Brazil: VistaBrazil - August 2014

Last Updated: 4 September 2014
Article by Veirano E Advogados Associados

The Untimely Death Of Campos Shakes The Campaign To The Core

Eduardo Campos, a Brazilian presidential candidate and 49-year-old father of five, was killed in a plane crash on 13 August, in a tragic incident that radically alters the electoral landscape at a crucial point.

A 12-seater Cessna jet carrying Campos, leader of the center-left Brazilian Socialist Party (PSB), crashed in bad weather in the coastal city of Santos, killing all seven people on board. Campos's running mate, Marina Silva, was not on the plane.

The black box recovered from the wreckage did not record the flight, according to the Brazilian Air Force (FAB). "The two hours of audio, the maximum recording capacity of the equipment, which were received and validated by certified technicians, were not of the flight of 13 August," said spokesperson Pedro Luis Farcic. "It is not yet possible to determine the date of the dialogue recorded."

Experts from the Centre of Investigation and Prevention of Aeronautical Accidents have been trying to reconstruct the black box files to find out what caused the incident.

While polls put Campos in third place after incumbent Dilma Rousseff of the Workers' Party (PT) and challenger Aécio Neves of the Brazilian Social Democracy Party (PSDB) – with less than 10 percent of the vote in recent polls – analysts had expected the former governor of the northeastern state of Pernambuco to gain more votes as his official television campaign got underway this week.

His poor standing was ascribed partly to the vast territory of Brazil, where it takes time for rising politicians to gain recognition nationally. Television campaigns are also an influential tool in a country with high illiteracy. A business-friendly leftist who was also tough on crime, Campos had hoped to appeal to both progressives and fiscal conservatives.

In a reflection of the wide-open possible political repercussions of the tragedy, Brazilian stocks have been volatile as investors struggle to assess whether Campos's death will make an opposition victory more or less likely. The Bovespa index lost early gains and dropped as much as 2.1 per cent before recovering to trade down 0.5 per cent on the day the news broke.

The remaining candidates will no doubt try to leverage the tragedy to their own advantage, and while Rousseff is still favored to win, her popularity has been dimming. That has been good news for investors who dislike the interventionist economic policies of PT. Under Brazilian law, the PSB has 10 days to choose a substitute, and it set a meeting for 20 August.

At the time of writing, it is widely expected that the popular Marina Silva of the Sustainability Network (Rede Sustentabilidade), who had been sharing the Campos ticket as vice-presidential candidate, will step in. She ran for president in 2010, winning 19 percent of the vote. A Silva candidacy could upend the race just seven weeks before election day, and she is already gaining ground, narrowly passing Neves in an 18 August poll. The PSDB formally announced on 20 August that it would throw its support behind Silva on a second ballot if its own candidate lost.

Party members see her as the natural successor to Campos, but her environmentalism and antiestablishment style are not universally admired. She nonetheless has a strong following among young voters. A strongly religious and committed environmental activist, Silva could attract votes from both the left and right, threatening Rousseff more than Campos could have done.

Known for her reformist principles, Silva has gained traction with some of São Paulo's traditionally conservative financial leaders, who would otherwise lean toward Neves. Silva polled higher than Neves this spring but was unable to reach the registration threshold for her party in time for the campaign.

Her candidacy would also hit the president where she is vulnerable. Silva will almost certainly put environmental issues at the forefront of the campaign, and Rousseff has championed the development of enormous hydroelectric dams in the Amazon. The president calls the initiative necessary but many in her own support base are against it.

In the immediate aftermath of the crash, Rousseff declared three days of mourning. "Today we lost a great Brazilian," she declared. "Eduardo was a great leader."

ECONOMY & BUSINESS

The BRICS summit

The five BRICS countries of Brazil, Russia, India, China, and South Africa held their 6th summit on 14 July in Fortaleza, Ceará. The concrete result was the creation of two institutions: a new development bank, and a contingent reserve agreement to provide assistance at times of crisis.

The final document has 71 sections, ranging over various mostly political international issues. That focus is partly a protest against delays in reforming the structure and governance of the International Monetary Fund (IMF), desired by emerging economies, and partly a result of the individual interests of the BRICS countries.

