Brazil’s president Dilma Rousseff is impeached

• The impeachment vote is still going on in the country’s lower house, but the ruling Workers Party has conceded defeat, reports Reuters. At the moment, of 412 votes cast, 307 have voted to impeach President Rousseff, and 101 have voted against. A total of 344 are needed to send the process over to the Senate.• For those wondering what’s taking so long, house members vote one-by-one, with each making a small speech alongside.

• Once in the Senate, a simple majority would be enough to put Rousseff on trial, a decision expected in May. Were the trial to be approved, Rousseff would be suspended from office, and former (but no more) ally Vice President Michel Temer would take over.

• Brazil’s stock market, of course, has put together a powerful rally this year on hopes for Rousseff’s removal. That is looking more like a reality at the moment.

Blackstone denies seeking to acquire Brazil mall operator

 Investment firm Blackstone Group LP (BX.N) on Sunday said it is not considering an acquisition of Brazilian shopping mall operator BR Malls Participacoes SA (BRML3.SA), denying a report published early in the day by newspaper O Globo.”We are not actively engaged in acquisition discussions for BR Malls,” Blackstone said in an emailed statement.

The Brazilian newspaper, without citing sources for its information, said early Sunday that Blackstone had hired JP Morgan Chase & Co. (JPM.N) to help it consider acquiring a controlling stake in BR Malls, which is based in Rio and is Brazil’s biggest mall operator.

The paper said the acquisition would amount to Brazil’s biggest-ever real estate transaction and would be valued at as much as 12 billion reais ($3.38 billion).

A spokeswoman for BR Malls, which is based in Rio and is Brazil’s biggest mall operator, declined to comment on the report.

A spokeswoman for JP Morgan Chase also declined to comment.

El-Erian says Brazil in ‘delicate situation’

Mohamed El-Erian’s bet on Brazil before President Luiz Inacio Lula da Silva’s election in 2002 was rewarded by a surge in the nation’s assets in the following years. More than a decade later, he says Latin America’s largest economy must seize the opportunity to undertake deep reforms.Brazil is facing the worst recession in a century amid a corruption scandal that’s ensnared some of its biggest companies and prevented Congress from focusing on measures to stimulate growth. After a selloff in 2015, the Ibovespa and the real are posting the best gains in the world this year, with bonds climbing more than twice the average for emerging markets and credit risk tumbling amid wagers that President Dilma Rousseff would be impeached and a new government would take over.

“Brazil now finds itself in a delicate situation, and one that threatens the well-being of both the current and future generations,” Mr. El-Erian, the chief economic adviser at Allianz SE, said in an e-mail to Bloomberg. “If the political class does not respond with a comprehensive set of policy measures, the country will be vulnerable to a prolonged recession, inflationary pressures, worse and spreading poverty, and gradually increasing internal and external financial pressures.”

While Brazil’s consumer and investor confidence levels have rebounded recently, they’re near historic lows as borrowing costs remain at the highest since 2006 to curb above-target inflation. Economists including Alberto Ramos of Goldman Sachs Group and former Brazil central bank director Alexandre Schwartsman have said the country needs to reform its social security and pension system as part of measures to shore up fiscal accounts.

Should the needed reforms happen, either at the hands of Ms. Rousseff’s government or the next administration, the real could rise beyond what analysts are now forecasting, Mr. El-Erian said. The currency will fall 11% to end the year at 4.15 per dollar, according to the median estimate of 51 strategists surveyed by Bloomberg. The real lost 0.2% or 3.6910 per dollar as of 11:18 a.m. EDT Thursday.

Mr. El-Erian, who previously worked as the co-chief investment officer of Pacific Investment Management Co., added to the firm’s Brazil holdings in 2002 as the country’s benchmark bonds plunged amid concern Ms. Rousseff would default after taking office. While the strategy put him at odds with investors including billionaire George Soros, it gave PIMCO’s Emerging Markets Bond Fund its best year since it was created in 1997 as Brazilian notes surged after the election.

In December, Mr. El-Erian said that the nation was going through a “house cleaning” that could hamper growth in the short term. Brazil’s economy is poised to shrink 3.5% in 2016, according to a central bank survey, adding to a 3.8% contraction last year.

“Brazil has an enormous potential, absolutely enormous”, Mr. El-Erian said. “What is missing is the political context that enables sustained policy implementation, coupled with broad-based understanding and support.”

Brazil stocks, currency extend rally on former president charges

Brazil’s stocks and currency rose on Thursday, extending a recent rally fueled by hopes ofpolitical change after prosecutors charged former President Luiz Inacio Lula da Silva in a money laundering investigation.

