM
13.0
15.0
8.9
12.8
12.4
13.5
10.0
8.4
12.2
12.5
11.3
10.2
9.3
10.6
11.0
39.3
10.3
19.5
89.2
12.3
18.6
45.8
22.4
38.5
37.1
10.2
6.2
8.7
29.2
10.9
36.5
17.2
19.3
8.9
9.7
27.2
NA
PE
2011E
10.6
9.2
6.0
NM
10.9
15.6
10.3
11.6
11.0
13.1
6.7
7.2
7.7
9.1
9.2
12.0
8.3
8.3
12.8
22.2
7.9
14.9
21.9
10.2
23.7
30.9
19.8
29.7
18.3
7.8
8.4
5.7
22.1
9.4
24.9
11.1
16.9
8.3
21.2
19.8
NA
2012E
9.5
8.4
5.9
50.3
9.5
13.2
9.4
8.1
9.5
7.3
6.6
6.4
6.8
7.9
7.7
11.9
6.5
6.3
12.6
15.8
6.5
14.6
19.3
8.6
15.6
20.9
16.5
21.4
13.2
5.9
8.0
5.8
15.7
8.0
18.2
10.1
15.7
6.9
14.9
15.4
NA
Source: IBES, Datastream. All estimates are IBES consensus. NM implies negative or large value. NA implies no consensus Data
EV/EBITDA
2011E
2012E
6.9
6.8
4.6
NM
14.4
6.8
6.2
9.4
4.6
8.6
5.5
11.9
7.4
8.5
7.6
8.2
10.5
7.5
6.6
9.8
6.0
6.7
8.2
10.9
8.0
4.5
8.3
3.9
6.0
8.3
13.5
4.3
9.9
7.1
6.3
8.7
-
5.6
6.6
4.3
39.6
11.6
6.6
4.7
6.8
4.3
7.1
4.9
7.5
6.5
6.0
8.2
8.2
6.3
6.4
9.0
5.2
5.8
7.1
9.0
6.8
3.8
6.5
3.6
6.3
6.7
10.6
4.1
8.9
6.4
6.3
7.3
-
EPS Growth
2011E
2012E
12.4%
-13.7%
49.9%
82.4%
18.8%
-3.9%
-13.7%
10.9%
12.9%
3.3%
49.9%
15.7%
57.9%
38.4%
22.6%
-15.1%
11.5%
27.8%
-14.0%
76.9%
30.4%
30.5%
NM
20.7%
-21.8%
48.2%
13.3%
29.5%
102.6%
31.0%
-26.3%
52.2%
31.8%
16.6%
46.9%
53.9%
14.7%
6.9%
-54.5%
37.3%
NA
11.9%
9.6%
0.9%
514.5%
14.9%
17.6%
9.6%
42.9%
15.0%
79.4%
0.9%
12.9%
13.6%
14.8%
19.8%
0.6%
29.1%
32.2%
2.0%
41.1%
21.5%
2.3%
12.9%
18.0%
51.6%
47.6%
19.8%
39.0%
38.8%
31.5%
5.0%
-2.6%
40.6%
17.4%
36.7%
10.4%
7.1%
20.7%
42.6%
28.6%
NA
DY
2011E
3.8
3.1
4.0
0.0
3.2
4.2
2.6
2.4
3.3
2.3
3.9
5.5
2.6
4.5
3.7
7.5
2.9
2.7
6.7
1.0
2.8
1.7
0.2
4.6
1.1
0.7
3.0
0.8
2.5
2.9
9.8
3.2
1.1
5.8
0.7
7.2
5.5
3.5
1.6
3.8
NA
ROE
2011E
15.0
10.6
26.4
2.4
22.1
7.5
10.6
10.2
19.9
7.5
26.4
19.7
20.2
32.0
19.8
134.2
15.8
13.2
102.5
8.3
24.0
4.7
12.0
17.6
3.3
6.9
29.7
33.2
10.2
16.8
9.2
29.0
10.3
11.5
7.1
21.3
34.5
4.3
12.3
35.2
NA
P/BV
2011E
1.6
1.0
1.6
7.3
2.4
1.2
1.1
1.2
2.2
1.0
1.8
1.4
1.6
2.9
1.8
16.1
1.3
1.1
13.2
1.9
1.9
0.7
2.6
1.8
0.8
2.1
5.9
9.9
1.9
1.3
0.8
1.7
2.3
1.1
1.8
2.4
5.8
0.4
2.6
7.0
NA
Updated as of 13 Apr 11
87
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Value: Brazil Sectors Valuation
Consumer Discretionary
Consumer Staples
Energy
Financials
Industrials
Materials
Telecommunication services
Utilities
Market Aggregate
13-Apr-11
MSCI Index
131
1195
1742
1235
240
2738
202
433
229411
Avg.
5yr
30.1
23.0
9.4
12.9
22.0
10.8
26.6
11.8
11.4
Current
Trailing
15.7
21.7
10.7
12.1
22.5
9.7
9.2
11.1
11.7
P/E (x)
12m
Fwd
2010E
10.8
17.4
18.4
22.7
12.5
9.9
10.7
12.5
17.7
23.9
7.9
10.4
9.0
9.2
10.2
11.4
10.7
12.0
2011E
11.5
19.4
12.6
11.1
19.0
7.9
9.1
10.5
10.9
2012E
9.1
16.1
12.2
9.7
14.7
7.6
8.9
9.5
9.9
Avg.
5yr
2.3
4.2
3.4
3.1
2.6
3.1
4.1
5.4
3.8
Div. Yield (%)
Current
Trailing
2010E 2011E
2.1
2.1
2.3
2.9
2.7
3.2
1.3
0.9
2.3
2.8
2.5
3.4
3.0
3.3
2.3
1.7
1.2
3.0
6.0
5.7
6.7
5.1
4.9
5.5
3.3
3.2
3.3
P/BV (x)
2012E
3.4
3.8
2.4
3.9
3.2
3.1
7.7
6.4
3.8
Avg.