The political character of the summit was emphasized by a subsequent meeting in Brasília with Unasur, which comprises all Latin American countries.

The creation of the New Development Bank (NDB) and the Contingent Reserve Agreement (CRA) was the culmination of a long negotiating process and was not exempt from controversy.

Brazil wanted the NDB presidency but was preempted by India and had to accept the chairmanship of the bank's board. China, which will provide most of the capital, insisted on headquartering the NDB in Shanghai. For President Vladimir Putin, a concern was to secure support for Russia against sanctions imposed by the United States and the European Union relating to the Ukrainian conflict.

It is unquestionable that merely holding the BRICS summit in Fortaleza was a diplomatic victory for Brazil, but India scored with the presidency of the bank, Russia profited politically, and China will enjoy increased access to the markets and infrastructure of emerging economies.

The structure of the new bank is complex and it remains to be seen if its founding members will be able to comply with the onerous conditions of participation. NDB is expected to start functioning in 2016, with capital of US$10 billion.

Infrastructure issues

Helping out in Havana

The National Bank for Economic and Social Development (BNDES) will finance the modernization of the Havana airport in Cuba to the tune of US$150 million. The project will be executed by Odebrecht. The last tranche of loans to Cuba amounted to US$682 million.

And Honduras

The government of Honduras has signed a protocol of intention with Embraer for the modernization of the country's air fleet. The fleet currently comprises aircraft manufactured by Embraer during the 1980s.

Developing regional aviation

The Brazilian government's plan to develop regional aviation will cost R$1 billion per year according to the special Secretariat for Civil Aviation (SAC). Funds will be allocated from the National Fund for Civil Aviation, which will take over the payment to airlines of the tariffs normally paid by passengers. The plan will also involve restructuring 270 regional airports as the national airline network expands.

Teaming up with Russia

Taking advantage of a visit by Russia's President Vladimir Putin, the Brazilian government concluded a memorandum of understanding (MoU) for preferential treatment with respect to bilateral investments. The goal is for RZD International, which operates the Russian railway system, to participate in Brazilian railway tenders. An MoU signed with RZD on 22 July also includes state-owned Vnesheconombank (VEB), a kind of Russian BNDES.

And China

Brazil will also sign a memorandum of cooperation with China over railways, in order to help enterprises from both countries to establish partnerships. The idea is to enable Chinese companies with capital, investments, and technology in the railway sector to join efforts with Brazilian enterprises that have experience of the domestic concessions regime in order to win tenders in the Brazilian market.

To that effect, it was announced on 16 July that an agreement had been signed between the China Railway Construction Corporation (CRCC) and Brazilian construction and engineering company Camargo Corrêa. The agreement relates to a railway from Lucas do Rio Verde, Mato Grosso, to Campo Norte, Goiás, but several others are also planned.

Moving on a monorail

Major Brazilian contractor CR Almeida has successfully proposed a public–private partnership (PPP) to construct a R$4 billion monorail in the state of São Paulo. The contract is expected to be signed soon and the work should be taken on by subsidiary logistics company EcoRodovias.

Speeding up export licenses

The Association of Private Terminals on the Tapajós River, formed by logistics and trading enterprises such as Cargill, Bunge, and Hidrovias do Brasil, convened an extraordinary session in Belém on 10 July to discuss a joint effort to accelerate the award of licenses to export grain from the center-west region through the so-called Northern Exit.

Currently, licensing delays prevent commodity exporters from heeding the "hydrological window of Amazonia," putting immense obstacles in their way. The grains harvest is expected to grow 2.3 percent this year to a record 192.5 million tons.

Container terminal news

Operating on the Peruvian coast

In association with Spanish company Serving, Brazilian groups Tucumana and Pataqui, both from Paraná, have won a tender to operate and administer a terminal for containers on the Peruvian coast.

Doubling capacity

The Libra Group operates three large container terminals in Brazil and plans an expansion of R$762 million, which would more than double the current capacity of its terminal in Santos. The group awaits authorization from the Ports Secretariat (SEP) and from the National Agency for Water Transport (ANTAQ) to realize its project.