 State investigators suspect the family of the former president, who was detained for questioning by federal police on Friday, owned an undeclared beachfront apartment in the city of Guaruja. 

    Lula’s support for current President Dilma Rousseff was widely seen as a key factor behind her re-election. 

    Rousseff is facing impeachment proceedings in Congress and many traders believe the corruption probe could strengthen the odds of her ouster and thus help the crisis-ridden country recoup its credibility.

    “Political issues are the main market driver and will remain so for a while,” said Carlos Vieira, an economist with Lerosa brokerage in São Paulo.

 Shares of state-controlled oil company Petrobras, the center of a wide-reaching graft scandal, rose as much as 3 percent, but later turned negative on the back of lower crude prices.

    Nevertheless, the benchmark Bovespa stock index remained in the black, supported by leading banks ItauUnibanco and Bradesco, up 3.3 percent and 2.1 percent, respectively. 

    Investors said the banks, as well as state lender Banco do Brasil SA, were being lifted by optimism about the political scenario. 

    Traders saw little immediate market impact from Brazil’s plan to tap global markets for the first time since it lost its investment grade rating with a dollar-denominated bond.

     The Brazilian real revisited its six-month highs and strengthened for the seventh session in the last eight. Trading was volatile, however, as some investors bet the central bank could see the recent rally as a cue to reduce its support for the currency.

    Brazil’s central bank has about 110 billion reais ($29.92 billion) in outstanding currency swaps on its books, contracts which offer protection from sharp currency devaluations. The strategy has drawn criticism from some analysts due to its high fiscal costs.

    The bank has been fully rolling over the stock of currency swaps for several months. Some traders saw a decision to only sell some of the contracts offered in a daily auction on Friday as a signal it could allow some to mature in April.

Brazil Considers Raising Foreign Investment Limit On Airlines

Brazil plans to propose to Congress in the first half of the year an increase in the foreign ownership of local airlines, in a move to help the struggling sector.The government continues to discuss the percentage increase in foreign ownership, but believes an increase from the current 20 percent limit is key to bolster investment in local airlines, Interim Aviation Minister Guilherme Ramalho said.

“This is a very favourable moment to attract foreign investment… we should not restrict the access of capital of these companies,” said Ramalho. “The government has a joint position on this matter and that is key for its approval.”

The proposal reflects President Dilma Rousseff’s major shift in policy to open up one of the Western Hemisphere’s most-closed economies and bring in capital to halt a recession entering its second year.

Ramalho said it is “very possible” that the government will propose an initial increase in the foreign ownership stake to be followed by another depending on market reaction and foreign interest.

The Finance Ministry is working on a proposal to raise the ownership stake cap to 49 percent from 20 percent with the option of acquiring a controlling stake if approved by local aviation and competition authorities, Reuters reported.

Brazilian airlines such as TAM and Gol have cut flights and reduced staff numbers to cope with what is expected to be the country’s worst recession in a century. The sharp depreciation of the Brazilian real has worsened the crisis in the country’s aviation sector.

Ramalho said the government has not yet decided if it will adopt any of the current bills to remove capital restrictions or make the change via a presidential decree, which will ultimately have to be ratified by Congress.

DOZENS OF PROPOSALS

There are currently around 68 bills in the Lower House of Congress and two at the Senate to lift limits on foreign ownership.

One of them, which is under review by deputy Clarissa Garotinho, calls for the complete removal of restrictions.

“I believe that we need to move ahead with a bolder proposal because increasing the stake to 49 percent will not solve the problems of the aviation sector in Brazil,” Garotinho said.

Once a rising emerging market star with a expanding middle class that triggered a boom in air travel Brazil’s economy is now in tatters. The economy is expected to contract 8 percent between 2015 and 2016, driving down flight demand and threatening the survival of local airlines.

Ramalho also said that plans to open up the capital of Infraero, the state-run company that controls most of Brazil’s airports, would be delayed until 2017 given current negative market conditions.

Prospects abound despite Brazil crisis

Latin American countries are at the whim of the strengthening US dollar and the dire outlook for commodities prices. These factors go some way to explaining the underperformance of the region in the past year, but there are other factors weighing down sentiment.The MSCI Emerging Markets Latin America index lost 27 per cent in 2015, while the MSCI Emerging Markets index was down just 10 per cent, data from FE Analytics shows. It was Brazil that dragged the region down, with the MSCI Brazil index shedding around 40 per cent.
With the exception of Greece, Brazil was the worst-performing market last year, an annus horribilis in which it also lost its investment-grade credit rating by Fitch, notes JPM Latin America Equity fund manager Luis Carrillo.