5yr
3.5
3.2
2.5
3.0
4.3
3.3
1.5
0.7
2.0
Current
Trailing
2.3
3.9
1.2
2.3
5.9
2.0
1.1
1.2
1.8
2010E
2.4
4.4
1.1
2.4
6.9
2.1
1.0
1.2
1.8
ROE (%)
2011E
2.1
2.7
1.4
2.0
3.6
1.6
1.3
1.2
1.7
2012E
2.0
2.6
5.9
1.8
3.4
1.3
1.2
3.1
2.0
2009
13.7
17.9
22.0
17.7
46.0
13.5
20.0
9.1
18.7
2010E
13.8
19.4
11.2
19.3
28.7
20.5
10.5
10.5
16.6
2011E
18.3
13.9
11.0
17.9
19.0
20.6
13.8
11.5
15.0
2012E
22.2
16.1
48.5
18.3
23.1
16.7
13.8
33.0
16.0
Europe
EM
EMF EMEA
EMF Asia
EMF Latam
Global
Mexico
Chile
Argentina
Peru
Colombia
China
India
Russia
South Africa
Korea
Taiwan
Japan
Turkey
Consumer Discretionary
Consumer Staples
Energy
Financials
Industrials
Materials
Telecommunication Services
Utilities
Market Aggregate
Sector Neutral*
USA
12-month forward PE
Brazil
Value: PE Matrix for Countries and Sectors
10.8
18.4
12.5
10.7
17.7
7.9
9.0
10.2
10.7
11.9
14.5
14.1
13.5
12.3
15.2
14.5
15.4
13.4
11.7
13.6
11.6
13.9
9.3
8.9
13.3
10.3
10.3
11.6
7.5
10.9
12.3
17.5
9.0
11.1
12.3
10.5
11.4
12.1
11.3
11.3
13.1
17.7
6.7
10.0
10.0
10.7
11.3
10.9
9.2
10.6
15.1
15.8
12.7
11.5
12.2
12.2
11.6
15.8
12.1
12.8
10.0
14.9
9.9
9.2
13.7
7.7
9.4
9.7
11.7
10.6
13.4
14.4
11.3
10.9
13.4
11.4
12.0
13.7
12.3
12.1
15.5
19.8
NA
15.9
NA
14.5
11.5
NA
14.4
13.8
25.0
20.3
NA
13.3
NA
NA
11.6
14.1
16.3
13.3
NA
NA
10.7
8.9
NA
NA
9.6
NA
9.4
11.2
NA
NA
NA
NA
NA
11.4
NA
NA
11.6
11.7
NA
31.1
NA
NA
NA
NA
NA
31.4
18.3
13.1
13.9
16.1
11.9
10.2
11.0
12.5
11.4
15.9
11.6
13.1
14.9
24.3
12.5
17.4
20.4
10.3
15.3
16.7
16.2
16.5
NA
27.1
6.1
8.6
NA
9.9
9.9
11.3
8.1
10.9
13.1
15.4
9.6
10.3
9.8
12.0
11.3
NA
11.3
11.4
10.1
13.0
14.5
8.8
11.3
11.3
7.4
38.4
10.6
11.8
16.7
17.6
21.2
15.1
10.9
12.6
15.2
NA
12.5
15.1
NA
15.7
9.5
11.8
10.8
11.4
11.0
NM
13.6
11.9
9.8
21.1
11.2
9.7
9.7
10.8
10.4
NA
10.5
11.4
Regional and Countries Valuations
Brazil*
Mexico*
Chile*
China
Korea
Taiwan
India
Russia*
South Africa*
USA*
Europe*
Japan*
Global*
EMF*
EMF LatAm*
EMF Asia
EMF EMEA*
13-Apr-11
MSCI Index
229411
34418
5526
71
607
312
777
1081
822
1257
1199
527
345
48448
75074
701
458
Avg.
5yr
11.4
15.6
25.2
16.1
11.5
24.7
18.9
12.7
14.3
19.0
16.4
19.4
18.4
14.3
13.7
14.6
14.6
Current
Trailing
11.7
18.7
16.8
13.3
12.0
14.4
19.5
9.5
14.4
13.2
8.3
15.0
13.6
13.1
13.4
14.0
10.9
P/E (x)
12m
Fwd
2010E
10.7
12.0
14.4
20.8
16.3
16.9
11.6
13.9
10.6
12.4
12.5
15.0
16.2
20.7
8.1
10.0
11.3
15.8
11.7
13.7
7.5
8.6
13.6
14.0
12.3
14.2
11.3
13.7
11.7
13.9
12.1
14.7
9.2
11.5
2011E
10.9
14.9
16.6
12.2
11.1
13.2
17.1
8.3
11.8
12.0
7.7
NM
12.3
11.7
12.1
12.6
9.6
2012E
9.9
13.0
15.6
10.5
9.6
11.2
14.2
7.5
10.1
10.9
7.1
11.0
12.3
10.3
10.7
10.9
8.5
Avg.
5yr
3.8
1.8
2.3
2.3
2.0
3.0
1.5
1.8
3.0
1.8
2.9
1.1
2.1
2.4
2.9
2.3
2.4
Div. Yield (%)
Current
Trailing
2010E 2011E
3.3
3.2
3.3
4.1
4.4
3.2
3.7
4.2
2.6
2.6
2.5
2.8
1.1
1.1
1.3
3.4
3.2
4.1
1.2
1.2
1.3
1.5
1.4
1.8
3.1
2.9
3.6
1.8
1.8
1.9
3.6
3.5
3.8
2.2
2.1
2.4
2.5
2.5
2.7
2.5
2.4
2.8
3.5
3.5
3.3
2.5
2.5
2.5
2.6
2.4
3.1
P/BV (x)
2012E
3.8
2.3
2.9
3.2
1.4
4.5
1.5
2.1
4.3
2.1
4.2
2.5
3.0
3.2
3.5
2.8
3.6
Avg.
5yr
2.0
2.8
1.9
2.4
1.6
2.0
3.9
1.8
2.6
2.9
2.3
1.8
2.5
2.1
2.2
2.0
2.3
Current
Trailing
1.8
3.8
2.1
2.2
1.6
2.0
3.1
1.4
2.5
2.2
1.6
1.0
1.8
2.0
2.1
2.1
1.7
2010E
1.8
4.3
2.1
2.3
1.6
2.0
3.2
1.5
2.7
2.3
1.6
1.0
1.8
2.0
2.2
2.1
1.8
ROE (%)
2011E
1.7
2.6
2.1
2.0
1.5
1.9
2.8
1.3
2.1
2.1
1.6
1.0
1.7
1.8
1.9
2.0
1.5
2012E
2.0
1.8
1.9
1.8
1.3
1.8
2.4
1.2
1.9
1.9
1.4
0.9
1.5
1.7
2.0
1.7
1.4
2009
18.7
19.3
13.3
15.4
11.3
7.8
13.4
13.4
15.0
16.0
17.3
0.0
11.1
13.6
18.5
13.2
14.6
2010E
16.6
19.5
7.7
17.4
14.2
13.8
15.6
15.9
17.5
17.3
19.4
8.6
13.3
15.7
16.4
15.4
16.1
Source: I/B/E/S, MSCI, JPMorgan.
* Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates.
For all other markets and sectors, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest.
