Category Archives: Politics

Brazilian stocks and Real fall amid difficulty in approving pension plan reform

Brazilian financial market reacts negatively again to the noise surrounding the pension reform. According to professionals, this morning’s news brought more negative elements about the possibilities of the government being able to approve the reform, which was reflected in the dollar, interest rate hikes and in the fall of the Ibovespa stock index at the opening of the trading session.

But, half an hour after business started, prices have worsened, reacting to comments from House of Representatives president, Rodrigo Maia, that would have expressed a more pessimistic reading regarding the number of votes to approve the reform.

This market behavior confirms the investors’ sensitivity to the pension plan reform news, something that has already been happening in the last sessions and that intensifies as the deadline for voting approaches.

The importance of this reform for the Brazilian stock, currency and interest markets has already been explained in this article from June in this blog.

Petrobras to raise up to US$ 2.3 Billion in IPO of it’s distribution subsidiary

BR Distribuidora, distribution arm of Petrobras (PBR), started yesterday the process that should be the largest IPO since 2013 in Brazil. With the sale of a maximum of 33.75% of its stake in BR, the parent company Petrobras may raise up to R$ 7.5 billion (US$ 2.3 Bi), an important figure for its divestment plan. This estimate takes into account the placement of all lots for sale and the ceiling of the indicative range of price per share, which ranges from R$ 15 to R$ 19, according to the prospectus released yesterday. In the pessimistic scenario, Petrobras would raise R$ 4.4 billion by selling 25% of the shares.

Considering the stock price range disclosed, BR should arrive on the stock exchange on December 15th , with a market cap between R$ 17.5 billion and R$ 22.1 billion (US$ 5.4 bi and 6.7 bi). Despite the expressive absolute valuation, it has a discount ranging from 26% to 40% against the trading multiples of one of its main competitors, Ultrapar, owner of the Ipiranga distribution network.

According to market sources, what explains the discount is the fact that, despite the governance safeguards included in its statute – such as the requirement that half of the directors be independent – the company will remain a state-owned company and, therefore, subject to political interference.

The perception in the market is that BR’s offer will not have demand issues. The question will be the price, to be officially set on December 13. While local managers will bargain discount, but should stay out, foreign investors have already given signs of interest. Because of the discount size offered relative to its peers, BR expects to attract enough demand to close the price between the middle and the ceiling of the range.

Adding the expected market cap range to the net debt of R$ 3.86 billion in September, BR should have company valuation between R$ 21.3 billion and R$ 26 billion. This concept of company valuation assumes that the company’s future cash flow will be shared between its shareholders and creditors.

When dividing this amount by BR’s adjusted profit before interest, taxes, depreciation and amortization (Ebitda) in the last 12 months, which was R$ 3 billion, one arrives in multiples of 7.1 times in the floor of the prices per share, 7.9 times at the midpoint and 8.7 times at the peak.

On yesterday’s trading session, Ultrapar’s shares traded at a multiple of 11.8 times its Ebitda in the last 12 months, hence the discount. Ipiranga represents 75% of the consolidated Ebitda of Ultrapar, which is a holding company.

Fitch keeps the Brazilian credit rating at BB, with negative outlook

Fitch Ratings reinforced Brazil’s credit rating on ‘BB’, with a negative outlook. That is, with the possibility of the classification being revised downwards in the future.According to the agency, the country’s ratings is limited by the structural weaknesses in public finances and high government debt, weak growth prospects and weaker governance indicators than the country’s peers, in addition to the recent history of political instability.

These weaknesses, Fitch added, are offset by the economic diversity of Brazil and consolidated civil institutions.

The negative outlook reflects the continuity of uncertainties related to the sustainability and strength of the Brazilian economic recovery, the prospects for medium-term debt stabilization and the progress of the legislative agenda, especially the pension reform.

Fitch expects a modest cyclical recovery in Brazil, with growth accelerating from 0.6% in 2017 to an average of 2.6% during 2018 and 2019. Consumption began to recover, sustained by lower inflation, which drives wage gains, stabilization of the unemployment rate and a recovery of consumer credit. A recovery in investment is also expected in the coming years.

