Download Brazil Update Q4 2014

Brazil Update Q4 2014
CHANGES IN PRESIDENT DILMA´S SECOND TERM?
President Dilma Rousseff was re-elected as President of Brazil at the
end of October with the smallest margin ever. Despite announcing
continuity in her policies the night she was re-elected, the
appointment of her economic team indicates changes.
The performance of the Brazilian economy remains weak. Stagflation,
characterized by low GDP growth, expected this year to reach 0.2%,
and high inflation around 6.5%, is the best description of the current
state of the Brazilian economy.
POLITICS
Brazilians voters went to polling stations across the country on
October 26th to elect the new President for the 2014-2018 term.
Dilma Rousseff of the Workers’ Party (PT), the current President and
candidate for re-election, won the poll with 54.5m votes, representing
51.64% of the valid votes cast. Aécio Neves, the challenger of the
centre-right party PSDB, was voted by 51m of Brazilians (48.36%).
A closer look at the results shows a clear division in the country.
Ms. Rousseff notched up an expressive victory in the poorer Northeast
region, winning in all nine states (out of 27 states in the country), while
Mr. Neves won in the richer South and Southeast regions and also in
the Central-West. Summing up these three regions, Mr. Neves lost only
in Rio de Janeiro and his home state of Minas Gerais, where he had
two terms as governor in 2003-2010 and was expected to win – what
probably cost him the victory.
There is another factor that must be taken in account. As voting is
mandatory in Brazil, 30.1m people abstained from voting, while 5.1m
nullified their votes and 1.9m voted in blank. This significant amount
of residual votes may suggest that Brazilians weren’t satisfied with any
of the candidates and that a significant change is needed to put the
country back on track or even to seek new routes.
Ms. Rousseff is likely to have a tougher time in the next term with the
new composition of the Federal Senate and the Chamber of Deputies.
PT and PMDB, two of the largest parties, lost ground to mediumsized parties, making it harder to form a governing coalition, now
that these parties have more bargaining power in terms of ministries
and federal budgets. The Lower House has an implausible number of
28 different elected parties. The public administration is swollen and
saturated, with a record 39 ministries.
In February next year, Ms. Rousseff will face her first challenge in the
new term as her party tries to elect the next presidents for both houses
in the Congress. Although PT and PMBD have an agreement to alternate the presidencies, and it is PT’s turn, they might have to step back
in order to assure governability.
There are indications that Ms. Rousseff in her next term will seek more
proximity to the United States and Europe.
The U.S. Vice-President Joe Biden is expected to be present at her
inauguration. International trade agreements, between Mercosul and
the European Union, in parallel with the EFTA, are among the priorities
in her second term.
There are expectations for changes in the presidencies of BNDES and
Petrobras. There are indications that BNDES will migrate from the
Ministry of Development, Industry and Commerce to the Ministry
of Planning and changes in the bank policies are expected regarding
lending terms and conditions.
ECONOMICS
President Dilma announced at the end of November her economic
team for her next 4-year term. She pledged “immense effort” to slow
inflation upon the announcement of her new Minister of Finance.
Public debt has to stop increasing in order to avoid a possible downgrade of Brazil’s sovereign risk rating.
The appointed new Minister of Finance, who will lead the
economic team, Joaquim Levy, with a PhD from University of Chicago,
is expected to implement orthodox economic policies, including more
rigorous fiscal discipline in order to restore investor confidence. In
previous jobs at federal and state levels, he implemented and was reputed for his austere economic policies. Nelson Barbosa was appointed
Minister of Planning and Alexandre Tombini remains as President of
the Central Bank.
Upon his announcement as Finance Minister, Levy stated that the
target for the primary budget surplus will increase in 2015 to 1.2% and
for the two subsequent years to 2%. The fiscal adjustments are the
basis and initial steps to exit the current stagflation scenario. A strict
implementation of the fiscal goals will increase investor
confidence, subsequently allowing for a fall in interest rates and thereafter economic growth. In parallel, inflation and inflationary expectations have to be brought down to the centre of the inflation target.
Planning Minister Barbosa will focus more on the social programs of
the next Dilma government .
Challenges facing Brazilian businesses on day to day operations remain;
the still relatively strong Real, high corporate taxation, myriad of taxes,
poor infrastructure, tight labor market, inadequately educated workforce, bureaucracy, expensive credit, local content requirements, legal
and regulatory uncertainty, etc., all resulting in high costs for corporates to operate in Brazil, amongst the highest in the world. The “Brazil
costs” remain a challenge!