Companies with different yearends are calendarised to December yearends and are free float adjusted for aggregation. Historical numbers are from MSCI.
88
2011E
15.0
20.5
12.3
17.5
14.2
14.7
17.7
16.8
20.0
17.9
20.9
7.7
14.3
16.4
15.5
16.1
17.2
2012E
16.0
17.6
12.8
18.0
14.8
16.2
18.2
16.5
19.8
18.0
21.0
8.4
12.5
17.0
16.0
16.8
17.2
Updated as of 13 Apr 11
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Brazil Style: Sector Ranks
Sector Ranking by Dividend Yield
2.9
2.8
2.6
2.3
2.1
13.7
Discretionary
14.2
11.8
11.1
10.3
Utilities
14.8
Energy
15.7
Energy
1.2
Materials
Energy
-34% -22%
-26%
3.4
Industrials
-7%
Relative to Index
Staples
-3%
5.9
Telecoms
-11% -1%
Discretionary
-40%
Relative to History
Telecoms
0%
25%
14% 4%
Utilties
13%
Materials
40%
53%
Brazil
70%
56%
Industrials
63%
Financials
80%
8.0
Financials
80%
9
8
7
6
5
4
3
2
1
0
Staples
120%
Utilities
Sector Ranking by PE Discount to Index*
* History is since 1995.
Sector Ranking By ADTV ( 3months)
25
520
500
419
400
16.8
15
287
300
21.1
20
10
131
Staples
Utilities
Industrials
Industrials
Telecoms
Discretionary
Financials
Energy
Source: MSCI, IBES, Datastream, J.P. Morgan. * Historic data from 1995.
0
Discretionary
0
0
Brazil
13
Financials
24
Materials
5
29
Staples
100
Telecoms
200
Materials
600
Sector Ranking by ROE
Updated as of 13 Apr 11
89
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Technical Indicators
Bovespa fair value range*
Bovespa Absolute and Relative to EM Index
750
Absolute
210
Relative to EM
650
190
550
170
450
150
350
130
250
110
150
90
50
70
(36027)
PE
(78649)
PB
(36104)
DY
(79551)
BY/EY
(57456)
BY/DY
(51902)
10000
45
40
35
30
25
20
15
10
5
0
(100823)
(25818)
2003 2003 2004 2005 2006 2007 2007 2008 2009 2010 2011
(120282)
(85703)
40000
70000
100000
130000
18
1.2
+1SD
-1SD
ARI
tii2005
l 2004
2004 20052004
2005
12
12
0.8
9
10
0.6
6
8
3
-1SD
95 97 98 99 00 01 02 03 04 05 06 07 08 10 11
l 2005
k i 2004
2004MT2005
P lil 2005
dd
2005 Th
2004
I Hd
2005
i
2005
100
95
90
85
80
Bovespa
Oct 10
50 DMA
Source: MSCI, IBES, Datastream, CEIC, Bloomberg, EPFR Global
Note: Bovespa absolute and relative to MSCI EM is rebased to 100 since Jan 03.
Feb 11
200 DMA
75
Jan 10
Mar 10
May 10
Jul 10
Brazil
Sep 10
Nov 10
Brazil ex Petrobras
Jan 11
2005
2
Chil
2005
EM Composite Valuation Indicator
110
Jul 10
C Phili
h2005
R i 2004
bli
2010 MSCI Brazil Performance ex Petrobras
105
Mar 10
4
98 99 00 01 02 03 04 05 06 07 08 09 10 11
2004
20
115
Nov 09
6
Brazil Commodities
0
Bovespa 50 and 200 Moving Day Average
75000
70000
65000
60000
55000
50000
45000
40000
Aug 09
14
Brazil Domestics
1
0.2
11
16
15
+1SD
0.4
95 97 98 99 00 01 02 03 04 05 06 07 08 10
-1SD
MSCI Brazil Commodities vs Domestics (PE)
1.4
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
+1SD
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
MSCI Brazil Trailing PB relative to MSCI EM
MSCI Brazil Forward PE relative to MSCI EM
90
MSCI Brazil Trailing PE
Mar 11
Czech
Russia
Hungary
Thailand
Philippines
Taiwan
Indonesia
China
Poland
Turkey
Chile
Mexico
Brazil
Korea
S. Africa
Malaysia
India
Cheap -1.2
-0.9
-0.6
-0.3
0.0
0.3
#
Expensive
0.6
0.9
Updated as of 13 Apr 11
2004
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Sector EPS Revisions: Changes in 2011 and 2012 Forecasts
125
2011
115
EM EPS Revision Cycle: Brazil Lagging EM
Consumer Discretionary
Brazil
120
12 mth Fwd
115
EPS
110
Taiwan
2012
105
Argentina
100
105
95
2012
95
90
2011
85
85
Feb 10
Apr 10
Jun 10
Aug 10
Oct 10 Dec 10
Feb 11
Apr 11
80
Feb 10
Apr 10
Jun 10
110
100
107
2011
Oct 10
Dec 10
Feb 11
Apr 11
70
98
60
Feb 10
95
Feb 10
Apr 10
ARI
Jun 10
Aug 10
Oct 10
Dec 10
i2005
l 2004
2004 20052004
2005
Feb 11
Apr 11
l 2005
k i 2004
2004MT2005
Apr 10
Jun 10
P lil 2005
dd
2005 Th
170
2012
150
140
130
120
2011
110
100
Apr 10
Jun 10
Aug 10
Oct 10
2004
Dec 10
I Hd
2005
Feb 11
25
Current to
Current
Peak
-79.4%
331.7%
12.5%
973,505
2,623,203
-63.5%
169.5%
1.6%
52
136
-64.8%
162.5%
8.2%
Russia
182
67
161
-63.3%
140.9%
13.0%
Korea
46
27
60
-40.9%
120.7%
-23.4%
Colombia
166
80
160
-52.0%
101.1%
3.6%
China
5
4
6
-26.9%
69.7%
-19.4%
Chile
277
211
347
-23.7%
64.4%
-20.3%
India
43
32
52
-25.8%
61.4%
-16.5%
302
211
338
-30.1%
60.4%
-10.8%
90,953
58,143
91,707
-36.1%
57.7%
-0.8%
36
25
40
-29.2%
57.0%
-10.0%
Brazil
25,664
15,864
23,354
-38.2%
47.2%
9.9%
Mexico
2,416
1,760
2,414
-27.1%
37.1%
0.1%
78
57
74
-26.9%
29.0%
6.0%
South Africa
Apr 11
i
2005
6
Trough to
2004
20
Chil
2005
2004
Telecoms
Materials
160
Aug 10
28
Peak to
Trough
147
Malaysia
2011
Current
2,664,224
Turkey
101
2012
80
Min
Peru
Indonesia
2012
104
90
90
Feb 10
Aug 10
Financials
Financials
Energy
Energy
110
Max
Oct 10 Dec 10
Source: MSCI, IBES, Datastream.