The country is in the midst of an economic and political crisis. The hugely unpopular president Dilma Rousseff has been caught up in a scandal surrounding state-owned oil company Petrobras, and rumours of her impeachment abound.

Mr Carrillo says: “The recent replacement of Brazil’s austerity-minded finance minister suggests a waning commitment to necessary reforms in order to shore up support for the president’s more left-leaning party in Congress.”

Oliver Leyland, senior investment analyst for Latin America at Hermes Investment Management, predicts a multi-year recession in the country.

He explains: “You do have this horrible scenario of low or negative growth, [and] high inflation still. You have this huge and ballooning fiscal deficit as well, which is a problem. So spending cuts are necessary, but they’re not coming through because of this political paralysis.”

In economic terms then, Brazil appears to have fallen behind its Bric (Russia, India and China) peers. But Mr Leyland believes the country’s institutional framework is performing well compared with the other Bric nations.

Alfredo Mordezki, head of Latin American fixed income at Santander Asset Management, is positive for other reasons.

He notes: “Brazil has a strong domestic market [the biggest in the region], its external sector is improving after the adjustment of the currency and it still holds some world-class companies in sectors that did well in the current environment, like food companies, or pulp and paper producers. Fiscal policies may become more neutral in the second part of 2016 and, if inflation expectations correct, monetary policy can become less of a hurdle.”

But he thinks any potential recovery in Brazil will be a 2017, not a 2016 story.

Another cause for concern is Peru, which may be downgraded to frontier market status this year over concerns it does not have sufficient investable companies.

Meanwhile, Argentina has been one of the best-performing countries in the region, with the MSCI Argentina index up 9.8 per cent in the year to January 28 2016. The country swore in new president Mauricio Macri in December last year, replacing Cristina Fernández de Kirchner.

Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management, notes the new administration is “market friendly”. He says: “Regime change can be very powerful – it’s one of the reasons why Argentina was a big outperformer. Venezuela is another example of that.”

But Mr Gutierrez believes Mexico – the “poster child for reform” – has been a disappointment, blaming the falling oil price. “It has been this great reform story, but the oil situation has complicated things for Mexico. When you look at total oil products including refined, it’s now an oil importer because it imports refined products from the US, though oil exports are still a big part of revenue for this government.”

As Mr Leyland points out: “Eighty per cent of Mexican exports go to the US. So the relatively steady recovery in the US economy is positive for the country.

“Equally, Mexico just has a better economic framework [than other Latin American countries] – unemployment and inflation are both quite controlled, the central bank is credible, and there’s no real issue with leverage levels either at the corporate or household level.”

Invesco Perpetual head of emerging equity markets Dean Newman also sees opportunities in Mexico, which he says has a robust manufacturing sector.

“We are impressed that president [Enrique Peña] Nieto has followed through on his 2012 campaign promise to overhaul the country’s energy sector, which has been opened up for international investment for the first time in more than 70 years,” Mr Newman notes.

China-Brazil infrastructure cooperation mutually beneficial

Infrastructure cooperation between China and Brazil is mutually beneficial and should be further strengthened, experts say.Brazil hopes to attract Chinese investment in highways, railways, ports, airports and other infrastructure projects, while the Chinese government regards infrastructure building key to bilateral cooperation, they say.

“The Brazilian government can count on infrastructure investment as a way to overcome the current economic recession, and promote economic and social development,” Xie Wenze, a visiting scholar from the Chinese Academy of Social Sciences.

A 1-percent increase in infrastructure investment can raise Brazil’s GDP by about 0.6 percent, he said.

Currently, bilateral infrastructure cooperation is mainly centered on one-off projects. Equity mergers and acquisitions around these projects are expected to bring long-term benefits for both sides, according to Xie.

Bilateral energy cooperation has yielded great results in recent years. China’s State Grid Corp. has expanded its business in Brazil as a result.

“The experience of equity mergers and acquisitions on the part of China’s State Grid Corp. could be promoted to other … projects in railways, highways, ports and other areas,” said Ivanildo Marcos Beltrao, a Brazilian company official.

To support cooperation projects between China and regional countries, the China-Latin American Cooperation Fund was launched in early January with a startup capital of 10 billion U.S. dollars.

A similar 10-billion-dollar fund was set up in September, 2015 to support China’s investment in an array of medium- and long-term projects in Latin America.

