CEO of Brazil’s largest investment bank arrested

Brazil arrested the CEO of Latin America’s largest investment bank and the governing party’s leader in the nation’s Senate on Wednesday.The arrests stem from an investigation into a money laundering scandal that has undermined Brazil’s government and once-strong economy.

The scandal involves Brazil’s state-run oil company, Petrobras, and has entangled many of the country’s business and political leaders. It has even caused Brazilians to demand the impeachment of President Dilma Rousseff.

Brazil, once a major economic success story, has been plunged into a deep recession by the scandal and the global downturn in commodity prices.

The country’s Supreme Court authorized arrest warrants for Senator Delcidio Amaral and Andre Esteves — the billionaire CEO of BTG Pactual — on suspicions of obstructing justice.

A judge said he issued the warrants on evidence that Amaral and Esteves had tried to silence a key witness in the corruption probe.

BTG Pactual confirmed that Esteves was cooperating with police.

The bank’s shares fell more than 20% on the news.

There was no comment from Amaral’s office in Brasilia. Amaral is a veteran lawmaker for the Worker’s Party, considered close to former President Luiz Inacio Lula da Silva.

The arrests mark a new stage in the investigation into allegations that construction companies paid huge bribes to Petrobras officials and politicians — many from the governing coalition — in exchange for lucrative contracts.

Many investors have already pulled out of Brazil, and the latest developments are likely to keep many away for some time to come.

The country’s stock index, Bovespa, is down 5.5% this year.

“Today’s arrests are meaningful and validate our assessment that the probe will deepen the political crisis into 2016,” Eurasia Group said in an analysis.

Central Bank in Brazil Forcasts 2016 Inflation Above Target Ceiling

While there was a consensus among financial analysts that consumer inflation in Brazil would top ten percent this year, the latest report by the Central Bank (CB) shows that analysts’ forecasts for 2016 inflation are also above the target limit of 6.5 percent. According to financial institutions surveyed by the CB for its Focus Report, inflation in 2016 is likely to reach 6.64 percent.The Focus Report, released by the Central Bank on Friday shows that forecasts for the 2015 inflation increased for the 10th consecutive time, going from 10.04 percent to 10.33 percent. Now, according to the BC inflation is only expected to fall within the target range in 2017.

This is the first time analysts have forecast inflation above the government target for 2016. If analysts’ forecasts are confirmed for this year and next year, it will be the first time official inflation is registered above the target ceiling for two consecutive years since 2002-2003.

According to the government’s system the center of inflation target is 4.5 percent, with a two percent tolerance in each direction, so that consumer inflation falling anywhere between 2.5 percent and 6.5 percent is considered within the target.

Consumer inflation is one of the indexes taken into consideration by the CB’s Monetary Policy Committee (COPOM), when deciding the benchmark interest rate (SELIC). According to financial analysts surveyed by the CB for the Focus Report, the SELIC which has been increased for the past seven consecutive meetings, is likely to remain stable during the upcoming Committee meeting this week, at 14.25 percent. This will be the last meeting of the COPOM this year.

Other indexes, like the IPCA (Consumer Price Index) in Brazil, rose by 0.82 percent in October, and according to the IBGE (Brazilian Statistics Bureau) it the highest inflation for the month since 2002. In this index the inflation rate now accumulates an increase of 8.52 percent for the first ten months of the year, the highest for the period since 1996.

Foreign Investors Buy into Brazil, Lead M&A Activity

Brazilian companies are the cheapest they have been in years, presenting bargain hunters with prime buying opportunities.But foreign investors appear to be keener on the nation’s prospects than Brazilians, many of whom are spooked by the political turmoil that is worsening the nation’s economic slowdown.

Earlier this month, New York’s Coty Inc. agreed to pay $1 billion for the beauty-care unit of São Paulo-based Hypermarcas, expanding its presence in Latin America’s largest economy.

Through October, international investors such as Coty closed on 285 mergers and acquisitions in Brazil, up 5% from the first 10 months of 2014, according to data from PricewaterhouseCoopers. Brazilians, meanwhile, signed 275 deals this year, down 26% from the same period in 2014.

It is the first time since 2000 that foreigners have outpaced locals, according to Rogerio Gollo, partner and head of mergers and acquisitions in Brazil for Pricewaterhouse. “If you had asked me in January, I would not have told you this was coming,” he said.