Note: The charts are rebased to 100 on Feb 2008 for the ease of comparison
Feb 11
Apr 11
190
180
170
160
150
140
130
120
110
100
90
80
70
Feb 10
Brazil Domestics and Commodities EPS Revision Cycle
2012
2011
Apr 10
Jun 10
Aug 10
Oct 10
Dec 10
Feb 11
Apr 11
Commodities
Domestics
Max
412.6
81.0
Min
156.7
45.5
Current
263.8
80.1
Peak to Trough
(62.0)
(43.8)
Trough to Current
68.4
76.1
Current to Peak
56.4
C Phili
h R i bli2004
2005
1.1
2005
2
Updated as of 13 Apr 11
91
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Value: Forward PE for sectors
Consumer Discretionary*
Brazil
18
15
12
Consumer Staples
27
24
24
21
21
18
18
15
15
9
12
12
6
9
9
6
6
3
3
95
97
98
99
00
01
02
03
04
05
06
07
08
10
95
11
97
98
99
00
01
02
03
04
05
06
07
08
10
95 97 98 99 00 01 02 03 04 05 06 07 08 10 11
Financials
Energy
24
24
21
21
18
18
15
15
12
12
9
9
6
6
3
3
Industrials
27
24
21
18
15
12
9
6
3
0
0
0
95
97
98
ARI
99
00
01
02
03
04
05
06
tii2005
l 2004
2004 20052004
2005
07
08
10
95
11
97
l 2005
k i 2004
2004MT2005
98
99
00
01
P lil 2005
dd
2005 Th
02
03
04
05
06
2004
07
08
I Hd
2005
i
2005
10
18
15
2004
20
36
18
32
15
20
9
4
99
00
01
02
03
04
05
06
07
08
10
11
2004
3
8
98
Chil
2005
6
12
3
2
9
16
6
2005
12
24
12
97
C Phili
h2005
R i 2004
bli
Utilities
28
95
95 97 98 99 00 01 02 03 04 05 06 07 08 10 11
11
Telecoms
Materials
95
97
98
99
00
01
02
03
04
05
06
07
08
Source: I/B/E/S, Datastream
Note: This Dashboard aims to show historic consensus forward PE from 1995 with +/- 1 SD bands. * Consumer Discretionary series discountinuous for the period of Sept 2000 - Nov 2002 as EPS was negative.
92
3
11
10
11
0
95 97 98 99 00 01 02 03 04 05 06 07 08 10
11
Updated as of 13 Apr 11
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Value: Dividend Yield for Sectors
Consumer Staples
Consumer Discretionary
Brazil
12
10
10
8
8
8
7
6
6
6
5
4
4
4
2
2
3
0
0
95
96
97
98
00
01
02
03
05
06
07
08
95
10
96
97
98
00
01
02
03
05
06
07
08
2
10
95
10
10
8
8
8
6
6
6
4
4
4
2
2
2
0
0
97
98
00
01
02
ARI
tii2005
l 2004
2004 20052004
2005
03
05
06
07
08
10
l 2005
k i 2004
2004MT2005
96
97
98
00
P lil 2005
dd
2005 Th
01
02
03
05
06
2004
07
I Hd
2005
08
10
i
2005
95
2004
20
14
7.5
12
10
6.0
10
8
2
1.5
0
0.0
00
01
02
03
05
06
07
08
10
05
06
07
08
10
97
98
00
01
2005
2
02
03
05
06
07
08
10
Chil
2005
2004
6
3.0
4
03
8
4.5
6
02
Utilities
9.0
98
01
Telecoms
12
97
96
C Phili
h2005
R i 2004
bli
14
96
00
0
95
Materials
95
98
Industrials
10
96
97
Financials
Energy
95
96
4
2
95
96
97
98
00
01
02
03
Source: MSCI, Datastream
Note: This Dashboard aims to show historic consensus dividend yield. The dotted red line implies Average Dividend Yield for the Sector and grey line Brazil Average Dividend Yield
05
06
07
08
10
0
95
96
97
98
00
01
02
03
05
06
07
08
10
Updated as of 13 Apr 11
93
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Annex 3: Tables
Table 1: Top 6 cities in the world by population .........................................................4
Table 2: Top 5 countries in the world by area .............................................................5
Table 3: Region Details ...............................................................................................5
Table 4: Healthcare Members (2008) ..........................................................................8
Table 5: Education Expenses (2006) ...........................................................................9
Table 6: Gini Coefficient (2007)..................................................................................9
Table 7: Bolsa Família Benefits (values as of 2010) .................................................10
Table 8: Economic Classes: household earnings per month ......................................11
Table 9: Distribution of Economic Classes................................................................11
Table 10: Access to Goods and Services of Different Economic Segments ..............11
Table 11: Travel & Tourism Competitiveness Index.................................................14
Table 12: T&T Competitiveness Index Breakdown (2009).......................................14
Table 13: Global Competitiveness Index (GCI) – 2009-2010 ...................................15
Table 14: Brazil’s classification breakdown ..............................................................15
Table 15: Infrastructure breakdown ...........................................................................16
Table 16: 2010 Nominal GDP ...................................................................................16
Table 17: Real GDP Growth – Supply Side...............................................................17
Table 18: Real GDP Growth – Demand Side ............................................................18
Table 19: Real GDP Growth per Region ...................................................................19
Table 20: PAC Investments .......................................................................................20
Table 21: PAC 2 Investment Estimates .....................................................................21
Table 22: MCMV Breakdown ...................................................................................21
Table 23: Ceiling Price for Units under Minha Casa Minha Vida .............................21
Table 24: Government Investment Plan – World Cup...............................................22
Table 25: World Cup Investments (Public and Private) ............................................22
Table 26: Public Sector Investments Plan – Olympic Games....................................23
Table 27: Petrobras Capex 2010-2014 – Distribution by Area ..................................24
Table 28: Consumer Spending Breakdown as a % of Total Household Consumption
(2008).........................................................................................................................27
Table 29: Inflation-Targeting System ........................................................................29
Table 30: IPCA Weight per Category and Metropolitan Region (Dec-2010)............30
Table 31: IGP Price Index Calendar ..........................................................................31
Table 32: Brazil Central Bank Chairmen since 1985.................................................32
Table 33: Recap of recent macro-prudential measures ..............................................32
Table 34: Recent History of Brazil’s IOF on Securities ............................................34
Table 35: Main Brazilian Exports (2010) ..................................................................35
Table 36: Top 10 Exports Companies in Brazil (2010) .............................................36
Table 37: Destination of Brazilian Exports (2010) ....................................................36
Table 38: Origin of Brazilian Imports........................................................................36
Table 39: Current Account by Country......................................................................38
Table 40: FDI Distribution per Sector .......................................................................39
Table 41: External Debt in Latin America (2010 estimate) .......................................40
Table 42: Registered External Debt Stock – By Debtor ............................................40
94
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Table 43: Breakdown of Expenses of the Brazilian 2011 Budget..............................41
Table 44: Composition of the Stock of Public Debt ..................................................42
Table 45: Investment Grade.......................................................................................43
Table 46: Complexities of the Brazilian Tax System ................................................43
Table 47: Main taxes charged in Brazil .....................................................................44
Table 48: INSS Contribution by Income Level .........................................................45
Table 49: Income Tax Contribution by Income Level for 2011 ................................45
Table 50: BNDES’s Investment Perspectives............................................................50
Table 51: Sector Composition of BNDES Equities Portfolio ....................................51
Table 52: Brazil’s 10 Largest Companies by Market Cap (Dec 2010) ......................52
Table 53: Bovespa by Sector (Dec 2010) ..................................................................52
Table 54: Summary of Corporate Governance Levels for Bovespa Companies........54
Table 55: MSCI Brazil Weighting by Sector.............................................................54
Table 56: MSCI EM index composition by country: Demand Classification............55
Table 57: Market Data and Net Foreign Investment..................................................55
Table 58: Top Ten Brazilian Pension Funds..............................................................56
Table 59: Latin America Private Pension Funds........................................................57
Table 60: Mutual Fund Industry ................................................................................57
Table 61: Brazilian Presidents ...................................................................................59
Table 62: Senate Composition ...................................................................................61
Table 63: Chamber of Deputies Composition............................................................62
Table 64: Governors elected in 2010 .........................................................................62
Table 65: Brazil’s major listed Oil, Gas and Petrochemical companies ....................64
Table 66: Brazil’s major listed Metals & Mining companies ....................................66
Table 67: Brazil’s major listed Financials companies ...............................................68