It seems as if the anti-cyclical macroeconomic policies, implemented
by the administration of President Dilma to offset the impacts of weak
domestic economy and consequences from the global crisis, have not
been sufficient to support the envisaged rebound in growth of the
Brazilian economy. Economic growth in 2014 will reach a meagre 0.2%,
mainly sustained by public spending, causing concerns for Brazilian
economy and its perspectives. Many say that the current model - a
consumption driven economy combined with strong government
spending and commodity based exports is not sufficient to reach sustainable growth figures. Increasing government interventionism causes concerns, uncertainties and imbalances.
Some economists urge for change in economic policies, allowing for
higher private sector investments in the economy and likewise increase in savings.
In order to secure investments, constitutional reforms are envisaged
such as; tax, social security and political reforms. in order to create a
new investment cycle for both foreign and domestic capital in Brazil.
Productivity and efficiency have not been prioritized by the government for sustainable economic growth, with them being more concerned on creating and maintaining jobs.
The government of President Dilma is working to increase investments
ratio to 20% of GDP and particularly seeking to increase infrastructure
investments. Peers such as Mexico and Chile currently invest over 20%
of GDP. On its most recently released report, IBGE (official government
statistics) estimated the investment rate to be at 17.4% of the GDP on
the third quarter, which represents an 8.42% decrease compared to the
same quarter last year. The fall, in terms of volume, on the gross fixed
capital formation is the main responsible for this gap.
Brazil posted third quarter a negligible GDP growth of 0.1%, after
posting negative growths during second quarter of 0.6% and 0.2%
during first quarter in relation to previous quarters. GDP growth for
2014 is expected to reach a meagre 0.2%.
Brazil: GDP
14
12
10
8
6
4
2
0
Dec-06
Dec-08
Dec-10
Dec-12
Dec-14
Source: Thomson Datastream/DNB Marke| ts
The Real ended November quoted at BRL 2.56 per USD, a depreciation
of almost 5% last month. The NOK/Real currency quote is currently
at NOK 2.75. During the last 12 months, the range in this relation has
been between NOK 2.51 to 2.82 per BRL.
Per cent change, y/y
10
Brazil: Key policy rate (Selic)
16
8
6
4
2
0
-2
-4
Q3 2004 Q3 2006 Q3 2008 Q3 2010 Q3 2012 Q3 2014
Source: Thomson Datastream/DNB Markets
Persistent high inflation remains as a threat for the Brazilian
economy. Inflation according to IPCA was in November 0.51%, thus
reaching on a year to year basis a level of 6.56%, above the upper limit
of the Banco Central target of 4.5% plus 2% tolerance. Only Russia
amongst the G-20 countries has higher inflation than Brazil.
Brazil: Inflation (IPCA) & target zone
Per cent
9
8
The performance of external accounts has deteriorated significantly
in 2014. Perspectives of a trade deficit and Brazil will not be able to
finance its current account deficit with foreign direct investments.
7
6
5
4
3
2
1
0
Nov-04
Nov-06
Nov-08
Nov-10
Nov-12
Nov-14
Source: Thomson Datastream/DNB Markets
On December 3rd, the Banco Central Copom meeting raised its SELIC
rate by 50 bps to 11.75%. The two recent increases show a clear
commitment to monetary tightening in order to reduce and control
inflation. Further interest rate increases are expected in the next
meetings in 2015 in order to bring inflation nearer to the centre of the
target, at 4.5%, by 2016.
The trade balance in November posted a deficit of USD 2.35 billion,
the worst figure for November in history. So far this year, the trade
deficit is at USD 4.2 billion, the worst figure since 1998. It is now
expected that Brazil will post in 2014 a trade deficit for the year, the
first since 2000, when the deficit was USD 731 million. Total exports
in November reached USD 15.6 billion and USD 17.9 billion on imports.
Lower commodity prices and trade volumes have resulted in weaker
performance in exports and a deteriorated trade balance. Particularly,
Brazilian manufactured goods performed poorly in November, a fall of
31.7% in relation to same month last year.
On the import side, increased volumes of oil products, almost 10% in
relation to same month last year, was the significant post. Despite
Brazil being the 7th largest economy in the world, it ranks as number
25 in terms of international trade. This shows that Brazil remains a
relatively closed economy with high trade barriers and lack of international competitiveness.
