Download Latin American Update, No. 2 – April, 2009

Latin American Update, No. 2 – April, 2009
Arne-Christian Haukeland
[email protected]
+ 47 55 21 19 53
Latin American Desk
If you need financial advice or services related to your business in
Latin America, please contact DnB NOR’s Latin­ American desk by
e-mail or telephone and we will do our best to assist you. If you wish
to subscribe to this free bi-monthly newsletter, please contact us at
[email protected].
Lars Kvamme
[email protected]
+ 47 55 21 18 11
Tom Mario Ringseth
[email protected]
+ 55 21 22 85 17 95
Karen Kosberg
[email protected]
+ 47 22 94 46 59
Marcela Hernández M.
Chile branch
[email protected]
+ 562 9230100
“Whilst every care has been taken in preparing this document,­ no responsibility or lia-bility is accepted­ as to the correctness and/or the accuracy of the
information­ contained herein. Any views expressed regarding future conditions
must not be regarded as promises or guarantees­. All opinions and estimates­
contained in this report may be changed after publication­ at any time without
notice. No liability is accepted whatsoever­ for any direct or consequential loss
arising from the use of this document.”
Brazil
reaffirmation of the government’s commitment to prudent
policies “remains critical for Brazil to protect the recent
improvement in fundamentals and to regain a sustainable
growth trajectory once the global economy stabilizes”.
The 2008 GDP growth in Brazil ended officially at 5.1%
after a strong contraction during the fourth quarter of 3.6%.
It was mainly industrial output which experienced a sharp
decline during the last quarter of 2008. Further, lower
investments influenced also GDP performance negatively.
GDP perspectives according to the Focus report of mid April
compiled by Banco Central present now a perspective of
average negative growth of -0,30% for 2009. Some leading
economists have come out with more negative views, GDP
contraction of 1-2 % of GDP.
The government continues pro-active as to several anticyclical measures to avoid worsening of the current crisis. They
have reduced commercial bank reserve requirements with
Banco Central, injected liquidity into the currency markets,
supported export financing, suspended and reduced taxes
and implemented SELIC interest rate reductions in January
and March and will continue
doing so throughout their bi monthly meetings later this year,
so long inflation performance permits. BNDES has received
additional BRL 100 billion funding from the National Treasury
in order to grant financing to medium and long term projects.
A major housing development plan to build 1 million houses
has been announced by the government. Tax reduction for
autos has resulted in the second highest monthly new auto
sales in history during March.
Politics:
President Lula received a lot of media attention during the
G 20 meeting in London at the beginning of the month.
Many issues were addressed in the meeting, the necessity
for stricter limits on hedge funds, executive pay, credit-rating
companies and risk-taking by banks. The IMF is to receive a
boost in its capital base and funds were committed to revive
trade and to help governments weather the economic and
social turmoil.
In practical terms, Brazil committed itself to help increase
the funding base of the IMF through a special committed line
of USD 10 billion. Brazil is to become a creditor of the IMF,
something unthinkable 10-20 years ago.
Domestically, as a result of the current economic crisis,
President Lula’s approval ratings of his administration fell by
almost 10% down to 62%. Despite this fall, his ratings still
remain among the highest in the country’s history.
Economics:
Standard & Poor’s rating agency reiterated at the beginning
of April Brazil’s investment grade rating BBB- for the long
term credit rating. This was “supported by the government
commitment to prudent macroeconomic policies during the
global recession”. Further, falling domestic interest rates will
better growth perspectives of the economy and reduce the cost
of government debt. According to S&P as to Brazil’s external
accounts, the change to a net creditor from a net debtor will
help shield the country from the global turmoil. Finally, the
The performance of monthly inflation figures in Brazil has been
closely followed by the government and the financial markets
as to its influence on monetary policy and future interest rate
adjustments. Basically, the only instrument utilized by the
government to control inflation and inflationary expectations
is the SELIC basis interest rate. In the past inflation has been
the main priority of the government of President Lula. With
the reduction in economic activity taking place globally and in
Brazil, there seems to have been in a shift in priority granting
more importance in sustaining economic activity than
following inflation target and performance. In January Banco
Central cut the SELIC rate by 1% to 12,75%. In the Banco
Central SELIC meeting on March 11, the interest rate was
cut by further 1,5% to the current rate at 11.25%. Market
expectations are that in the next Banco Central interest rate
meeting at the end of April, a further reduction of 1-1.5%
will take place due to that inflationary pressures are currently
weak and lower interest rates will stimulate the economy.
Many economists have envisaged a stronger reduction in
interest rates in Brazil which remain the highest in the world.
There are perspectives that the Selic rate will enter into a
single digit figure during the next months for the first time in
history.
According to O Globo newspaper April 9, 2009, lending
costs from Brazilian banks are unbelievably high, quoted
by the newspaper at 30.8% p.a. for corporate customers
and 52,7% p.a. for individuals. President Lula is quoted in
the same newspaper saying that “lower bank spreads is an
obsession”.
The IPCA index for March came out at 0.2% down from
0.55% in February. Annualized IPCA inflation figure as per
March was at 5,61% down from 5,90% from the previous
month. Inflation expectations during the next months are low,
with deflation of prices at wholesale level, excess industrial
capacity and weak demand which should allow for further
interest rate reductions this year.
The Real closed in the end of March at BRL 2.32 per USD,
slightly stronger than the previous month at BRL 2.38 per
USD.