Table 68: Brazil’s major listed Homebuilder companies...........................................69
Table 69: Brazil’s major listed Retail / Personal Care companies .............................72
Table 70: Brazil is top ranked within global protein industry....................................72
Table 71: Brazil’s major listed Food companies........................................................73
Table 72: Brazil’s major listed Beverages company..................................................74
Table 73: Brazil’s major listed Tobacco company.....................................................75
Table 74: Brazil Planted Area Breakdown for Annual Crops....................................76
Table 75: Brazil’s major listed Agribusiness companies ...........................................77
Table 76: Brazil’s Production Outlook ......................................................................77
Table 77: Brazil’s major listed Pulp & Paper companies ..........................................78
Table 78: Traffic Growth y/y vs. GDP Growth y/y ...................................................78
Table 79: IRR of Toll Roads in Brazil.......................................................................79
Table 80: Brazil’s major listed Roads companies......................................................80
Table 81: Brazil’s 5 Busiest Airports in 2010............................................................80
Table 82: Brazil’s major listed Electricity and Water companies..............................82
Table 83: Main Economic Indicator – Yearly............................................................83
Table 84: Main Economic Indicators – Quarterly......................................................84
Table 85: Debt and Fiscal Indicators .........................................................................85
95
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Annex 4: Figures
Figure 1: Brazil Divided by Region.............................................................................5
Figure 2: Brazil’s population .......................................................................................6
Figure 3: Population growth until 2050 .......................................................................6
Figure 4: Average Life Expectancy .............................................................................6
Figure 5: Fertility rate ..................................................................................................6
Figure 6: Population density by state ...........................................................................7
Figure 7: Urban Population as % of Total ...................................................................7
Figure 8: Healthcare Expenditures as a % of GDP (2008)...........................................8
Figure 9: Heath Plan (Insurance) Sector Revenues......................................................8
Figure 10: Illiteracy Rates 2007...................................................................................8
Figure 11: Illiteracy Rate in Brazil ..............................................................................9
Figure 12: Education Expenditure per Student ............................................................9
Figure 13: Gini Evolution in Brazil ...........................................................................10
Figure 14: Income distribution (2009) .......................................................................10
Figure 15: Homicide Rate per 100,000 People (2009)...............................................12
Figure 16: Penitentiary System Deficit ......................................................................12
Figure 17: Evolution of Public Security Investments ................................................12
Figure 18: Federal Police Personnel ..........................................................................12
Figure 19: Tourist Arrivals in Brazil..........................................................................13
Figure 20: Main Travel Destinations .........................................................................13
Figure 21: The most problematic factors in doing business.......................................16
Figure 22: Brazilian GDP Growth .............................................................................17
Figure 23: Economic Growth: Brazil vs. EM vs. G-7................................................17
Figure 24: Latin America GDP..................................................................................17
Figure 25: GDP Components by Expenditure (Demand Side) ..................................18
Figure 26: GDP Components by Sector (Supply Side)..............................................18
Figure 27: GDP per Capita ........................................................................................19
Figure 28: Regional Participation in Brazilian GDP (2008) ......................................19
Figure 29: Emerging Markets Gross Fixed Capital Formation..................................19
Figure 30: Gross Fixed Capital Formation in Brazil..................................................20
Figure 31: Capacity Utilization (% of total installed capacity)..................................20
Figure 32: Public Investment as a % of GDP ............................................................20
Figure 33: Mortgages as a % of total credit ...............................................................21
Figure 34: High Speed Train Total Costs by Sector ..................................................23
Figure 35: Petrobras Domestic Oil and Gas Production ............................................23
Figure 36: Supply-vs-Demand Forecast by EPE........................................................24
Figure 37: Industrial GDP..........................................................................................24
Figure 38: Industrial Production ................................................................................25
Figure 39: Industrial Production by Category............................................................25
Figure 40: Durable vs. Nondurable Goods Production ..............................................25
Figure 41: Retail Sales ...............................................................................................25
Figure 42: Consumer Confidence NSA .....................................................................26
96
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(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 43: Consumption of Furniture, Appliance, Electronics and Computers Index
...................................................................................................................................26
Figure 44: Household Ownership ..............................................................................26
Figure 45: Inhabitants per Vehicle (2008) .................................................................26
Figure 46: Consumption Allocation by Region (2008)..............................................27
Figure 47: Unemployment Rate.................................................................................27
Figure 48: Composition of Labor by Type of Job......................................................27
Figure 49: Net Formal Job Creation (Hires – Fires) ..................................................28
Figure 50: Job Creation by Category – 2010 .............................................................28
Figure 51: Real Wage Mass.......................................................................................28
Figure 52: Minimum Wage Evolution .......................................................................28
Figure 53: Inflation Rate since 2006..........................................................................29
Figure 54: IPCA vs. INPC .........................................................................................31
Figure 55: IGP-M and Its Components......................................................................31
Figure 56: IPCA vs. IGP-M .......................................................................................31
Figure 57: Selic Rate vs. Inflation yoy Growth .........................................................33
Figure 58: Exchange Rate..........................................................................................33
Figure 59: Real Exchange Rate..................................................................................33
Figure 60: Interest Rate by Country (end of 2010) ....................................................34
Figure 61: Trade Current (Exports + Imports)...........................................................34
Figure 62: Trade Balance...........................................................................................35
Figure 63: Total Exports as a % of GDP (2009) ........................................................35
Figure 64: Brazil’s Export Composition by Category (2010)....................................35
Figure 65: Brazilian Monthly Imports .......................................................................36
Figure 66: Imports from China ..................................................................................37
Figure 67: Imports Destination by Regions (2010)....................................................37
Figure 68: Current Account .......................................................................................37
Figure 69: Service Account Deficit Rising ................................................................37
Figure 70: Annual Brazilian FDI ...............................................................................38
Figure 71: Participation of Key Countries in Brazilian FDI ......................................38
Figure 72: Foreign Portfolio Investment in Brazil .....................................................39