What has turned the tide for many investors has been the weakening of the Brazilian currency by more than 30% to the dollar so far this year, which has helped foreign investors. In addition, the deepening of Brazil’s economic malaise—exacerbated by weakening political leadership—has hurt local companies.

Such cyclical booms and busts are common in emerging markets, and investors expect South America’s largest country by GDP to bounce back on the strength of its rising middle class and wealth of commodities. For those willing to endure some volatility, betting on Brazil now could pay off handsomely, said PwC’s Mr. Gollo.

“The buyer who is looking at Brazil with a horizon greater than three years is getting a good deal,” he said.

But the current picture is bleak. State involvement in key sectors and loose monetary policy unleashed during President Dilma Rousseff’s first term has left the government awash in debt and struggling to plug a massive budget hole. Reforms have taken a back seat as Brazil’s Congress focuses on the massive corruption scandal at state-run oil giant Petróleo Brasileiro SA, and impeachment efforts against the president.

“When you have a crisis of this magnitude, you need a vision…but the government does not have that,” said Ricardo Lacerda, founding partner and CEO of BR Partners, a boutique investment bank based in São Paulo.

As a result, business, consumer and investor confidence have collapsed. GDP growth is projected to contract by more than 3% this year. Urban unemployment recently hit a five-year high of 7.6%. Inflation is running at nearly 10%. Industrial production plunged nearly 11% in September from a year ago.

Among the hardest hit is Brazil’s auto industry. Vehicle sales through October totaled 2.15 million units, down 24% compared with the first 10 months of 2014. Thousands of auto workers have been laid off or furloughed. Some manufacturers who bet big on Brazil are putting on the brakes.

Chinese auto maker Chery Automobile Co., Ltd. is delaying a planned $300 million investment in its existing factory in the city of Jacareí, said Luis Curi, the company’s vice president in Brazil. Through October, Chery’s Brazil sales totaled 4,704 vehicles, down 38% from the first 10 months of 2014, according to the national auto-dealers association, Fenabrave.

Mr. Curi said the company has been hit by slumping demand and soaring prices for imported parts because of the weak real. “We’re living a perfect storm in Brazil,” he said.

In contrast, Honda Motor Co.’s Brazil sales have increased 15% to 125,061 vehicles so far this year, according to Fenabrave. But the Japanese auto maker, too, is retooling its investment plans amid concerns about the nation’s shaky economy and unpredictable politics.

The company said in late October it would delay the launch of a second Brazil vehicle-assembly plant that was slated to open in the first half of 2016. The new facility, which has been constructed in Itirapina in São Paulo state, will open “according to market developments,” Honda said in a statement. Paulo Takeuchi, director of institutional relations for Honda South America, said the auto maker remains confident about Brazil in the long-run, but is taking a cautious approach for now.

“What concerns us most is uncertainty, both political and economic,” Mr. Takeuchi said.

Brazil keen to further strengthen trade ties with India

Brazil today called for expanding a trade pact with India by adding more products such as frozen chicken (whole) and processed soyabean in the tariff agreement and also stressed on technology transfer and investment in agriculture research. Brazil is also keen to export ethanol and milk products to India and boost shipments of edible oils.

India and MERCOSUR, comprising Brazil, Argentina, Uruguay and Paraguay, already has a preferential trade pact.

“We would like to expand tariff agreement,” said Katia Abreu, the Brazilian Minister of Agriculture, Livestock and Food Supply.

She said that existing agreement is “timid” in field of agriculture and there is a need to expand the base from the current about 450 products to 2,500 products.

India-MERCOSUR preferential trade agreement (PTA) came into effect from June 1, 2009. The major sectors covered in the offer list under the PTA include meat, chemicals, leather goods, iron and steel products, machinery items and electrical machinery.

India and Brazil have a bilateral trade of USD 11.36 billion.

“We can bring frozen chicken (whole) to India. We face difficulty in chicken,” Abreu said at a FICCI conference.

Speaking on the sidelines, the minister stressed on easing the rules for trade apart from improving the trade agreement.

“We would like to expand our relations well beyond the area of just tariff. Most important is to improve and better rules,” Abreu said.

Brazil has been emphasising with all the countries to harmonise and make rules easier, she said.

On trade agreement, Abreu said: “We currently have about 450 products included in the tariff agreement. We would like to see this figure grow to 2,500”.