External accounts are positive, but weak due to lower global
demand for Brazilian exports and weak domestic demand for
imported products. Exports in March reached 11.8 billion and
imports USD 10 billion. The trade balance for March reached
a surplus of USD 1.771 billion, bringing first quarter figure for
this year to USD 3 billion in relation to USD 2.8 billion same
time period last year. Current account figures this year have
been in the red with USD 2.8 billion in January and USD 600
million in February. Foreign direct investments in January
were USD 1.9 billion and USD 2 billion in February. Foreign
direct investments are expected to surpass and to finance the
current account deficit expected in 2009.
Currency reserves were by the end of March at USD 202
billion slightly up in relation to previous months. The total
external debt of both public and private sectors was at end of
February estimated at USD 195.8 billion. Brazil is maintaining
its currency reserves and currently in a net creditor position.
Public sector accounts have deteriorated during the first
months of this year. Not only has fiscal income been lower
because of the contraction in the economy due to reduction
and suspension of taxes, but public spending has increased
strongly through employment and anti cyclical measures.
This has caused concern and many consider this now to be a
trend rather than a month or two of poor fiscal performance.
The February primary deficit for the consolidated public
sector came in at BRL 6.1 billion compared to same month
last year a surplus of BRL 2.6 billion. The net debt to GDP
increased in February to 37 % of GDP.
Finance:
The stocks market remains volatile, but with a positive trend.
The IBOVESPA stock market index in USD closed at the end
February posting a loss of 5.4% in relation to previous month
and in March a gain of 10.1% in relation to February.
Bond prices have fallen during the last month. The BR 40
bond posted at the end of March a spread of 325 basis points
over US Treasury bills and almost 75 basis points less than
at end of February.
Business:
Brazilian oil sector continues to post news as to discoveries
of new fields. There are expectations from the market that
Petrobras will soon re-start to purchase equipment and
services both internationally and domestically. There has
been somewhat of a standstill during the last months as efforts
have been made to seek price reductions in view of the new
activity level of the sector. Financing has also been challenge
for both suppliers and buyers of equipment and services.
Forecasts:
The Focus Report posted by Banco Central at the second
week of April, based on survey among economists from
100 Brazilian banks, came out with the following forecasts:
IPCA inflation index for 2009 down from previous surveys,
currently at 4,25% and for 2010 4.42%. Exchange rate at
end of 2009 unaltered estimated at BRL 2.30 per USD and
at end of 2010 at BRL 2.29 per USD. GDP performance for
2009 set at a contraction of -0,30% and for 2010 at 3.5%.
The trade surplus for 2009 is estimated at USD 15 billion and
in 2010 at 14 billion. Foreign direct investment is expected
to reach in 2009 USD 22 billion and in 2010 USD 25 billion.
The current account is expected to post a deficit in 2009 at
USD 21billion and in 2010 a deficit of USD 24 billion. The
Selic benchmark interest rate is expected to end 2009 at
9.25% p.a. and at end 2010 at 9.5%. The net public debt to
GDP ratio is estimated to reach by end 2009 level of 37% and
at end 2010 at 35.81%.
There are yet no strong signals as to a sustainable recovery of
economy or specific sectors. Volatility of all markets are still
expected during the current and next quarter.
Story of the month: Financing in Reais through BNDES.
As written earlier, due to high lending costs by Brazilian
banks, BNDES is the main source for corporate medium and
long term Reais financing of investments in Brazil. In general,
BNDES will not finance acquisitions.
By financing in Reais, companies can match revenues in
Brazil in Reais and expenses in Reais thus avoiding currency
risks and difficult and expensive hedging operations,
BNDES has specific legislation which allows it to fund
themselves through special funds and to lend at competitive
rates below the SELIC government bank intervention interest
rate. The main fund for financing in Reais has been the FAT
fund (Workers fund).
With the increase of the scope and lending of BNDES the FAT
fund was not sufficient for the bank activities. Consequently,
more funding was required. The new source of funds coming
from the National Treasury ref. Medida Provisoria 453 is
denominated TN fund.
The third source of funding is the currency basket (Cesta de
Moedas).
Today, depending on sector, financing is granted by BNDES
in a combination of two or three of these funds.
Tenors, depending on sector, are usually 8-10 years.
Financing amount is usually 80% of project value. Guarantee
structures can be negotiated. Usually existing or completed
projects / assets can be part of the guarantee structure.
As to cost and guarantees structures, financing via the FAT
fund, in addition to TJLP currently at 6.25%, there are two
spreads which are added; the basic spread of 0.9% and credit
risk of operation between 0.5% to 3.57%. The latter will be
defined by internal risk rating of the company by BNDES,
contracts, escrow accounts, deposit guarantee, assets,
mortgage, etc. A SLC from pre-approved bank will facilitate
loan processing and time in addition to secure lowest spread
at 0,5%.
If the TN fund is used, the cost will be the same as for the FAT
Fund increased by 2.5%.
Usually, BNDES requires up to 130% in guarantees of loan
amount and in some cases personal guarantees. With a SLC
from a pre-approved bank, the guarantee will be 100% of the
loan amount.
Handling of loan application will normally take 180 days at
BNDES, but a complex guarantee structure might delay this
process.
DnB NOR has extensive experience in financing projects
jointly with BNDES opening Standby Letters of Credit in
favour of BNDES thus guaranteeing lowest lending rates and
rapid processing of loan application.
Another important area for BNDES financing is the shipping
sector, both applicable to shipyards and ship owners. The
FMM (Merchant Marine Fund) is the only USD fund available
at BNDES which can grant pre-fixed interest rate financing
up to 20 years in the range of 3-5%.