Ships for a new purpose

The Brazilian shipbuilding industry will have to adapt itself to operate with greater efficiency and less pollution as the use of LNG becomes widespread and shipping requirements change. Ships carrying superoxide can weigh 15 million tons. Ones carrying nitrogen oxide, 25 million tons, and those carrying carbon oxide, 1.05 billion tons.

Buying a shipyard

Andrade Gutierrez, a leading market contractor, will take over negotiations to acquire a share in the Iesa Óleo e Gás (IESA) oil and gas shipyard in Charqueadas, Rio Grande do Sul. IESA has contracts to supply 24 gas-compression modules for Petrobras FPSOs, for US$720 million, with an option to raise the order to 32. The first six modules should have been delivered this month but the company has been running behind schedule due to financial problems

Faltering follow-through

The Federal Court of Appeals (TCU) has conducted 23 audits of programs such as the federal housing scheme Minha Casa Minha Vida (my home, my life) and other large projects and concessions. The results point to systemic failure in the conduct of government projects and provision of government services – with negative implications for infrastructure.

The government announced in 2010, for example, that the World Soccer Cup would attract R$23.5 billion of investment in 83 infrastructure projects, but only 31 projects were completed, at a cost of R$29.2 billion.

Financing infrastructure

Brazilian infrastructure programs inventoried through to 2018 will require investments of R$920 billion. This refers to projects planned over the period in the oil and gas, transport, energy, and sanitation sectors.

BNDES on 30 July approved R$550.5 million in financing for sanitation projects in São Paulo, Paraná, Rio Grande do Sul, and Amazonas, benefiting 1.4 million people.

Mining notes

From Minas to Rio

Anglo-American declared its giant Minas–Rio project finished. The project involves mining iron ore in Minas Gerais and transporting it to Rio de Janeiro for export. Some 90 percent of the work is complete, at the cost of R$30 billion.

Vale value rising

Vale exceeded its record production of iron ore in 2014Q2 by 12.5 percent. It produced 79.4 million tons, versus 70.5 million produced during the same period in 2013.

Even with a year-on-year 28.3 percent drop in investments for the quarter, the company's profits were R$3.2 billion over the period. Investors are pleased with the efficiencies engendered by cost cutting; the share value has increased, going against current trends.

Zinc doesn't sink

The price of zinc has risen 16.4 percent so far this year, to US$2,410 per ton on the London metal exchange. Improvement in global demand, especially from China, has helped to raise prices.

Banking and finance

Flexible fiscal policy

The National Confederation of Industry (CNI) is proposing changes in Brazilian fiscal policy as of 2015 in order to restore confidence in the economy. CNI submitted its proposals to presidential candidates on 30 July.

They are essentially aimed at making economic cycles more flexible, in part through exogenous factors that interfere in fiscal results, such as adjustments to the minimum wage.

The approach of Janus

On 26 July, the Central Bank of Brazil announced that it would keep interest rates high. Of 39 economists interviewed by Valor Econômico newspaper, 33 project a stable Selic interest rate of 11 percent through to the end of the year.

One day later, on 27 July, the bank took measures to stimulate credit and thereby consumption. The package consists of an injection of R$45 billion into banks to enable them to extend credit to families and enterprises.

The government denies that the two measures were inconsistent.

Moody's weighs in

In a report on Brazil, ratings agency Moody's said that the economy will remain weak for the rest of the year. The country's rating – currently at Baa2 with a stable bias – will be influenced by the ability of the next administration to redress negative tendencies.

Tax news

Twenty-one of Brazil's 27 states decided on 29 July to put an end to a contentious fiscal disagreement. ICMS 70/2014 was signed before the National Council of Fiscal Policy (CONFAZ), consisting of the Secretariats of Finance of all states.

The states have decided to withdraw fiscal benefits granted without the approval of that body but to grant an amnesty to taxpayers who availed themselves of credits arising from tax benefits that had been granted improperly.

Drumming up cash

The government issued Provisional Measure (MP) 651 on 10 July. The move will ensure that it gets a cash injection of R$15 billion via anticipated payments from enterprises and the renewal of the Refis and Reintegra programs. The Federal Union expects to collect R$4.5 billion more with the new Refis debt-refinancing program and the Petrobras bonus.