The government is spending more and collecting less tax income. In
the third quarter investments have increased 1.3% in comparison to
the second quarter, but decreased 8.5% in comparison to the same
period last year. Government expenses have increased 1.3% in comparison to the second quarter and 1.9% in relation to the same period
last year. The consolidated public sector posted a primary surplus of
BRL 3.7 billion in October, compared to a deficit of BRL 25.5 billion in
September. The net public debt-to-GDP ratio in October was at 36.1%
of GDP, compared to a 35.9% of GDP in September. At the year-end in
2013 the net public debt-to-GDP ratio was at 33.6% GDP.
Brazil: Trade balance (visible)
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
Nov-04
Bill. USD
Nov-06
Nov-08
Nov-10
Nov-12
Nov-14
FINANCE
Source: Thomson Datastream/DNB Markets
Brazil: Current account balance
Per cent of GDP
2
1
Brazil: Stock market
Bovespa, index, 1000
80
70
60
50
40
0
30
-1
20
-2
10
-3
0
Dec-99
-4
Dec-02
Dec-05
Dec-08
Dec-11
Dec-14
Source: Thomson Datastream/DNB Markets
-5
-6
The BOVESPA São Paulo stock market index (Ibovespa) ended
November at 54,664, increasing 0.07% during the month, but posting
a fall of 4.5% in USD during last month. Year-to-date, the index has risen
6.13%. The Brazil country risk index during second week of December
was posted at 239 bps.
Thousands
The current account posted a deficit in October this year of USD 8.1
billion and the current account deficit so far this year was USD 71
billion, compared to USD 67.6 billion in the same period last year. This
deficit corresponds to 3.7% of GDP on an annual basis. Foreign direct
investments in October were USD 5 billion and so far this year USD
51.3 billion. The foreign direct investments do not cover the current
account deficit.
1993
1998
2003
2008
2013
Source: Thomson Datastream/DNB Markets
FORECASTS:
International reserves were at the end of November at USD 370 billion
and quite stable during this year. Banco Central currency swaps were
at the end of November at USD 105.8 billion. By the end of October,
total external debt compiled by Banco Central including short, medium
and long-term external debt of public and private sectors was USD
343.5 billion significantly up from same month one year ago at USD
311 billion.
The Focus report, an economic survey carried out by Banco Central
amongst economists from 100 financial institutions, came out on
December 12th with the following projections for the year-end 2014
and for 2015:
Indicators
2014
2015
Current Account Balance (USD Billion)
-85.00
-77.79
Exchange Rate (BRL per USD)
2.60
2.72
Foreign Direct Investment (USD Billion)
60.0
58.2
GDP (% of Growth)
0.16
0.69
Inflation Index (IPCA)
6.38
6.50
24
Benchmark Interest Rate (SELIC)
11.75
12.50
10
23
Net Public Sector Debt (% of GDP)
35.90
37.00
8
22
Trade Balance (USD Billion)
-1.60
5.00
6
21
4
20
2
19
Unemployment, according to IBGE, came out in November
(referencing October figures) at an all-time low level of 4.7%. Labor
market remains tight; however we see weaker tendencies in the
construction and manufacturing sectors. Real incomes continue to
strengthen, with an average salary at BRL 2,122.10.
Brazil: Labour market
12
Unadjusted, six metropolitan areas
18
0
Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14
Unemployment, %
Source: Thomson Datastream/DNB Markets
Employment, mill. (ra)
STORY OF THE MONTH
Recent Petrobras development
Several scandals involving Petrobras have come up during this year
deteriorating the reputation of the company. The widening corruption probe might influence the largest global oil investment plan to
develop the Brazilian offshore pre-salt potential. So far this year, its
share price has fallen by almost 40% at NYSE and its share prices are
at its lowest since 2005.
In the Presidential electoral campaign this year, the ”Lava Jato” (Car
Wash) operation, also known as “Petrolão”, has come up. Corruption
allegations relating to Petrobras, contractor
companies, political parties and politicians have arisen based on the
statements of a former Petrobras’ executive director, who made a
plea-bargain deal with the Federal Police after his arrest. He has alleged that contractors have formed a cartel overcharging Petrobras
on projects and paid a 3% commission on the contracts to political
parties and politicians of the ruling coalition. The contractors involved in the allegations hold contracts amounting BRL 59 billion (USD
22.7 billion) only in Petrobras. Further investigations are taking place
after the arrest of almost 30 persons, most from contractors and
several plea agreements have been reached.
