Panel, Conference Presentation
Brazil: The Country of the Future?
Milken InstituteCate Ambrose, Flavia Buarque de Almeida, Renato Lulia-Jacob, Mario Mesquita, Piero Minardi, Tom Tull
- President Dilma Rousseff is expected to be removed this month with a vote scheduled for May 12th, succeeded by Vice President Michel Temer, though this transition is not anticipated to resolve Brazil's systemic issues immediately.
- The Brazilian economy is projected to undergo a prolonged U-shaped recovery requiring more than two to three years, with sustainable growth likely unachievable for at least three to four years.
- Investors operating on five to ten-year horizons are expected to find opportunities, while significant growth and optimism are unlikely to materialize within the next two to three years.
- A window of opportunity exists for the new administration to implement fiscal reforms within the first couple of months, specifically before the local elections in October and the year-end budget deadline.
- The window for President Temer to initiate decisive action is estimated to end by the middle of the year, preceding the August Olympics, to ensure proposals are not weakened by congressional opposition later.
- Significant fiscal and political reforms are deemed necessary and painful, with a high risk that politicians may delay or backtrack on the urgent approach required to address the crisis.
- The banking system is stable enough to absorb shocks, yet lending has ceased due to a liquidity crash, while individual loan delinquencies are rising rapidly with interest rates reaching 50% to 70% annually.
- M&A activity in 2015 was intense with 59 completed transactions, 60% of which were cross-border with capital flow equally from North America and Europe and significantly from Asia and the Middle East.
- Sectors such as health care, education, and specialty retail are outperforming the broader economy with real-term growth exceeding 10% annually, whereas real estate, infrastructure, and utilities offer lower but not necessarily bottom-tier valuations.
- Companies growing in real terms during the crisis are expected to exit first, while private equity managers may identify turnarounds in specific sectors over a two to five-year period.
- British American Tobacco has allocated $2.5 billion to delist its Brazilian company, and the Singaporean sovereign wealth fund GIC is doubling down on deals and acquiring stakes in major hospital chains despite valuations not being at rock bottom.
- Distressed investing opportunities are projected to grow over the next 12 to 18 months, with firms like Brazil Plural having already restructured approximately $15.5 billion in debt since late 2013.
- Currency volatility remains significantly higher than normal with major events occurring every two to three weeks, prompting a strategy of building long portfolios over two to four years to mitigate risks.
- The Central Bank has purchased over $30 billion in derivatives in two weeks to prevent currency appreciation, and inflation and growth are expected to move in parallel with devaluation to allow equity growth companies to hedge.
- Opportunities exist for international firms without current presence to buy at market lows, though it remains uncertain if the market has truly bottomed out or if bargains will arrive if the crisis extends.
- The new government is expected to remove impediments to foreign investment in infrastructure, though success in attracting capital is estimated at 60% to 65% pending the establishment of clear regulatory frameworks.
- The corruption scandal is viewed as a transformational moment requiring comprehensive accountability including jail time for politicians, with the risk that stopping the investigation halfway would be counterproductive.
- Political reform is considered essential to halve corruption, involving caps on spending and making vote buying illegal, while labor law is identified as the most difficult area for legal reform.
- Institutional stability is viewed as stronger than markets like China or India, yet signals of worry persist regarding the long-term view of family offices potentially damaging capital markets developed over the last 20 years.
- The Workers' Party represents 25% of the population and historically requires a second round in elections, creating uncertainty regarding the level of opposition it will pose to the Temer administration.
- Private arbitration is now accepted by Brazilian courts, providing a mechanism to resolve legal disputes that previously took up to 15 years, while the Congress signals a shift away from raising taxes to adjust fiscal accounts.