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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%.