Weak financial indicators

The Bank for International Settlements (BIS) analyzed the Brazilian debt at the end of June and found that its expansion entails risks to the country. The bank's early warning system has identified problems with Brazil's credit/GDP ratio.

In related news, the inflow of US dollars to Brazil fell 64 percent over the past quarter, and according to Goldman Sachs, the Brazilian real is overvalued.

Raising capital

The demand for Brazilian Treasury papers issued through to 2045 is nearly double expectations, at US$6.5 billion. The Treasury issued US$3.55 billion in an operation that concluded on 24 July.

Taking advantage of the strong external demand for Brazilian bonds, several enterprises also raised capital in early July. Thus, Fundição Tupy, a manufacturer of auto parts, entered the foreign debt market for the first time with an issue of US$359 million that was oversubscribed eightfold.

Klabin, a paper manufacturer, returned to the market after 15 years, and raised US$500 million in 10-year bonds. Cimpor, a cement manufacturer that is part of the Camargo Corrêa Group, raised US$750 million in 10-year bonds.

Caixa Econômica Federal (CEF) on 16 July launched a bond issue of US$500 million on the international capital market in order to reinforce its capital base. The issue consists of subordinate bonds and is the first of its kind by a Brazilian bank.

In related news, the Bovespa index has reached its highest level in 16 months, thanks to the appreciation of state-owned companies after a Datafolha poll showed a technical tie between candidates Dilma Rousseff and Aécio Neves on a second ballot in the upcoming presidential election.

Bullish on BTG Pactual

BTG Pactual bank announced on 10 July that it had acquired a British reinsurance firm, Ariel Re. BTG Pactual also acquired Swiss private bank BSI for US$1.68 billion from Italian Assicurazíoni Generali on 14 July. The Brazilian bank will thus manage assets of over US$200 billion and extend its business beyond Latin America.

M&A transactions flourishing

Mergers and acquisitions moved US$1.8 million in 2014Q1 in Brazil, the highest level since the global financial crisis. The volume of M&A transactions so far this year is already 70 percent higher than last year.

Insuring the big guns

American insurance company Aceh has acquired the high-risk portfolio of Itaú-Unibanco for US$1.5 billion. The portfolio includes such clients as Petrobras, Vale, and Odebrecht. With this transaction, Ace becomes the leader in this segment, with a 20 percent share of the market.

Economy in brief

GDP projections

A report from the Brazilian Ministry of Planning on 22 July reduced government expectations of economic growth to 1.8 percent and raised the inflation estimate to 6.2 percent. The new figures have the consequence of raising the estimate of government revenues from the Refis debt refinancing program, thus avoiding the need for further cuts in the federal budget.

The Institute for International Finance (IIF) has also revised its evaluation of the Brazilian economy, predicting economic growth of 1 percent this year and 1.5 percent in 2015.

The International Monetary Fund (IMF) has again reduced its Brazil projections, from 1.8 to 1.3 percent GDP growth in 2014 and from 2.7 to 2.0 percent in 2015. On 29 July, the IMF suggested that the Brazilian GDP may drop 3.75 percent in relation to the basic economic performance expected by the Fund, thereby including it among the most vulnerable emerging economies, beside Argentina, India, Indonesia, Russia, South Africa, and Turkey.

Finance Minister Guido Mantega immediately sought to disqualify the report.

Stimulus for some

Mauro Borges, minister of Development, Industry, and Foreign Trade (MDIC), announced on 4 July that the government still intends to launch a package of stimulus measures this year targeting the machines, equipment, and automotive parts segments of the economy.

President Dilma Rousseff said the ministry is planning a 10-year program to increase economic productivity. The program was initially suggested by the Brazilian Association of Machine Manufacturers (ABIMAQ), and will include a credit line for the sale of domestic machinery and an important line for National Bank for Economic and Social Development (BNDES) financing.

Industrial-sized deficit

The cumulative deficit of Brazilian industry over the last 12 months was a record US$108.4 billion. To blame are mostly the loss of competitiveness of Brazilian manufactured goods and the economic crisis in Argentina, normally a large buyer of Brazilian products.

