Latest News from Brazil’s Markets – Week of 2nd May 2016
The week saw a Senate Special Committee vote overwhelmingly to accept that a plenary session of the Senate should hear a motion to start impeachment hearings against President Dilma Rousseff. The motion is scheduled to be heard on 11th May. If, as expected, the motion were to be passed by a simple majority Vice President Temer would take office immediately as Interim President of Brazil while President Rousseff would step down for 6 months. During this 6 months period the Senate House would hear the arguments for and against her impeachment. The hearings would be presided over by the President of the Brazilian Supreme Court and, based on events to date, would not be expected to restore Dilma Rousseff to the Presidency.
Adding to the uncertainty, the Brazilian Supreme Court suspended the Speaker (President) of the Lower House, Eduardo Cunha, from his mandate in Congress at the request of the Federal Prosecutor General. The allegation was that he had been interfering with Congressional hearings on his fitness for office and needed to be removed in order to avoid further interference. A colourful and controversial character, Cunha clearly had Congress under his spell and possibly still does. Whatever his misdemeanours, and however grave they are, Eduardo Cunha’s undeniable skill in moving legislation through Congress would have been a guarantee of the successful passing of the unpalatable legislation needed to restore the country’s economy to health. His modus operandi will not be mourned, but in this specific case his output might have been invaluable to the country. His departure heightens the pressure on a potential Temer Government to exercise supreme political skill and leadership, a challenging task for anyone.
Somewhat predictably, Fitch downgraded Brazil’s sovereign debt from BB+ to BB due to “deeper than expected economic contraction and changing fiscal targets that have undermined credibility”, echoing somewhat the impeachment claims against President Rousseff. Henrique Meirelles, the expected Finance Minister in a potential Temer Government, said that the first step of a new Government should be to establish realistic fiscal targets.
On the business front, the effects of the economic crisis on the liquidity of businesses has dominated the news. Most of these are in a defensive mode in their attempts to cope with the situation. Companies are redesigning their operations, disposing of assets that do not quite fit in with their current needs, lightening their debt burdens as well as seeking new partners and entering new markets to compensate the downturn in the domestic markets. Others happily carry on with their investment programs, believing that they need to be ready for Brazil’s emergence from the downturn. In the midst of the despondency, there are still entrepreneurs with the vision to spot opportunities where others see none, and to have the courage of their convictions to invest in making their visions a reality.
Here are the stories from last week’s business news that we thought might interest UK exporters, importers and investors:
- Special Edition of The Lancet on SUS, Brazilian NHS, set to be published in week of 9th May: The Brazilian Public Health System, SUS, was inspired by the NHS and is one of the biggest Public Health Systems in the world. This edition is a must-read for public health service providers and managers as well as for medical equipment suppliers who might want to enter the Brazilian market at a time of possible change in SUS procurement policies for the better. – Diagnosis.
- France leads opposition to the talks on the European Commission’s proposed Trade Deal with Mercosul (South American Trade Area): Earlier in the week France had raised objections to the EU negotiations with the USA on the Transatlantic Trade and Investment Partnership. Now, almost half of the EU countries, led by France and including Ireland and Portugal, are contrary to the European Commission’s plans to resume negotiations on a Trade Deal with Mercosul in the week of 9th May.The bone of contention is the perceived threat that the efficient, large-scale agricultural production of South America poses to less efficient, relatively small-scale agricultural production within the EU. Mercosul (also referred to by its Spanish abbreviation of Mercosur), consists of Brazil, Argentina, Uruguay, Paraguay and Venezuela, and already is one of the EU’s Top 10 trading partners. – Non to laissez-faire.
- Regional construction companies occupy space left by majors: The number of publicly quoted companies among Brazil’s Top 10 construction companies in 2015 fell to 4 from 7 in the previous year. New entrants to the Top 10 include regional contractors Pacaembu and Bueno Netto, who cater to the low end of the housing market. “The Companies catering to middle and high income customers slammed on the brakes” said Felipe Silveira of Coinvalores brokerage. “We have a lean organisation with almost zero stock,” said Lúcio Birrman, CFO of Bueno Netto. – Nature abhors a vacuum.