Brazil’s Vale Will Draw $3 Billion From Credit Lines

Brazilian mining giant Vale SA on Tuesday said it would borrow $3 billion in emergency financing, a sign of distress from the world’s largest iron-ore producer.Vale said the revolving credit line would “increase liquidity and bridge potential cash flow needs.” It didn’t disclose the interest rate it received and said another $2 billion was available.

The miner, which needs capital to pay for expansion projects, is tapping the line of credit partly because it hasn’t been able to garner as much as expected through the sale of assets. Banks have gotten cold feet about financing commodities deals amid a deep rout in prices, throwing a wrench into the plans of mining companies to shore up their balance sheets as they struggle to pay for mine expansions undertaken during the boom.

Vale has been unable to obtain project financing to complete a 2014 deal to sell a stake in its Mozambique coal operations to Japan’s Mitsui & Co. That transaction, originally scheduled for completion in the second half of 2015, would have boosted Vale’s cash flows by $3 billion.

“It doesn’t bode well for [Vale] to be using this line,” said Klaus Spielkamp, a bond analyst in Miami at Latin America-focused brokerage Bulltick Capital Markets.

In addition, Vale faces the stigma of being Brazilian at a time when international capital markets have largely shunned the South American country’s companies amid a sweeping corruption scandal and economic crisis. A major accident on Nov. 5 at Samarco, Vale’s local joint venture with BHP Billiton Ltd., further rattled investors.

Brazil’s Inflation Unexpectedly Slows as Recession Bites

Brazilian inflation unexpectedly slowed last month, beating forecasts from all analysts surveyed by Bloomberg, as food prices rose less than in the previous month amid a deepening recession.The benchmark IPCA inflation index moderated to 0.96 percent in December from 1.01 percent in November, the national statistics agency said Friday. That compares to the median 1.05 percent estimate from economists surveyed by Bloomberg. 

“It’s good news in the near-term, but not something that shows clearly that core prices will be trending down,” Carlos Kawall, chief economist at Banco Safra, said about slowing inflation. “The fact that it came mostly from food prices doesn’t show that we can celebrate this.” 

Brazil missed its 2015 target as annual inflation accelerated to 10.67 percent, the fastest for a full year since 2002 and more than double the midpoint of the official target range of 2.5 percent to 6.5 percent. As a result, central bank President Alexandre Tombini had to publish an open letter to the government explaining why he fell short.

Inflation isn’t expected to fall within range this year either, even as the deepening recession and higher borrowing costs chip away at Brazilians’ purchasing power. Leading economists forecast policy makers will redouble efforts to contain consumer prices by embarking on a new round of monetary policy tightening as early as this month.

Traders agree, as swap rates on the contract due in April 2016 rose 2 basis points to 14.66 percent on Friday. The real strengthened 0.5 percent to 4.0248 per U.S. dollar amid improved appetite for emerging-market assets. It dropped 33 percent last year, the worst performer among all 31 major currencies tracked by Bloomberg after the Argentine peso.

The real’s depreciation fueled inflation last year, as did the rising price of government-regulated items, Tombini wrote in his open letter to Finance Minister Nelson Barbosa. He reiterated his commitment to reach the 4.5 percent target in 2017, while Barbosa said in a statement that the government would contribute with fiscal policy and measures designed to boost productivity.

“No matter what happens with other policies, the central bank will adopt the measures needed to meet the target,” Tombini wrote.

Banco Safra’s Kawall expects a 150 basis-point tightening cycle this year, starting in January. Higher interest rates would be a bitter medicine for an economy headed to a deep two-year recession, forecast to be the worst since at least 1901. Fearing more job losses, members of President Dilma Rousseff’s Workers’ Party have publicly opposed additional increases to borrowing costs. December data strengthens the case for holding off, according to Enestor dos Santos, principal economist at BBVA.

“We should be more patient and wait for more data, but in my view it takes some pressure off the central bank,” Dos Santos said. “Inflation peaked in December and it will start to decline from January. I think this would not be the best moment for the central bank to tighten monetary policy.”

Deeper Recession

The central bank has held the Selic rate at a nine-year high even as Brazil’s recession deepened. The slump contributed to slower price increases for food and beverages as well as housing. The biggest single contributor to inflation in the month was the price of airfare, a volatile component that rose 37.07 percent.

A rate increase at the January meeting of the monetary policy committee known as Copom isn’t a foregone conclusion, with banks including BBVA and Banco Fibra expecting no change. Higher borrowing costs would hurt investment more than contain inflation, and Brazil should instead consider raising its inflation target, Workers’ Party President Rui Falcao said in a Dec. 28 interview.