Figure 73: Brazil International Reserves....................................................................39
Figure 74: International Reserves by Country (end of 1Q11)....................................39
Figure 75: Federal Government Revenues and Outlays.............................................40
Figure 76: Primary Surplus........................................................................................41
Figure 77: Nominal Deficit........................................................................................41
Figure 78: Interest Payments .....................................................................................42
Figure 79: Net Public Sector Debt .............................................................................42
Figure 80: Net Public Sector Debt Split into Internal and External Debt ..................42
Figure 81: Average Maturity of Brazil’s Public Sector Local Debt...........................43
Figure 82: Net Debt vs. Gross Debt...........................................................................43
Figure 83: Total taxation as a % GDP .......................................................................44
Figure 84: Brazil Ranks 14 within Countries with the Highest Tax/GDP Ratio (2009)
...................................................................................................................................44
Figure 85: Tax Burden by Jurisdiction ......................................................................44
Figure 86: Most Representative Taxes in Brazil........................................................45
97
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(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 87: Credit as a % of GDP ...............................................................................46
Figure 88: Credit as a % of GDP by Country (in 2009).............................................46
Figure 89: Total Credit Growth .................................................................................46
Figure 90: Credit to Individuals .................................................................................46
Figure 91: Total Credit Destination by Debtor ..........................................................47
Figure 92: Breakdown of Consumer Credit per Credit Type.....................................47
Figure 93: Non-performing Loans .............................................................................47
Figure 94: Average Maturity for Consumer Credit....................................................47
Figure 95: Average Spreads for Consumer Loans .....................................................48
Figure 96: Public Sector Credit as a % of Total Credit..............................................48
Figure 97: Household Debt Stock as a % of Annual Income.....................................48
Figure 98: Total Debt Service as a % of Annual Earnings ........................................48
Figure 99: Mortgages as % of GDP ...........................................................................49
Figure 100: Mortgages by Country............................................................................49
Figure 101: FGTS + SBPE Total Mortgage Disbursements ......................................50
Figure 102: BNDES Participation in Credit Rose after 2008 Crisis ..........................50
Figure 103: BNDES Disbursement............................................................................50
Figure 104: BNDES vs. Capital Markets...................................................................51
Figure 105: 15 Largest Stock Exchanges in Terms of Market Cap ...........................51
Figure 106: Bovespa Market Cap ..............................................................................52
Figure 107: Bovespa Index performance ...................................................................53
Figure 108: Bovespa Performance in 2010................................................................53
Figure 109: IBX50 vs. Ibovespa ................................................................................53
Figure 110: Foreign Equity Investments in the Bovespa (Secondary) Market ..........55
Figure 111: Investor Participation in Total Bovespa Volume....................................56
Figure 112: Bovespa Average Daily Traded Volume ................................................56
Figure 113: Pension Fund Allocation ........................................................................57
Figure 114: Mutual Funds’ Total AUM.....................................................................57
Figure 115: AUM Breakdown by Category...............................................................58
Figure 116: Fixed Income vs. Equity vs. Multi-Strategy...........................................58
Figure 117: Electorate Divided by Age .....................................................................58
Figure 118: Last 5 Presidents’ Popularity..................................................................60
Figure 119: Brazil’s Energy Matrix 2009 ..................................................................63
Figure 120: Expected Oil Production Growth (CAGR 2009 - 2035).........................63
Figure 121: Simplified map of Brazilian Basins........................................................64
Figure 122: BZ – Main steel-consuming sectors .......................................................65
Figure 123: Vale’s iron ore output has doubled since 2000 and accounts for over 75%
of Brazil’s output .......................................................................................................65
Figure 124: Brazil is the 8th major crude steel producer - as of 2010 .......................65
Figure 125: Brazil’s crude steel capacity may reach ~64Mt by 2016 ........................66
Figure 126: Brazilian flat-steel imports have stabilized at high levels ......................66
Figure 127: Deposit Market Share .............................................................................67
Figure 128: Loan Market Share .................................................................................67
Figure 129: Private credit as a percentage of GDP ....................................................67
Figure 130: Total Loans to GDP................................................................................68
Figure 131: Sector P/E 12 Months.............................................................................69
98
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Figure 132: Sector Performance vs. Selic ..................................................................69
Figure 133: Housing Market by Income Segment .....................................................70
Figure 134: Listed Companies’ Launches..................................................................70
Figure 135: SBPE + FGTS Financing........................................................................70
Figure 136: Construction Inflation Breakdown .........................................................70
Figure 137: Brazil Retail Sales ..................................................................................71
Figure 138: Brazil Consumer Confidence..................................................................71
Figure 139: Food Retail Market Share (2009) ...........................................................71
Figure 140: Hardline Market Share (2008)................................................................72
Figure 141: E-commerce Market Share (2008, 2009)................................................72
Figure 142: Exports have flattened as % of total production .....................................73
Figure 143: Brazil to consume 19mn tons of meat in 2011E.....................................73
Figure 144: Brazil’s pastures to decline ~40 mn hectares by 2030E .........................73
Figure 145: World’s Top 8 beer markets by volume, 2009 .......................................73
Figure 146: AmBev’s Beer Brazil Market Share .......................................................74
Figure 147: Beer EBIT margin of leading brewer in top markets, 2009E .................74
Figure 148: Brazil’s beer per capita to keep gradually improving.............................74
Figure 149: Global smoking incidence ......................................................................74
Figure 150: Smoking is concentrated in Brazil’s lower-income segments ................74
Figure 151: Souza Cruz market share evolution ........................................................75
Figure 152: Souza Cruz manages to grow sales and EPS despite lower volumes .....75
Figure 153: Federal Excise Tax (IPI) collection ........................................................75
Figure 154: Sugarcane: Increasingly a Domestic Story .............................................76
Figure 155: State and Federal Concessions ...............................................................78
Figure 156: Expected Investments in Infrastructure ..................................................79
Figure 157: Third Round of Federal Concessions .....................................................79
Figure 158: Domestic RPK Growth y/y.....................................................................80
Figure 159: Power Generation Capacity Breakdown by Source................................81
Figure 160: Electricity Demand and GDP Growth in Brazil .....................................81
Figure 161: Regulatory WACC for Brazilian Utilities over Time .............................82
Figure 162: Map of Distribution Companies in Brazil ..............................................82
99
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Companies Recommended in This Report (priced as of market close on 14 April 2011)
CCR (CCRO3.SA/R$46.10/Overweight), Embraer SA (ERJ/$32.33/Neutral), GOL Linhas Aereas Inteligentes S.A.
