Author: Santiago Fittipaldi
It may not be the “spectacle of growth” that President
Lula promised, but Brazil’s economic recovery is becoming more robust and sustainable.

Although recent economic data point to a gradual economic recovery in Brazil that began last year, some local corporates have yet to benefit from the turnaround. First-quarter earnings reports were a mixed bag. While some analysts believe certain companies are being left behind on account of their domestic focus, others argue high interest rates are to blame. Still others contend poor governance may be a culprit.

First-quarter earnings presented some surprises, as a few companies came in below market expectations. While the nation’s energy generation and distribution sectors were boosted by government tariff hikes, electric utilities Cemig and Eletropaulo, for example, undershot analysts’ forecasts. Telecom provider Embratel reported a 10.8% year-on-year increase in net revenue and 14.8% rise in Ebitda, but overall profits were still down. Likewise, oil giant Petrobras saw net profits decline by 28.4%, with net revenue down 5.3% and Ebitda down 8.5%.

The outlook for the second quarter is improving, but exporters seem to be taking the lion’s share of recovery benefits. “Decent value in the exchange rate provides profits for most export-related activities, and so exporters have been profiting most,” says one Brazilian investment banker, who feels electrical utilities—meeting increased demand from a rebounding industrial sector—and mobile telephony companies are also poised for a strong quarterly showing.

Exporters may still fare best, as the nation’s recovery, evidenced by 2004 GDP growth expectations of 3.5%, appears to be export driven. May’s record-high $3.1 billion trade surplus brought the year-to-date surplus to a hefty $11.2 billion that month. “The ongoing adjustment to the trade side is offsetting a lower availability of capital,” said a report by Credit Suisse First Boston. “We expect the trade surplus to reach at least $24 billion this year, leading to the second consecutive year of a current account surplus.”

Some analysts disagree that exports are driving the comeback and feel improved domestic sales will be reflected in the second quarter’s earnings outcome. According to the national statistics agency, retail sales rose 11.6% over the year to March in value terms. The largest gains were in automotive and furniture sales, which rose 32% and 36.6% year-on-year, respectively, in March, aided partly by an increase in credit availability. Interestingly, more basic items did not fare as well, with the ABRAS supermarket association reporting a 2.4% year-on-year decline in sales for the first quarter of 2004.

“We believe that the upswing in economic activity that got under way late last year will continue in the months ahead, with domestic consumption and investment growth taking over as the main drivers,” ABN AMRO commented in a report published in June. According to the bank, consumer demand should benefit more from rising incomes than from expanding credit, while investment spending should be supported more by the accelerator effect rather than by valuation and cost-of-capital effects.

Financing remains a problem, as high interest rates may hold back both investments and consumer spending. “We remain concerned that the high level of real interest rates will hold the economy back a bit, though we believe that growth is here in 2004,” says Bear Stearns. While the central bank’s benchmark Selic rate has been held at 16% since the beginning of the year, the average monthly rate on bank loans stands at 44.7%.

“While most Americans can live on credit for as long as two years by re-mortgaging their homes or juggling credit cards, Brazilians live under much tighter credit conditions,” contends InfoAmericas, a Miami-based consulting firm, in a research paper published last year. According to the firm, many Brazilians are loath to use credit cards unless they can pay back the charges without incurring interest, while middle-class consumers use post-dated checks as a form of short-term financing.

“While the elite can bank offshore, the vast majority keep their savings in local currency at home where they earn less than the inflation rate,” adds InfoAmericas. “For all these reasons, large-ticket purchases can be put off for years until enough cash is saved. Then consumers tend to move quickly to replace an aging refrigerator, computer or car.”

Companies seeking financing alternatives have helped revive local debt and equity markets. Brasil Telecom, a telecom provider, for example, in June approved a 500 million real ($160 million) five-year non-convertible debenture issue—its fourth such deal. In June the Inter-American Development Bank (IADB) approved a partial credit guarantee of up to $68 million for a local real-denominated bond issue for Telemar, the country’s largest telecom operator, in a seven-year deal expected to total the equivalent of $170 million. In a move to stimulate the debenture market, the IADB itself launched a real-denominated bond in April.

In May Natura Cosmeticos, a leading producer of consumer products, launched an IPO, the first on the São Paulo stock exchange since February 2002. That deal was followed by IPOs in June for Gol, a low-cost airline carrier, and for América Latina Logística (ALL), a logistics and railway company. Other deals are said to be in the pipeline.