According to the agency, the risks that can cause the government not to reach its fiscal goals in the short term include a weaker economic recovery and the difficulty in cutting public spending, especially in the election year. The implementation of the pension Reform and other adjustments will be necessary to ensure that expenditures meet the target in the medium term.

Fitch projects that Brazilian public debt will continue to grow during the forecasted period, even taking into account the impact of the National Treasury’s loan payments anticipated by the National Development Bank (BNDES) between 2017 and 2018. The agency projects that debt will reach 76% of GDP in 2017 (above the median of the “BB” countries, 45%) and advance to 80% in 2018.

Brazil’s current account deficit is expected to fall below 1% in 2017, according to Fitch projections, and should remain below 2% in the period projected by the agency. The deficit fell 80% during the first nine months of 2017, compared to last year, with the growth of the trade surplus.

Funding of Brazilian companies with debt and equity jumps to R$ 192 billion (US$ 60 bi)

The wind begins to shift to the capital market in the wake of falling interest rates to near historic lows and the contraction of bank credit after two years of deep recession. Since last year, the favorable environment has opened space and consolidates a trend of strong growth for corporate debt issues, along with capital openings and subsequent stock offers, which increasingly assume a major role as a source of financing for large companies .
Between January and September, data from the Brazilian Association of Financial and Capital Market Entities (Anbima) shows that the issuance of fixed income securities in Brazil and abroad by companies plus funding through variable income in the country reached R$ 176.3 billion, or three and a half times the volume of R$ 49.9 billion granted by BNDES in the same period, according to figures from the state bank itself.

For Sergio Goldstein, chairman of Anbima’s corporate finance committee, the expansion is expected to continue in 2018: “the economy probably accelerates next year and thus there’s no way the capital market does not come along.”

A singularly favorable situation fuels this movement of greater participation of the capital market as a source of funds: falling interest rates and prospects that it will remain close to historical lows for a prolonged period, low inflation, growth, albeit gradual, and a change in the policy of subsidized rates by the BNDES.

Should you buy Brazilian stocks right now?

Brazil is in a very binary situation right now and that’s bringing huge volatility. Brazil’s current crisis is a fiscal one. That’s what caused the huge drop up until 2015. The labor party added a lot to the social networking in its 12 years in power and did not do the reforms the country needs, most notably, the pension plan reform. Pension plan deficit represents already 2.8% of the GDP, without change and with an aging population, this number will be unsustainable in as soon as 5 years. The labor party did have its merits in the beginning by taking a lot of Brazilians out extreme poverty but the lack of political power and will to make the reforms, coupled with huge corruption, erased most of its merits. So, comes 2016 and everything changes? Stock market and currency jumps and interest rates go down. The economy must have improved, right? Wrong! The only thing that improved was the expectation. With the rumors and subsequent consolidation of Dilma’s impeachment, the new president, Temer, who has in congress support what he lacks in popularity, was doing all the necessary reforms to the economy. The GDP has not improved yet, but the perspective is great and the price is right.

Then, comes corruption again and now it implicates Michel Temer. Stocks go down 10% and currency another 7%

Short after, markets start to recover thinking that, with or without Temer, the government base in the congress will be the same and the reforms will happen.

Then the binary dilemma: economy will continue to improve if these reforms pass and that seems to be the scenario both with the current president or with one replaced by the congress. In Brazil, if a president and vice president are impeached after two years in power, the replacement is chosen by the congress until the next election. However, there’s strong popular movement and even a proposed constitutional amendment to do direct elections right now and not wait until 2018. If that happens, you could see the labor party or other extremist come up strong and drop the stock market and currency further.

So, will this “diretas já” movement happen? It’s possible. The country is in big disbelief with the political representatives and not without reason. The curious part is that the direct election is what would be the most harmful to the economy and therefore, the population.

