Brazil mulls emergency loan to Rio de Janeiro ahead of Olympics

By Alonso Soto and Marcela Ayres

BRASILIA (Reuters) – Brazil is considering an emergency loan to the cash-strapped state of Rio de Janeiro as it prepares to host the Olympic Games in less than two months, according to two senior government officials familiar with the situation.

The loan would be guaranteed by the state’s participation in local companies and could be extended to the states of Minas Gerais and Rio Grande do Sul, which are struggling to pay employees and pensioners as a crippling recession reduces tax revenues.

“These states need cash injection. There is no other way,” said a member of the government’s economic team who asked for anonymity in order to speak freely. “These loans will be backed by states’ assets such as banks, utilities, gas and sanitation companies.”

Eligible states would transfer their stakes in government-led companies to the federal government, which could in turn sell them to private investors as it did during the last states’ debt restructuring in the late 1990s, the source said.

Rio’s main state-controlled company is its water and sewer provider Companhia Estadual de Aguas e Esgotos do Rio de Janeiro, commonly known as Cedae.

The city of Rio de Janeiro has enough money to complete the infrastructure for the Olympics, but a financial crisis at the state level threatens to disrupt public services during one of the world’s biggest sporting events, which starts on Aug. 5.

The oil-producing state, hit hard by the recession and drop in crude prices, faced its worst ever public health crisis this year when unpaid doctors and nurses walked off the job at hospitals and clinics were left without essential supplies such as syringes and disinfectants.

The Rio Olympics, the first held in South America, also has been marred by political turmoil that led to the suspension of the president and an outbreak of the mosquito-borne Zika virus that has been linked to brain malformation in babies in Brazil.

The amount of the emergency loans will depend on how much debt relief the government can give other states also in fiscal distress, another source involved in the talks said.

On Thursday, several Brazilian states seeking relief from debt that amounts to 11.2 percent of Brazil’s gross domestic product resumed talks with the government of interim President Michel Temer.

This creates a tricky situation for Temer, who in May replaced suspended President Dilma Rousseff while she stands trial for allegedly breaking fiscal rules. Providing relief to the states could exacerbate a fiscal crisis that has cost the country its hard-won investment grade rating late last year, driving up borrowing costs.

Temer’s government has rejected a proposal to pardon state debt payments for two years and lower interest rates retroactively, according to state representatives who met with finance ministry officials on Thursday. More meetings are scheduled for next week.

The finance ministry press office declined to comment. The finance secretary of Rio de Janeiro could be not be reached for comment.

Rio de Janeiro’s finances have deteriorated so much that the state missed debt payments to a French development bank and the Inter-American Development Bank last month. Moody’s Investor Services called the event a “credit negative for all of Brazil’s states.”

The state ramped up its payroll during years of high oil prices, expecting that royalties on massive crude discoveries off its coast would keep its coffers full.

Now the state is cutting social programs, eliminating secretariats and raising taxes to plug an expected budget deficit of 19.9 billion reais ($5.91 billion) this year.

Rio Grande do Sul-state Finance Secretary Giovani Feltes confirmed the negotiations for the loans, which he said will be used only for investment, but will give his state a much-needed breather.

“This loan will not go to current expenditures because the law doesn’t allow us to use loans to pay our employees,” Feltes said in a phone interview. “Obviously this (loan) would improve out fiscal situation.”

Brazil taps ex-Bunge boss Parente as Petrobras CEO, replaces Bendine

Brazil’s interim President Michel Temer named Pedro Parente chief executive officer of state-led oil company Petroleo Brasileiro SA on Thursday as his government tries to kick-start a shrinking economy and shore up the debt-laden oil producer.Parente, an engineer, former Bunge Ltd executive and one-time chief of staff to former President Fernando Henrique Cardoso, replaces Aldemir Bendine, according to the president’s office. Bendine had been running Petrobras, as the company is known, for the last 15 months.

Petrobras did not immediately reply to a request for comment on the appointment.

Parente, 63, will be charged with efforts to rescue Petrobras from financial crisis brought on by low world oil prices, crippling debt and a massive corruption scandal.

Parente is best known for his role as chairman of the Brazil unit of agribusiness and commodities-trading giant Bunge Ltd from 2010 to 2014. Bunge is Brazil’s largest grains exporter.

The appointment also marks Parente’s return to Petrobras after 14 years. He sat on Petrobras’ board under former Brazilian President Cardoso. Parente was a key player in opening Petrobras to competition and international investment after the Cardoso administration ended Petrobras’ monopoly over exploration and production in 1997.

From 1999-2002 he also served as Cardoso’s chief of staff and managed a severe energy crisis that required electricity rationing and the quick building of supplementary power stations. He also helped manage a reduction of the government’s stake in Petrobras.

The Petrobras he will take over, pending approval by the company’s board of directors, will be quite different than the one he left. Petrobras invested $4.91 billion in 2002, Parente’s last year on the board. A decade later Petrobras was investing nearly $50 billion a year and despite major cutbacks still plans to spend $19 billion this year.

Despite the nearly ten-fold increase in investment, Petrobras has struggled in recent years to increase domestic oil production as much as expected, missing annual targets for 12 straight years.

Meanwhile, its total debt soared faster than output to about 450 billion reais, or nearly $130 billion, at the end of the first quarter from 33 billion reais ($9.32 billion) in 2002. Petrobras is now the most indebted oil company in the world. Plans to sell $14 billion of assets have stalled, forcing more cuts.

Temer, who replaced suspended President Dilma Rousseff last week while she faces an impeachment trial, chose Parente on Monday, according to a report on the Web site of the O Globo daily newspaper.

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.

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