She said that Brazil is interested in exporting ethanol and milk products, which have great demand in India and boost exports of edible oils as well.

In dairy sector, Brazil wants to help India boost milk productivity. It is keen to bring to India the gene bank for milk-producing cattle as well as embryo and semen.

Abreu spoke about enormous opportunities for collaboration between Indian and Brazilian agriculture sector through technology transfer and investment in research.

She emphasised on the need to remove intermediaries and develop an independent commercial relationship between the two nations.

“Either the two countries could allow the other international players to lead the trade for them or India and Brazil could remove the intermediaries and develop an independent commercial relationship,” Abreu said.

Europe’s Top Banks Are Cutting Losses Throughout Latin America

European banks are on the retreat all across Latin America.Societe Generale SA announced in February that it’s dismissing more than 1,000 workers while exiting the consumer-finance business in Brazil. In August, HSBC Holdings Plc sold its unprofitable Brazilian unit, with more than 20,000 employees. Two months later, it was Deutsche Bank AG’s turn. The German lender said it’s closing offices in Argentina, Mexico, Chile, Peru and Uruguay and moving Brazilian trading activities elsewhere. Barclays Plc is shrinking its operations in Brazil too.
The exodus threatens to deepen Latin America’s turmoil, making it harder for companies and consumers to obtain financing. The region already is out of favor as sinking commodity prices drive it toward the worst recession since the late 1990s. European banks, meanwhile, are looking to cull weak businesses as they struggle to generate profits and meet tougher capital requirements back home.
“All large European banks are under great pressure from regulatory changes and low stock prices to change their business models,” Roy Smith, a finance professor at New York University’s Stern School of Business, said in an e-mail. “These changes have to be quite significant to make enough difference.”

Spain, Switzerland

The exits are opening opportunities for local rivals and global banks from the U.S., Spain and Switzerland willing to wait out the economic slump.
Latin America’s economy will probably contract 0.5 percent this year, squeezed by falling commodity prices and a slowdown in Brazil that’s predicted to be the longest since the Great Depression, estimates compiled by Bloomberg show. That would make it the first recession in the region since 2009 and the biggest since 1999. Demand for investment-banking services is tumbling, with fees plunging 45 percent this year through Oct. 15 to a 10-year low of $817 million, Dealogic said.
“European banks have fairly weak profits right now and in some cases low capital levels,” Erin Davis, an analyst from Morningstar Inc., said in an e-mail. That leaves “little wiggle room” to absorb losses or low profits from Latin America, even if they believe in its long-term potential, Davis said.
Deutsche Bank, which started operating in Latin America in 1887 with a unit in Argentina, has about 269 jobs in the five countries it’s leaving, according to its 2014 financial statements. In Brazil, it has about 334 employees.
“The region is attracting fewer investments, and that reduces the need for investment banking,” Ricardo Mollo, a professor at Insper business school in Sao Paulo. At the same time, demand for loans is waning and late payments are rising.
Brazil, Latin America’s biggest economy, is also the place cuts pay off the most for some European banks. In addition to Societe Generale dropping its consumer-finance unit there, HSBC sold its Brazilian subsidiary to Banco Bradesco SA in a $5.2 billion deal announced in August. Barclays, which had about 150 people in 2013 in Brazil, has reduced the team to 80, people familiar with the matter said.
Societe Generale “remains committed to Brazil and will continue to serve its institutional and corporate clients through its local entities,” the bank said in a statement. Barclays declined to comment.

As for HSBC, Chief Executive Officer Stuart Gulliver has said the pullback was needed as part of a plan to reduce expenses by as much as $5 billion by 2017. Elsewhere in Latin America, Gulliver said in June in an interview with Mexican newspaper Reforma that HSBC would stay in Mexico, after previously saying the country was one of four potential markets the bank would leave.

HSBC Scrutiny

Complicating HSBC’s decisions about the region are money-laundering and tax-evasion scandals linked to Swiss accounts in Brazil. It’s also been under scrutiny in the U.S. since 2012 after it reached a $1.9 billion deferred-prosecution deal to resolve claims it helped Latin American drug cartels launder money.
Global banks with sizable Latin American subsidiaries that operate trading and investment-banking businesses could pick up some of the business European banks are leaving behind, Fitch said in a report, singling out Citigroup Inc., Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, JPMorgan Chase & Co. and Bank of America Corp. Local players in the region, such as Itau Unibanco Holding SA and BTG Pactual Group, might also benefit, Fitch said.
JPMorgan says it doesn’t plan to make changes to its team in the region, while Bank of America, which has about 1,000 employees in Latin America, added 150 people this year. Citigroup sold its consumer and commercial units in Peru, Costa Rica, Panama, Nicaragua and Guatemala, and is maintaining its corporate and investment-banking businesses.