Bottom line: if you are looking at the long term: more than 5 years, this is probably a good time to buy. But in the next two years, except a lot of volatility or just remain neutral altogether (my position right now). If you are looking for hedge, you can consider BZQ, an ETF that seeks daily results that correspond to twice (200%) the inverse of the MSCI Brazil Index

Brazil is out of recession. But should you buy it?

President Michel Temer and economic ministers will celebrate the growth of 1% of the Gross Domestic Product (GDP) in the first quarter of this year, compared to Q4 of 2016, excluding seasonal factors. When they do this, they will actually be celebrating the growth of agriculture and foreign demand (exports). Domestic demand – household consumption and investments – continued to fall and with worse results than expected.In the economists’ estimates, GDP would grow, on average, 0.9% in the first quarter of 2017 QoQ, in the seasonally adjusted series. Here, the recorded growth of 1% was slightly higher. But economists predicted 9.4% growth in agriculture and the GDP brought a rise of 13.4%. In industry, the result was also better, of 0.9% against a forecast of 0.8%. The services sector remained stable, but the expectation was a growth of 0.3%.

It is on the demand side that the GDP has been more frustrating. Economists projected the first increase (of 0.4%) after eight consecutive quarters of falling household consumption. The IBGE indicated, however, a further retraction of 0.1%, postponing the recovery. And the investment retreat was much deeper than expected. Estimates indicated a small decline of 0.3%, but the reality was cruel and the figure was negative at 1.6%. All comparisons are QoQ, minus the seasonal effects.

Weak domestic demand is also clear in trade data, down 0.6% from the end of last year.

The government may even celebrate the outcome, but from the standpoint of indicating a domestic recovery, GDP in the first quarter was worse than expected. And the political crisis and the signal issued yesterday by the Monetary Policy Committee (Copom) that the interest rate down trend will slow down, act to further delay the good news, so long awaited.

Brazilian Government Announces Economic Package with 12 Measures

President Michel Temer announced on Thursday (15) a new economic package with measures to stimulate the economy. Also taking part in the announcement were the house or representative’s president, Rodrigo Maia (DEM-RJ), Senate’s President Renan Calheiros (PMDB-AL), Finance Minister Henrique Meirelles and the Minister of Planning, Dyogo Oliveira.

Temer started the announcement saying that the goal is to stimulate growth and reduce unemployment. Before announcing the measures officially, the president commented on the approval of the PEC 241, which limits spending increases for the next 20 years, approved on Wednesday.

According to Temer, “these reforms aim to increase the growth of the Brazilian economy. We never ignored the difficulties that we would have when we took over the government, but we are succeeding in advancing these topics.”

Despite being positive for the economy, these 12 measures are seen as a desperate way to try and deviate the attention from the corruption investigations that are currently hitting Temer’s government right in the core. In any case, the measures are positive. To them:

Tax Debt Negotiation

Finance Minister Henrique Meirelles was responsible for giving more details on each of the measures. The first provides for tax debt negotiation for companies with debts due through November 30. Meirelles said that “any tax debt” is eligible, including social security. For debts that are being questioned in the Court, it is necessary to prove the desistance of the lawsuits.

“The program allows tax negotiations for companies that are preparing to grow again, as macroeconomic adjustment is under way,” said Meirelles.

Guaranteed Property Letter

Another measure, according to Meirelles, is the regulation of the “Letra Imobiliária Garantida”, an instrument of funding for real estate credit. The objective is to broaden the supply of long-term credit for civil construction.

Meirelles said that this type of bond, being both secure and long-term, is an “important alternative source for real estate lending and increases the supply of long-term lending to the industry.” This measure will have to go through public consultation and then be regulated by the National Monetary Council (CMN).

Improvement in the “positive register”

Meirelles also announced the improvement of the positive credit rating, which allows the creditor to analyze the person’s history. Membership becomes automatic, and exclusion has to be requested. The goal is to reduce credit risk and make room for lower interest rates for good payers.