On its refinery business, Petrobras allegedly paid USD 792m in
excess according to the TCU - Federal Auditing Court. This relates
to the acquisition and upgrade of the Pasadena unit in Texas and
two domestic refineries being built in Pernambuco and in Rio. For
example, the Abreu e Lima greenfield refinery at Suape, which was
initially estimated at a cost of USD 2.5 billion, has through changes in
the original project surpassed investments of USD 20 billion.
On November 17th, the board of Petrobras asked for the criminal
prosecution of 15 Petrobras employees and ex-employees,
including a former president, who is connected to the Pasadena
refinery acquisition.
Things do take time in Brazil and the investigations in the Petrobras
scandals will also take time, particularly when related to the
politicians as they will have their cases tried by the Supreme Court.
It has been mentioned that any existing contract in Petrobras under
suspicion will not be cancelled, but rather be re-negotiated.
Petrobras announced that it is setting up a compliance division to
improve corporate governance and to seek recovery of the money
involved in corruption. It has hired two law firms (TRW and Gibson,
Dunn & Crutcher) to investigate the extent and impact of the
allegations.
Petrobras is listed at NYSE. The Brazilian and the U.S. authorities are
cooperating in the investigations along with the U.S. Department of
Justice and the SEC.
Fitch Ratings published a press release on December 2nd stating that
“recent allegations of corruption scandals in Petrobras contracting
practices hold the potential to affect its credit quality to the extent
it slows production growth, affects access to debt capital markets,
and receives monetary penalties.” Further, they express their concern
about Petrobras’ ability to perform well, if changes don’t happen.
Fitch believes “production growth is necessary in order to maintain
current rating”. The agency also highlights the Brazilian company’s
limitations “to implement rapid domestic price increases to offset
sharp changes to either international oil prices or movements in the
foreign exchange rate”. Petrobras’ credit quality is very important for
the company’s health in the medium and long term – the company
relies on debt capital markets to “fund investments and to refinance
debt” – and hence maintaining its current rating is essential.
But Petrobras is already under pressure with Moody’s recent downgrade of its baseline credit assessment from Baa3 to Ba1. This decision
was mainly based on Petrobras’ inability to deliver its third-quarter
earnings on time, after PwC refused to audit this report, following
the corruption scandals. However, the agency affirmed Petrobras’
Global Scale Rating (GSR), reflecting “the
federal government’s likely willingness and ability to support
Petrobras in case of need through state-owned banks”. In the event
of a downgrade in its GSR, Petrobras will also lose its investment
grade, making the company less attractive in capital markets.
Another point of concern is the downward trend on oil prices. This
trend is coming from several factors, including Saudi Arabia’s decision
to block the OPEC output cut, increased US output and natural gas
competition. Saudi Arabia, the world’s largest exporter, can afford
cheaper oil, unlike most of its competitors. Some of the new output
is high-cost, so the Saudis seem to be thinking on their long-term
interest. Lower prices, along with fewer investments, could push
some of the competitors out of the market, , therefore increasing
Saudi Arabia’s market share.
Petrobras’ expensive pre-salt operation might be jeopardized if the
lower prices trend persists.. The Brazilian government has
artificially controlled inflation by limiting fuel price readjustments,
what made Petrobras sell imported gasoline and diesel at a loss
when the oil price was over USD 80 a barrel. Now, for the first time
in years, Petrobras is actually profiting from imports. In other words,
the state-owned company is likely to lose either way
But despite the recent negative developments, on the positive side
Petrobras production will reach 6% production increase this year,
despite lower than the 7.7% target, with pre-salt production having
reached over 600,000 barrels per day in October. Petrobras production in October reached a new monthly record of 2.579m boepd.
Although the recent developments present large challenges
to Petrobras, it’s still too early to reach any conclusions. Further
developments, investigations, legal proceedings, are expected
during the next months regarding the Car Wash operation. Ms.
Rousseff’s recently appointed economic team, which is considered
by the market as highly capable of strengthening Brazil’s fiscal and
economic situation, and actions by Petrobras board and also possible management changes will most likely boost confidence in the
company. Petrobras is currently in its most challenging period in its
history, but the state-owned company has the size, proven oil reserves, technical capacity and support to turn this situation around.
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A rne-Christian Haukeland
Tom Mario Ringseth
Adriana Duarte
Luan Monteiro
Marcelo Alvarenga
[email protected]
[email protected]
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