U.S. Improvement

“The U.S. economy is doing better, so it’s normal that U.S. banks are also doing better and being more aggressive in taking risks in Latin America,” Mollo at Insper said.
Argentina is the country where perceptions are shifting the most, 10 days before a presidential election where the two main candidates have promised change from a dozen years of populism led by the Kirchner family. Hedge funds and other investors say the departure of President Cristina Fernandez de Kirchner could bring a more market-friendly government and a profit windfall.
Many Swiss firms are still bullish on the region as well. Julius Baer Group Ltd., the third-largest wealth manager in Switzerland, announced in July it would acquire a stake in Mexican firm NSC Asesores after boosting its interest in GPS Investimentos Financeiros e Participacoes SA to 80 percent in Brazil last year. Credit Suisse Group AG is keeping its team in Latin America, and its Brazilian unit hired 15 people this year for private banking. UBS AG, the biggest wealth manager in the world, is also hiring in the region. Chinese banks including China Construction Bank Corp. and Bank of Communications Co. are buying local lenders and increasing their presence.

Santander’s Confidence

And Spain’s Banco Santander, which withstood Brazil’s 1999 currency devaluation and financial crisis in 2002, remains confident about the country’s prospects. Chairman Ana Botin said in September that reforms under way could mean a return to growth as soon as next year.
For many of her competitors, time has run out for that kind of optimism.
“Going back a few years, global banks were trying to offer all products to all people in all locations, said Richard Barnes, an analyst at Standard & Poor’s in London. “With tightened regulatory requirements, you just can’t really do that anymore.”

Shares Drop As Commodity Saga Continues, Finance Minister Out?

Some headlines from Brazil, with the iShares MSCI Brazil Capped exchange-traded fund (EWZ) down 2.4%
Local press reports in Brazil Wednesday said Brazil’s Finance Minister Joaquim Levy could be replaced within months as the economy and currency collapse. Brazil President Dilma Rousseff may choose Henrique Meirelles, a former central bank president.
Brazil’s government says it will fine mining companies BHP Billiton (BHP) and Vale (VALE) for a disastrous mine dam collapse. BHP shares are down 2.4% this morning while Vale shares are down 1.5%. “The government is increasingly concerned over the rising death toll and contaminated mud flowing through two states as a result of the disaster,” Reuters reports in the story, “Brazil vows to make BHP, Vale pay for deadly mine disaster.”

Oil Workers Strike in Brazil for Wages, Investments, Assets

Twelve oil work unions which are part of the Oil Workers Federation (FUP) in Brazil began on November 1st, a strike at Petrobras refineries all over the country. According to union officials, strikers are protesting against Petrobras’ asset sales, investment cuts, project suspensions, and reduction of some workers’ rights.
“The strike was agreed upon more than 45 days ago. We did try negotiating with Petrobras and the major shareholder, i.e. the federal government, before stopping working, but our demands were not met,” said Simão Zanardi Filho, of the Union of Oil Workers of Duque de Caxias, Rio de Janeiro state, and FUP director in an interview to Agencia Brasil.

In a statement, Brazil’s oil giant says the company is willing to sit down at the negotiations table and discuss pay raises with union leaders. According to company officials Petrobras has offered an 8.11 percent pay raise, while workers want 18 percent.

In addition to the pay increase, unions are against the sale of assets and the reduction in investments announced by the company. According to the Federation of Oil Workers ‘cuts in investments, sales of assets, interruption of construction and halt in projects impact the country’s development and national sovereignty.

Last month Petrobras’ Council approved the sale of 49 percent of the stocks of subsidiary Gaspetro to Mitsui Gas and Energy Brasil for R$1.9 billion. The sale is part of Petrobras’ corporate plan, announced in the first semester of this year, to improve the company’s financial situation. In August the state-owned oil company authorized the sale of 25 percent of stock from another subsidiary, BR Distribuidora.

In addition to the sale of some of its assets, Petrobras also announced this year it was reducing investments from US$37.1 billion in 2014 to US$25 billion in 2015.