“Any dovish decisions in the next Copom meetings will spur market suspicion that the central bank is facing greater political interference, even if technical reasons for a more moderate approach exist,” Chris Garman, managing director at political consultancy Eurasia Group, wrote in a note before the release of the data.

BTG Pactual Sells Distressed Debt Unit to Itau Unibanco

Brazil’s largest private sector banking group said on Thursday that it had agreed to acquire the distressed debt unit of the troubled investment firm BTG Pactual for about 1.2 billion reais, or about $307 million.The banking group, Itau Unibanco, will acquire 82 percent of the distressed debt unit, Recovery do Brasil Consultoria, for 640 million reais and approximately 70 percent of the firm’s nonperforming loan portfolio for 570 million reais. The portfolios have a face value of 38 billion reais, the bank said in a filing. Both stakes correspond to BTG’s entire ownership of each.

The International Finance Corporation, the World Bank’s private investment arm, will retain its minority stakes in both the firm and the nonperforming loan portfolios.

The price was less than the 1.7 billion reais than BTG had sought, according to multiple people with knowledge of the negotiations. Some in the market thought BTG could have fetched the higher price if it had been more patient. That suggests that BTG continues to face pressure to demonstrate liquidity and good financial health after the arrest of its founder and former chief executive, André Esteves, on Nov. 25.

Mr. Esteves faces charges by Brazil’s attorney general of obstruction of justice and interfering with the broad investigation into corruption involving the state-owned oil giant Petrobras. Although he was released from jail on Dec. 17, he remains under 24-hour house arrest awaiting trial and cannot return to work at BTG. He has resigned as its chief executive and chairman of the board.

BTG’s stock fell by about half in the weeks after his arrest and was still trading near its low at around $15 a share on Thursday.

BTG continues to grapple with turning a corner. In a December research report, Goldman Sachs said that it expected the firm’s cumulative funding gap — as measured by assets versus liabilities — to reach 1.6 billion reais by the end of this year and widen to 11 billon reais by the end of next year.

In a respite, BTG obtained a line of credit of six billion reais this month from the private credit firm Fundo Garantidor de Créditos, which is funded by Brazilian banks.

Yet it continues to be on an aggressive campaign to sell assets, and Recovery was one of its most prized.

“They were putting a lot of pressure to get it done quickly,” one of the individuals with knowledge of the negotiations said of the speed of BTG’s sale of Recovery. That turned off some potential buyers, he said, as BTG “did not want folks to be able to check under the hood” before reaching an agreement.

If BTG had been more patient, that person said, BTG may have fetched as much as two billion reais for Recovery. “There was no reason to push for a close by the end of the year,” he said, other than demonstrating financial health in the calendar year.

Initially, Itau Unibanco was neither BTG’s preferred buyer nor the most likely candidate, according to several people who spoke on the condition of anonymity. BTG was close to reaching a deal this month with the American investment firm Lone Star Funds, according to two people.

Lone Star was widely seen to be the favorite as it had been talking to BTG well before the arrest of Mr. Esteves.

“Lone Star was the pretty obvious buyer from the beginning,” said one of the people, adding that, “I did not think anyone was ahead of them.”

Recovery was particularly attractive to foreign buyers because it allowed them a way to enter Brazil’s lucrative distressed debt market without having to build their own operation here.

Yet talks with Lone Star broke off last week for reasons BTG Pactual has yet to disclose. One individual said the two parties were apart on price by about approximately 300 million reais. Sam Loughlin, Lone Star Funds president of the Americas, did not respond to an email requesting comment.

Before these negotiations, more than 20 firms had expressed interest in Recovery. BTG gave a deadline of Dec. 16 for submitting nonbinding final offers.

Clint Kollar, a managing director with TPG Special Situations Partners, the dedicated credit platform of TPG Capital, met with BTG at its São Paulo headquarters this month, according to one person with knowledge of his plans.

The Fortress Investment Group showed interest until Dec. 16, but was told its bid would be too low, so it backed out. Although Fortress recently closed its macro funds, having faced huge losses in Brazil, according to an article in The Wall Street Journal in October, its credit business, which includes distressed and special situations, continues to have interest in Brazil.

Apollo Global Management had also taken interest in Recovery. Cerberus initially looked at it but balked at a price of more than one billion reais.

The terms of the deal with Itau are subject to regulatory approval.

Information and news for people considering or actively investing in Brazilian stocks or bonds.

Don't miss the news related to Brazil investment!


Subscribe to this blog and receive notifications of new posts by email.