- Spanish infrastructure group GS Inima buys a Sanitation concession from troubled contractor OAS: The Spaniards paid some £16 million for the concession of the small but prosperous town of Araçatuba in the rural part of São Paulo State. – Getting a foothold.
- EDP, Portuguese power utility, inaugurates Brazilian plant 8 months ahead of schedule: The hydro plant is located in northern Brazil and will generate 219 MW. The plant was constructed by a Brazilian contractor, CESBE, from southern Brazil for a consortium of EDP and CTG (China Three Gorges). This is the second such plant in succession that this team has completed ahead of schedule. Miguel Setas, President of EDP Brazil, said of the uncertainty surrounding infrastructure investment in Brazil “we are not concerned about this, we just continue with our focus on execution and meeting our commitments.” – Winning team.
- Brazil’s States on Sale! From zoos to supermarkets! In a frantic search for windfall revenues, insolvent Brazilian States are scraping the bottom of the barrel for forgotten assets that they can sell to raise cash. The State of Bahia is putting a small supermarket chain on the block for almost £16 million, while the tiny State of Alagoas is hoping to sell a State bank that is already in liquidation plus a pharmaceutical Company that has not operated for 10 years. The State of Rio Grande do Sul is hoping to find buyers for surplus property and even a zoo. Certain States, such as Rio de Janeiro, have significant assets that could attract outside interest, such as Sanitation Companies and Concessions, but still seem somewhat reluctant to let these prized possessions go. – Clearance sale!
- Banks request courts to declare bankrupt Brazilian Contractor Schahin: Schahin had presented to the bankruptcy courts a recovery plan for the 13 Companies in the Group. However, the banks have told the courts that recovery of the Schahin Group is no longer viable and that creditors will have a better chance of recovering part of their loans and other receivables if the Group is liquidated. Several of the large Construction and Engineering companies involved in the Lava Jato (Car Wash) Government corruption scandal have presented recovery plans to the bankruptcy courts in an effort to obtain court protection from creditors. However, so far, Schahin is the only one whose creditors have rejected the plan and requested liquidation. – The parts may be greater than the sum.
- Chinese consortium drops out of the bidding for Petrobras natural gas pipeline: Petrobras hoped to raise US$5 to 6 billion from the disposal of NTS, which owns and operates its natural gas pipeline in South Eastern Brazil. A Chinese consortium, led by subsidiaries of PetroChina, was considered favourite to win the bid, but has dropped out. The alleged reason appears to be the risk of concentration of revenues in a sole customer – Petrobras. Mitsui, Engie and Gás Natural Fenosa have all considered the acquisition, but the Canadian Infrastructure Fund Brookfield, an old Brazil hand, is now thought to be in advanced negotiations with Petrobras for the acquisition. – Buyers’ market?
- Petrobras pockets US$1.3 billion on exiting Argentina and Chile: These disposals are part of Petrobras’s plan to raise US$14 billion by sale of shares or disposal of assets. – Cashing in.
- Pulp producer Eldorado invests £60 million in eucalyptus biomass power plant: The Company plans to generate energy from the stumps and roots of the trees that are consumed in its cellulose pulp plants. The initial thermal power plant should have an installed capacity of 50 MWh. Another 5 similar sized plants are planned. – Circular economy.
- Consolidation of companies in electronic payments sector: There are 20 companies operating electronic payments means in Brazil today according to FinetechLabs, an agency that monitors financial service start-ups. Most of them are looking to gain scale, an objective that is behind a flurry of acquisitions and mergers in the last four weeks. First the German Wirecard purchased local company Moip for some £33 million, then Stone, another local company controlled by Brazilian Fund Arpex Capital, purchased Elavon from Citibank and US Bancorp. More recently, the German companies Payleven and SumUp merged, then it was the turn of PayU and Bcash, controlled by South African Media company Naspers,to do the same. – Right sizing.