(GOL/$13.39/Neutral), MRV (MRVE3.SA/R$13.15/Overweight), OHL Brasil (OHLB3.SA/R$65.70/Neutral), PDG Realty
(PDGR3.SA/R$9.19/Overweight), PETROBRAS ON (PETR3.SA/R$28.82/Neutral), TAM S.A. (TAM/$19.41/), Vale ON
(VALE/$32.65/Overweight)
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
In compliance with Instruction 483 issued by Comissao de Valores Mobiliarios (the Brazilian securities commission) on July 6, 2010, the
Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal views
about the securities and issuers; (2) that all recommendations issued by him or her were independently produced, including from the entity
in which he or she is an employee; and (3) that he or she will set forth any situation or conflict of interest believed to impact the
impartiality of the recommendations herein, as per article 17, II of Instruction 483.
Important Disclosures
•
•
•
•
•
•
•
•
100
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for
PETROBRAS ON, Vale ON within the past 12 months.
Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of GOL
Linhas Aereas Inteligentes S.A., PETROBRAS ON, TAM S.A..
Client of the Firm: CCR is or was in the past 12 months a client of JPM. Embraer SA is or was in the past 12 months a client of
JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service and non-securitiesrelated services. GOL Linhas Aereas Inteligentes S.A. is or was in the past 12 months a client of JPM; during the past 12 months,
JPM provided to the company non-investment banking securities-related service. PETROBRAS ON is or was in the past 12 months a
client of JPM; during the past 12 months, JPM provided to the company investment banking services and non-investment banking
securities-related service. TAM S.A. is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the
company non-investment banking securities-related service. Vale ON is or was in the past 12 months a client of JPM; during the past
12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and nonsecurities-related services.
Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services
from PETROBRAS ON, Vale ON.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Embraer SA, GOL Linhas Aereas Inteligentes S.A., PETROBRAS ON, Vale ON.
Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other
than investment banking from Embraer SA, GOL Linhas Aereas Inteligentes S.A., PETROBRAS ON, TAM S.A., Vale ON. An
affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from
Embraer SA, GOL Linhas Aereas Inteligentes S.A., PETROBRAS ON, TAM S.A., Vale ON.
J.P. Morgan and/or its affiliates are acting as financial advisor to LAN Airlines S.A. (NYSE:LFL), in connection with its nonbinding agreement to merge with TAM S.A. (NYSE:TAM), as announced on August 13, 2010. The merger will be subject to
customary conditions including both parties entering into a binding definitive agreement and satisfaction of conditions, including
corporate and shareholder approvals, actions and regulatory approval. This research report and the information herein is not intended
to provide voting advice, serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of
a proxy or any other action by a security holder.
MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior
written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or
used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the
entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or
compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness
for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of
its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages
of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
CCR (CCRO3.SA) Price Chart
Date
Rating
Share Price
(R$)
Price Target
(R$)
06-Jun-08
OW
30.02
44.50
80
OW R$52
64
OW R$44.5
Price(R$)
N R$26
N R$31
N R$45
48
12-Mar-09 N
21.26
26.00
21-Sep-09 N
30.39
31.00
30-Aug-10 N
39.70
45.00
18-Nov-10 OW
44.28
52.00
Date
Rating
Share Price Price Target
($)
($)
20-Feb-07
32
16
0
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Apr
11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Jun 06, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Embraer SA (ERJ) Price Chart
OW $18
OW $20OW $25
N $18
85
OW $23
OW $18OW $23
N $27
68
OW
UW $23
UW $20
OW $20OW $16
OW $18
OW $27
UW $18
N $32
N $35
N $33
N $32N $36 N $40
51
Price($)
34
17
0
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Apr
11
OW
45.98
--
01-Dec-08 OW
14.40
20.00
12-Jan-09
OW
17.40
23.00
23-Feb-09
OW
13.24
18.00
30-Mar-09
OW
13.17
16.00
08-Apr-09
18.00
OW
15.44
04-May-09 OW
18.73
20.00
06-Jul-09
OW
15.99
18.00
03-Aug-09 OW
19.49
23.00
08-Sep-09 OW
22.81
25.00
05-Oct-09
OW
22.57
27.00
30-Oct-09
27.00
N
23.45
02-Nov-09 N
20.25
18.00
06-Jan-10
UW
22.44
18.00
22-Mar-10
20.00
UW
24.56
03-May-10 UW
24.08
23.00
02-Aug-10 N
26.99
32.00
07-Sep-10 N
26.65
35.00
14-Oct-10
28.33
32.00
N
01-Nov-10 N
29.28
36.00
21-Mar-11
N
33.97
40.00
28-Mar-11
N
32.96
33.00
101
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
GOL Linhas Aereas Inteligentes S.A. (GOL) Price Chart
56
UW
42
OW
N
N
UW
UW
OW $7.5
N $15.5
N $17
N $20
Price($)
28
14
Date
Rating
24-Oct-06
N
Share Price Price Target
($)
($)
31.99
-
01-Dec-06 UW
28.46
-
25-Sep-07 N
23.88
-
01-Aug-08 UW
9.97
-
12-Sep-08 OW
9.15
-
29-Jan-09
OW
4.56
7.50
03-Apr-09
UW
3.08
--
09-Nov-09 N
11.80
15.50
05-May-10 N
12.83
17.00
08-Nov-10 N
17.55
20.00
Date
Share Price Price Target
(R$)
(R$)
0
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Apr
11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
MRV (MRVE3.SA) Price Chart
75
Rating
OW R$14.33
60
OW R$13
N R$14.33 OW R$6
OW R$9.33
45
OW R$16
OW R$23
OW R$21
Price(R$)
30
15
0
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Aug 01, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