Credit measures

Meirelles says another measure is to allow price differentiation according to the mode of payment. Such a change allows retailers to charge different prices depending on the payment mode used, ie different prices if the customer pays cash or credit card, which is currently prohibited by law. He recalled that it is common for stores to give discounts for purchases made in cash, but not the same on credit cards.

Reduction of card interest

Another measure presented by Meirelles is the reduction of interest rates on the credit card charged to the consumer and the term of payment to the merchant. The minister says the regulation should be submitted within 10 days.

Bank spread

According to the finance minister, the government is also proposing the creation of the electronic duplicate with the objective of reducing the so-called “spread” of the banks (difference between the rate of funding, close to the basic rate of the economy, at 13.75%/ year today, and the rate charged to bank customers).

“We want to create a central registry of duplicates, credit card receivables and allow the granting of credit with a lower guarantee, which increases the security for creditors and the supply of credit for small and medium-sized enterprises, with lower interest rates. “, he said.

Reduction of bureaucracy

On the issue of de-bureaucratization, Meirelles says that they will simplify the payment of labor, social security and tax obligations through a system called eSocial. The objective is to reduce the time spent by companies to fill declarations, forms and books and the redundancy of information provided to the tax authorities. The deadline for implementation in all companies would be July 2018.

Refund of taxes

Another proposal is to simplify the procedures for restitution and compensation of the taxes administered by Receita (Brazilian IRS), including the compensation between the social security contribution and other taxes.

Business Start-up

Meirelles says another measure will reduce the time to open ventures. A national network for simplifying the registration and legalization of companies and businesses will be implemented.

Competitiveness

The government also announced measures to speed up purchases and sales in foreign trade. According to Minister Meirelles, a single web-accessible portal will be created to forward all documents and data required for business transactions with other countries.

“The idea is to cut import and export procedures by 40 percent”, he said. The implementation period for exports is until March 2017 and for purchases from abroad until the end of next year.

BNDES

Following this, the Minister of Planning, Dyogo Henrique de Oliveira, spoke about other measures. The first deals with the increase from R$ 90 million to R$ 300 million the limit to access the BNDES credit for micro, small and medium enterprises.

Companies with up to R$ 300 million in revenues can also renegotiate debts of operations of up to R$ 20 million with the BNDES. Therefore, companies can seek cheaper interest rates, based on the Long-Term Interest Rate (currently at 7.5% per year).

According to him, the total volume of refinancing is estimated at R$ 100 billion, which will “increase the liquidity of companies”.  “Today, companies are suffering from a great deal of liquidity,” said the Planning Minister.

For large companies, with revenues above R$ 300 million per year, operations included in the Investment Support Program (PSI) may be refinanced. “These refinanced amounts will be with BNDES’ own resources, but with funds with TJLP (Long-Term Interest Rate) funding, with a lower cost”, he said.

FGTS

Another measure announced is the distribution of half of the profits in the FGTS to the workers. “That is to say, when there are profits, part of them will continue to be deposited and the other half will be made available to the worker to pay debts or make a different use”, he said.

Still on the FGTS, he announced the gradual reduction of the additional fine of 10% – which is paid by employers at the time of dismissal of employees, on top of the 40% that goes to employees. According to him, the idea is to reduce that 10% at the rate of one percentage point a year to relieve the entrepreneurs.

EWZ: Ibovespa has its best semester since 2009 and US$ drops 18.6% versus the Brazilian Real

Brazilian’s most traded stock ETF in the US, EWZ soared 46.5% in the same 6 months:

EWZ-6-Months

In the beginning of the year, the perspective for the Brazilian market was not good with the country in recession and inflation sky rocketing. However, in the middle of February, the inflection started fueled by a global recover in commodities prices and an improvement in the expectations for the economic policies, which became known as the impeachment rally.

Besides, the downside event of the semester, the Brexit, was followed by an unexpected help which were the speculations that central banks all over the world will stimulate their economies to face market volatility. On Friday, the president of England’s central bank, Mark Carney, said that the growth in the UK will slow down in the next months and additional interest rate cuts and other measures of monetary ease will be necessary.

