Understanding recent changes in Brazil

11/01/2017

Brazil, the true South American giant and the world’s eighth largest economy, has suffered several political and economic changes in recent months.

After long political processes that strictly respected the country’s Constitution and Institutions, a new government with strong liberal tendency and pro-market orientated is leading the country. The new government policy aims to match the high expectations of the Brazilian society in general, and in particular entrepreneurs and almost twelve million unemployed people hit by the economic crisis that has accumulated over the past three years.

In fact, Brazil is about to make major changes in its regulatory, economic and legal landmarks. The goal is to attract investors, especially foreigners, to carry out a number of priority projects in infrastructure and explore great business opportunities in various sectors.

The first movements of these changes have already been drafted in the capital, Brasilia, and in the major economic and financial center of the country, São Paulo. Projects for economic liberalization, reduction and control of public spending, new concessions of services and public works, privatization of state-owned companies, and the opening of several economic sectors to foreign capital are highlighted, as well as reforms of social security, tax and labor systems.

Certainly some of these reforms, particularly the tax and labor, will require more time, cohesion and political efforts to be implemented. However, the new direction and willingness of the government represent good news for investors, who were disappointed by the lack of real possibility for changes in the past years.

Changes regarding to the liberalization and opening of the economy, reduction and control of public spending, new concessions of services and public works, privatization of state-owned companies may suffer minor obstacles, although political difficulties are not negligible in the Brazilian political system. These issues are the challenges of the new government in the short term.

The new Brazilian diplomatic stance already reflects this direction, because it is closer to the opening of the country and its integration in the global market. The economic and commercial interests tend to prevail over the political and ideological interests, that guided Brazil’s foreign policy in the last thirteen years. Moves in this direction are already clearly visible in the Mercosur and in Brazil’s rapprochement with the most important world economies.

Projects for constitutional amendments and new laws are being negotiated politically in order to allow greater fiscal control, combating public spending. This may especially reassure the financial markets about the solvency of Brazil to honor its commitments and debts in the medium and long term.

Business opportunities

Along the movement of Brazil in search of overcoming of its economic crisis, foreign investors will find a favorable environment to their investments. Among the main economic factors, we highlight the strong depreciation of the Brazilian currency (Real) in the recent months, and the relatively low price of assets and shares of Brazilian companies. In other words, Brazil is cheap.

Most Brazilian companies need strategic partners and investors to continue and advance their activities, either because of debt, cash or expansion needs. Similarly, the market of mergers and acquisitions also envisions a favorable horizon to foreign investors. This opens up huge business opportunities for investors and foreign companies.

Whether through buying stakes in Brazilian companies, joint ventures or even mergers and acquisitions, companies and foreign funds have a considerable range of opportunities.

Agribusiness

Agribusiness is essential for the economy and the balance of payments in Brazil. This sector represents 23% of the Brazilian Gross Domestic Product.

The estimates of the Organization for Economic Cooperation and Development (OECD) and the United Nations Food and Agriculture Organization (FAO) said that Brazil will take the lead of world exports of the agricultural sector in 2024.

The continued growth of the crop by 2024 will be based on improved productivity and expansion of crops. The plantations will occupy a total area of 69.4 million hectares in 2024. Much of this expansion will occur through sugarcane, cotton and soy.

Soybeans will remain the main agricultural product of Brazil, currently second largest exporter after the United States. However, sugar (1st  world producer), coffee (1st world producer), orange juice (1 world producer), beef (2nd world producer), ethanol (2nd world producer), poultry (3rd world producer), pork (4th world producer), cellulose (4th world producer) and corn (4th world producer), will continue to have considerable importance.

Brazil is an excellent opportunity for agribusiness, in view of these optimistic forecasts, the current Brazilian interest to attract foreign investors, the depreciation of the Real in recent months, and the relatively cheap price of land.

One of the obstacles to foreign direct investments in agribusiness concerns restrictions on the purchase or lease of rural land by Brazilian companies with majority foreign capital. Since 2010, through a Legal Opinion of the Attorney General, it was established some restrictions that become more bureaucratic foreign investment in rural land.

In recent months, the new government acknowledged the mistake made by the previous administration, pledging to review these restrictions and bureaucracy. This will allow the feasibility of huge investments by foreign companies and funds.

We are following the developments of this issue carefully, so that we can immediately inform our clients and friends about new business opportunities. We encourage investors to consider prospects on land purchases and leases, to conquer the front in future opportunities.

Public concessions and privatizations.

To strengthen these opportunities and, considering the huge Brazilian lack of investment in infrastructure, the new government prepared a new public concessions and privatization program, correcting mistakes made by previous administrations. Among the opportunities identified initially by the Brazilian government, we highlight the following projects:

Transport sector

Airports (scheduled for the first half of 2017):
• Concession of the Cities of Porto Alegre, Salvador, Fortaleza and Florianopolis.

Ports (scheduled for the second half of 2017):
• Concession of Santarém fuel terminals.
• Concession of wheat terminal in Rio de Janeiro.
Roads (scheduled for the second half of 2017):
• Concession of BR-364, BR-365 in the States of Goiás and Minas Gerais.
• Concession of BR-101, BR-116, BR-290, BR 386 in the State of Rio Grande do Sul.

Railways (scheduled for the second half of 2017):
• Concession of North-South railway, in the States of São Paulo, Minas Gerais, Goiás and Tocantins.
• Concession of Fiol railway in the State of Bahia.
• Concession Ferrogrão railway in the States of Mato Grosso and Pará.

Sector of Oil and Gas

(Scheduled for the second half of 2017).
• 4th round of bidding of complementary fields (land) of oil and gas under the concession regime.
• 2nd round of bidding under production sharing regime (usable areas).

Energy sector

(Scheduled for the second half of 2017)
• Amazonas Distribuidora de Energia
• Boa Vista Energia
• Cia. Acre Electricity
• Cia. Energetica de Alagoas
• Cia. Piaui Energy (first half of 2018)
• Centrais Elétricas de Rondonia
• Companhia Energética de Goiás (CELG) (date unknown)

Hydropower.

(Scheduled for the second half of 2017)
• St. Simon, between the State of Minas Gerais and Goiás.
• Miranda in State of Minas Gerais.
• Volta Grande in the State of São Paulo.
• Pery in the State of Santa Catarina.
• Agro Trafo in the State of Tocantins.

Mining

(Date unknown)
o Phosphate between the States of Paraiba and Pernambuco.
o Copper, lead and zinc in the State of Tocantins.
o Coal in the state of Rio Grande do Sul.
o Copper in the State of Goiás.

Sanitation.

(Scheduled for the first half 2018)
o Cedae in the state of Rio de Janeiro.
o Caerd in the State of Rondonia.
o Cosanpa in Para State.

Lotery

(Privatization – date unknown)
o Lotex.

We hope to help the reader to understand the Brazilian current scenario and find good local business opportunities.

 Wagner Garcia Botelha