102
Apr
11
01-Aug-08 N
35.40
14.33
19-Jan-09
OW
11.21
6.00
11-May-09 OW
21.19
9.33
20-Jul-09
29.19
13.00
OW
17-Sep-09 OW
32.40
14.33
15-Jan-10
OW
13.00
16.00
15-Oct-10
OW
18.00
23.00
17-Mar-11
OW
13.75
21.00
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
OHL Brasil (OHLB3.SA) Price Chart
Date
Rating
Share Price
(R$)
Price Target
(R$)
06-Jun-08
105
N R$64
84
N R$35.4
Price(R$)
N R$17
N R$31
N R$58
63
N
26.49
35.40
17-Mar-09 N
13.34
17.00
13-Nov-09 N
31.20
31.00
30-Aug-10 N
48.00
58.00
18-Nov-10 N
61.10
64.00
Date
Share Price Price Target
(R$)
(R$)
42
21
0
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Apr
11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Jun 06, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
PDG Realty (PDGR3.SA) Price Chart
Rating
OW R$10
18
OW R$17
OW R$15
Price(R$) 12
OW R$9 OW R$15
OW R$11OW R$12
OW R$15 OW R$14
6
01-Aug-08 OW
5.88
15.00
19-Jan-09
3.18
9.00
OW
11-May-09 OW
4.96
15.00
20-Jul-09
6.08
17.00
OW
17-Sep-09 OW
6.80
10.00
15-Jan-10
8.16
11.00
OW
05-May-10 OW
8.00
12.00
15-Oct-10
OW
11.00
15.00
17-Mar-11
OW
9.28
14.00
0
Nov
07
Feb
08
May
08
Aug
08
Nov
08
Feb
09
May
09
Aug
09
Nov
09
Feb
10
May
10
Aug
10
Nov
10
Feb
11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Aug 01, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
103
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
PETROBRAS ON (PETR3.SA) Price Chart
Date
102
Rating
OW R$35OW R$49
85
OW R$72OW R$42OW R$50.5
68
N R$57 OW R$47 N R$35
N R$43
OW R$54
OW R$51
N R$34
Price(R$) 51
34
17
0
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Apr
11
Share Price Price Target
(R$)
(R$)
05-May-08 N
49.00
57.00
27-Jun-08
OW
52.13
72.00
16-Oct-08
OW
25.45
47.00
01-Dec-08 OW
22.59
42.00
21-Jan-09
OW
26.93
35.00
09-Mar-09
N
30.99
35.00
12-May-09 OW
40.88
50.50
08-Jun-09
41.97
49.00
OW
16-Nov-09 OW
43.00
54.00
22-Mar-10
40.55
51.00
03-May-10 N
35.40
43.00
01-Nov-10 N
29.10
34.00
Date
Rating
Share Price Price Target
($)
($)
24-Oct-06
N
OW
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage May 05, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
TAM S.A. (TAM) Price Chart
65
UW $14.5
52
39
UW
N $7.5
N
N
N $11
N $14
N $11
N $20.5
Price($)
26
13
0
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
104
Apr
11
31.63
-
01-Dec-06 UW
27.88
-
25-Sep-07 N
26.61
-
29-Jan-09
N
7.51
11.00
03-Apr-09
N
6.01
7.50
30-Jul-09
N
12.30
11.00
03-Nov-09 N
14.47
14.00
09-Nov-09 UW
16.05
14.50
14-May-10 N
16.13
20.50
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Vale ON (VALE) Price Chart
Date
75
OW $23.3 N $31.5
OW $19.8
60
OW $17.8
45
OW $23.4
OW $31.5
OW $27.9
OW $30.68
OW $46.1OW $47.5 N $18.5
N $24.5
N $23.5
OW $45 OW $42
OW $39.5
OW $38
OW $4
Price($)
30
15
0
Sep
06
Jun
07
Mar
08
Dec
08
Rating
Share Price
($)
Price Target
($)
25-Sep-02 OW
10.86
-
22-Dec-06 OW
14.59
17.80
07-Feb-07 OW
16.96
19.80
17-Apr-07
OW
20.95
23.30
09-Jul-07
27.90
OW $35.5 OW $39.5OW $47.5
Sep
09
Jun
10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Dec 30, 2001 - Feb 12, 2002, and Aug 25, 2005 - Dec 22, 2006. This chart shows J.P. Morgan's
continuing coverage of this stock; the current analyst may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Mar
11
OW
24.29
14-Sep-07 OW
27.25
31.50
03-Oct-07
N
32.30
31.50
11-Apr-08
46.10
OW
35.82
02-Sep-08 OW
25.23
47.50
16-Oct-08
OW
11.64
30.68
19-Nov-08 OW
11.09
23.40
20-Feb-09 N
13.60
18.50
03-Aug-09 N
19.73
23.50
08-Oct-09
24.41
24.50
10-Dec-09 OW
28.02
35.50
12-Mar-10 OW
30.03
39.50
12-Apr-10
33.95
45.00
N
OW
04-Jun-10
OW
25.54
39.50
12-Jul-10
OW
25.22
38.00
21-Sep-10 OW
28.51
42.00
22-Oct-10
OW
32.07
47.50
14-Apr-11
OW
32.65
48.00
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research
analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE
All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s
coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying
analyst(s) coverage universe.
J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2011
J.P. Morgan Global Equity Research Coverage
IB clients*
JPMS Equity Research Coverage
IB clients*
Overweight
(buy)
47%
50%
43%
70%
Neutral
(hold)
42%
45%
49%
62%
Underweight
(sell)
11%
33%
8%
56%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.
105
Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which
include revenues from, among other business units, Institutional Equities and Investment Banking.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMS, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of JPMS,
and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public
appearances, and trading securities held by a research analyst account.
Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a
marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co.
and its subsidiaries.
Options related research: If the information contained herein regards options related research, such information is available only to persons who
have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of
Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at
http://www.optionsclearing.com/publications/risks/riskstoc.pdf.
Legal Entities Disclosures
U.S.: JPMS is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a
member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a
member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No.
2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg
Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated
by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd,
Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS
Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a
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Emy Shayo Cherman
(55-11) 3048-6684
[email protected]
Latin America Equity Research
18 April 2011
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