Sure, Brazil is not out of the woods yet and the new government still has lots to do to recover the economy. However, the better economic climate has started to translate into improvements in the confidence:

Consumer and Industry Confidence in Brazil

Besides the more favorable political environment, what is also helping in this confidence growth is the fact that some economic indicators are improving, albeit still very bad: IBC-Br, Industry and Services.

Brazilian Retail Sales up 0.5% MoM in April

Brazilian retail sales volume in April increased 0.5% MoM but fell 6.7% YoY, both worse than market expectations, according to IBGE (Brazilian Institute for Geography and Statistics). Although in the monthly comparison, most of the sectors have recorded an increase, it was not enough to reverse the downwards trajectory, still visible in the annual comparison of past months. 

Therefore, we continue with a negative bias to the sector’s performance in 2016, we do not know when sales will have the strength to reverse the negative trend, given:

  • The uncertain political scenario, which makes difficult the turnaround on the confidence and economic growth. 
  • Rising unemployment Rate
  • Low and expensive offer of credit

On the other hand, we have signs that the worst may be behind, since the decrease in retail sales in January was 10.3% YoY

Brazilian Steel Industry in Survival mode for the Foreseeable Future

The Brazilian steel industry has seem better days. If we look at the three stocks traded as ADRs in the NYSE, we can see the depth of their agony in the last ten years:

Gerdau (NYSE:GGB):

Gerdau - Brazilian Steel Industry Agony in the last 10 years
Gerdau – Brazilian Steel Industry Agony in the last 10 years

Companhia Siderúrgica Nacional – CSN (NYSE:SID):

SID - Brazilian Steel Industry Agony in the last 10 years
CSN – Brazilian Steel Industry Agony in the last 10 years

Usiminas (OTC:USNZY):

Usiminas - Brazilian Steel Industry Agony in the last 10 years
Usiminas – Brazilian Steel Industry Agony in the last 10 years

In the 27th Brazilian Steel Congress, held by the Brazil Steel Institute, industry executives said that the moment is still of high pressure and explained their survival strategies. As a common theme, they all mentioned exports will be the way to survive in the short term.

Benjamin Steinbruch, shareholder and president of Cia. Siderúrgica Nacional (CSN), said he believes the internal market is “the future” of the sector. It is necessary that the government create mechanisms to ensure that competitive conditions are the same as in other countries. He also complained about the high interest rate in the country today.

Questionable government policies in recent years have led to an impoverishment of the country. “It is the highest impoverishment through which a nation has been, without a war”, he said.

The new president of Usiminas, Sergio Leite, explained that the focus of the moment is survival – in the next three to five years this will be the order of the day. Meanwhile, calls for government priority to a program for the processing industry in the country. “Restructure and adapt businesses to market reality [is needed].” The “bottom” is already approaching, but recovery will take time, he said.

André Gerdau Johannpeter pointed out that the current crisis in the sector was announced. For some time, he said, we have been discussing the pressure that the Chinese excess capacity would have on the Brazilian market. According to the president of Gerdau, this oversupply from China will impact even on the next five to ten years.

“In the short term, what we can do is to seek export. There will be no domestic recovery”, Gerdau said. “Without exports, the picture is dramatic: layoffs and closed plants. In the medium and long term, we need structural competitiveness, changes in labor laws and taxes”, he added.

The event also brought experts on China and foreign trade, which said that the recognition of the Asian country as a market economy by the World Trade Organization (WTO) could distort the steel industry and other sectors in the world.

Usha Haley, professor at the University of West Virginia, said Chinese mills have access to cheap and easy capital, while receiving large subsidies from the local government. She believes that Chinas’s ultimate goal is just to increase production and, while maintaining employment and guaranteed volumes in the domestic market, be able to become a major exporter of the material.

Despite the gigantic fall in stock prices over the last 10 years, it’s hard to get positive on this industry. Sure, after so many years of oversupply and depressing costs, one could expect a turnaround and, in fact, all three ADRs are sharply higher in 2016. However, a more consistent recovery seems to be far for this industry.