- Glass companies maintain investments despite recession: Domestic sales of glass fell between 15 to 18% in Q1 2016 according to the Brazilian Glass Industry Association (Abividro). The market leader, Cebrace, (JV between NSG-Pilkington and Saint Gobain), reported that its domestic sales had fallen by 10% in the same period. However, both Cebrace and Asahi, another major producer,have decided to maintain their investment programs. “We understand all too well the cyclical nature of these crises and we know that we have to be prepared for the recovery in the market,” said Reinaldo Valu, CEO of Cebrace. – Stick to the plan.
- Seven Brazilian companies extend date for filing annual financial statements with SEC: This unprecedented situation reflects the degree of complexity that Companies are facing with the recession. Of the companies affected 3 are government owned, Eletrobras, Cemig (both Power conglomerations) and Sabesp (Sanitation), all of which might be having difficulty computing the book values of their regulatory assets. The others cover a wide range of industries: from Petrochemicals (Braskem, which is reporting record profits), Telecoms (Oi, which is renegotiating debt with its creditors), Retail (Pão de Açucar – Casino) and Steel (CSN). The revised filing date should be 17th May. – Tough times for number crunchers.
- Privatised airports ask to postpone payments for concession rights: At a time when the Government is trying to progress new concessions for 4 regional airports, the groups operating the airport concessions granted in 2011 have asked the Government to suspend payments for their concession rights. They allege that macro-economic conditions have deteriorated significantly since the concessions were granted and that the resulting deterioration in cash flows makes it difficult to meet the payments schedule. – Hard up.
- Congress and local airlines resist move to allow non-Brazilians to own up to 100% of local airlines: The group of political supporters closest to Vice President Temer is in favour of removing all restrictions against non-Brazilians owning local airlines. But this proposal is facing resistance from Congress and from the sector itself (ABEAR – Brazilian Association of Airlines), both of which support raising the limits on non-Brazilian capital from the current 20% to a maximum of 49%. – In two minds.
- Braskem increases exports of petrochemicals in Q1 2016 to achieve record operational results: In Q1 2016 net revenues increased 19.4% to some £2 billion while EBITDA was £612 million due to increased exports compensating weak domestic demand. Fernando Musa, new President of Braskem, said that the strong international performance of the business, particularly in the USA, has led Braskem to look at opportunities for the purchase of assets outside Brazil. “The Company is assessing opportunities to de-bottleneck lines and to construct new lines, but we remain open to opportunities for acquisitions in the market”. Braskem expects to invest £734 million in operations during 2016. – Globalising.
- Cosan enters the Spanish market for lubricants: Lubricants is a small portion of Cosan’s sugar, ethanol and infrastructure business, and was acquired in 2008 from ExxonMobil in Brazil. Since then it has purchased Comma, a lubricants producer with a plant in Kent and operations in Ireland with products distributed in Europe and Asia. In 2015 its revenues totalled some £350 million. In Spain it will operate with the Mobil trademark, under licence from ExxonMobil. – Slick operator.
- Brazilian automobile production drops by 26% in 4 months to end April 2016: The sector is working at 48% of capacity according to Antonio Megale, President of Anfavea, the Automobile Producers Association. – Downtime.
- Gol Brazilian Airline proposes debt renegotiation but international bondholders cry Foul! Bankers Houlihan Lokey have been hired by Gol’s international creditors who appear to believe that local creditors, Banco do Brasil and Bradesco Bank, are receiving more favourable terms from Brazil’s second biggest airline. – Level playing field?
- Pests driving Brazilian Biotech Start-up: Cristiane Tibola, former biotech coordinator for Suzano Pulp and Paper, struck off on her own with Pragas.com (“Plagues”. com). Her Start-up Company cultivates bespoke insects and other pests for use in crop protection research by Embrapa, the renowned Brazilian agricultural research institute, Monsanto and Bayer, among others. Pragas.com is now hoping to expand the business by developing delivery techniques and services for the more effective use of these off-the-peg pests. – A plague on you!
This summary contains a selection of Business News from Brazil’s Markets for information purposes only and does not constitute any basis or recommendation for taking specific business decisions. Readers are recommended to seek appropriate advice from their legal and business advisors before taking any business decisions.
For further information please contact Fabrício Soares, Business Development Manager at Britcham Brazil: firstname.lastname@example.org