Business news

Dongfeng disagreement

A case is being adjudicated before the International Court of Arbitration in London (LCIA) between Brazilian investors and Chinese state giant Dongfeng Motor. The manufacturer of heavy trucks had been expected to produce trucks at a factory at Pouso Alegre, Minas Gerais, but the R$1.67 billion joint venture was suspended after Swedish automaker Volvo bought 45 percent of the Dongfeng subsidiary that was to set up operations in Brazil.

Volvo denies any intervention in the decision process, and despite the setbacks, the Brazilian mining state considers that the project may still be viable. The original design of the plant would be the largest international project undertaken by Dongfeng and would provide a gateway to the Latin American market.

Microbial manufacture

American company Alltech will invest US$60 million to expand its plant at São Pedro do Ivaí, in the state of Paraná. The plant ferments algae in order to extract a fatty acid known as DMA (dimethyl acetal), used as animal feed and ultimately as a food additive for human consumption.

Phosphate fortunes

Russian company PhosAgro, the second-largest global producer of fertilizers, derived from phosphates, plans to establish its own trading company in Latin America. The most likely candidate to host it is Brazil, already one of the largest markets for PhosAgro.

Growing Agrex

One year after Japanese company Mitsubishi acquired an 80 percent controlling interest in Brazilian agricultural company Ceagro, rechristened Agrex, it has already announced an accelerated investment program aimed at efficiency gains and improved operational and financial performance over the next five years. The company has a significant presence in the grain chain, and Mitsubishi is rumored to be pursuing 100 percent ownership. Agrex officially denies this.

Tetra Pak plant

Swedish company Tetra Pak, which produces food packaging, on 10 July inaugurated the expansion of its factory at Ponta Grossa, Paraná. The plant represents an investment of R$200 million.

CSN seeks US assets

In its third attempt at acquiring US assets, Brazilian steel mill Companhia Siderúrgica Nacional (CSN) is seeking to buy Gallatin Steel, a Kentucky-based joint venture of Brazilian company Gerdau and Indian company ArcelorMittal. CSN had been negotiating the acquisition of two plants in the United States belonging to Russian group Serverstal but the deal fell through, as did a bid on a ThyssenKrupp plant in Alabama. CSN is Brazil's third-largest steelmaker. Reportedly it is seeking US assets to hedge against the prospect of recession in Brazil.

AKG in São Paulo

The German AKG Group, a manufacturer of cooling systems, announced on 22 July that it plans to build a radiator plant in Lorena, São Paulo, its first in Latin America and 14th worldwide. The unit will begin production in three years' time, but meanwhile AKG plans to start operations in Brazil at an already existing industrial site within the next nine months.

New planes for TS H

American company Trans States Holdings (TSH) has placed an order with Embraer for 50 E175-E2 jets, with options for a further 50. If all the options are exercised at list price, the deal will be worth US$2.4 billion. The second- generation E-jet is expected to introduce significant efficiencies in maintenance costs, fuel use, environmental impact, and performance. Deliveries are expected to begin in 2020.

Making heavy trucks

Chinese automotive manufacturer JAC Motors, which is building a factory at Camaçari, Bahia, already plans a second factory in the country, exclusively for the production of heavy trucks. The total investments in the Bahia factory will amount to R$1 billion by 2015.

Investing in automakers

Foreign investment in automotive companies rose to US$1.26 billion, its highest level in five years, an increase of 51.6 percent over 2013. In 2009, foreign investment in the sector reached close to US$2 billion.

Controlling air traffic

Brazilian firm Atech, part of the Embraer Defesa e Segurança group, was hired by the Airports Authority of India (AAI) to implement a system for the management and control of air traffic in India. The system will integrate data from airlines, airports, and control agencies. The contract is estimated to be worth US$18.5 million and the implementation is expected to take 30 months.

Cementing their efforts

Votorantim Cimentos, Brazil's largest cement producer, has joined forces with Spanish company Cementos Molins to form a new enterprise called Yacuces for the purpose of developing large projects in Latin America. Votorantim will take a 51 percent stake in the new venture.

The two companies are already partners in Cementos Avellaneda in Argentina and Cementos Artigas in Uruguay. The new agreement will involve the purchase by Yacuces of 66.7 percent of Bolivian cement company Itacamba, for US$18.6 million.

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