Taxes are another area of concern. Brazil’s overall tax burden—including federal, state and municipal taxes—rose to 35.7% of GDP last year, up from 35.5% in 2002. “This is one of the highest tax burdens among countries with a level of development comparable to that of Brazil,” said Goldman Sachs, which noted the tax burden stood at 29.7% in 1998. “The tax burden in Brazil is unevenly distributed and distortionary. This imposes a large burden on legitimate businesses and pushes many workers into the informal sector of the economy.”

Despite these issues, the Planning Ministry expects the investment rate to rise to 19.7% of GDP, compared with last year’s 18%. Several companies have already unveiled ambitious investment programs—such as Petrobras’s $53.6 billion program for 2004-2010—while foreign investors are also making a comeback after FDI fell from $16.6 billion in 2002 to $10.1 billion in 2003. This year, FDI is expected to rise to $13 billion. A survey of large multinational firms conducted by the United Nations Conference for Trade and Development (UNCTAD), published in June, found Brazil was outranked only by China as the country that offers the most opportunities for foreign investors in 2004-2005.

But attracting greater investment flows—both foreign and domestic—may also hinge on the corporate sector’s ability to tackle basic governance issues. According to the Institute of International Finance (IIF), a Washington-based association of global financial institutions, Brazilian companies must improve their governance practices, including extending voting rights to small shareholders and increasing the number of independent directors on their boards. The IIF notes that, while market capitalization as a share of GDP has averaged 100% in Chile and 130% in the US over the past 10 years, it was only 30% in Brazil. The IIF argues that companies must become more open in a country where 52% of the top 100 non-financial firms are family-controlled.

Analysts will be looking closely at second-quarter earnings to determine whether a recovery is truly under way. Most already agree that the effects of Brazil’s traditional boom and bust cycles may be diminishing. “The ongoing recovery is probably short of the ‘spectacle of growth’ promised by President Lula da Silva one year ago,” said ABN AMRO, “but it is probably closer to balanced growth than any of the Brazilian upswings that have occurred since the economy emerged from hyperinflation in the mid-1990s.”

Brazil’s best Banks


Banco Itaú

Banco Itaú has posted nearly $1 billion in annual pre-tax income for five years in a row, making it one of Latin America’s most profitable financial institutions. While most Brazilian banks were struggling to survive the fallout from last year’s sharp currency devaluation, Itaú posted $1.09 million in net income. The bank has grown through high-profile acquisitions.


Banco do Brasil

Banco do Brasil offers the Brazilian agricultural and agribusiness sectors a wide portfolio of financial products to support their expansion. The bank has increased its agricultural credits by easing requirements and making loans available to a larger cross-section of farmers, while committing to raising its financial support for the 2005-2006 harvest by 30%.



Hedging-Griffo is a major player in the Brazilian agricultural futures market and provides clients with advice on hedging strategies. It is a financial intermediary in both domestic and international commodities transactions and acts as broker for hedgers on international markets for such key Brazilian commodities as coffee, orange juice, sugar, cotton, cocoa and soybeans.


Banco do Brasil

As a government-owned commercial bank, Banco do Brasil extends export credits to a broad mix of clients, including state governments, public and private corporations and SMEs. It also manages export credit lines provided to Brazil by international entities such as the US Eximbank and the Japan Bank for International Cooperation.


Banco Bradesco

Banco Bradesco, Brazil’s largest private bank, offers clients a wide variety of foreign exchange services. The bank’s forex division has a strong focus on the country’s growing foreign trade sector, where it helps clients complete trade transactions. It also handles a large portion of money remittances sent home by Brazilian workers residing abroad.


Banco Pactual

For more than two decades, Banco Pactual has been Brazil’s leading local investment bank. Amid last year’s tough Latin American market conditions, Pactual provided corporate clients with financing solutions by bringing new debt and equity issues to market. Much of its success is based on its relatively small scale, allowing for greater flexibility and execution speed.


Banco Nacional de Desenvolvimento Econômico e Social (BNDES)

As the Brazilian federal government’s economic development bank, BNDES is legally committed to supporting projects that contribute to the country’s economic and social growth. As such, BNDES finances many of the country’s large-scale infrastructure development programs, including industrial modernization projects aimed at boosting the country’s competitiveness.


Banco do Brasil

A one-stop trade finance shop, Banco do Brasil offers clients services that include forex transactions, standby letters of credit, trade draft discounts and other guarantees to facilitate import and export operations. It also has a trade regulation consulting division and is involved in the federally funded Proex export financing program.


Banco do Brasil

In a country hard hit by sharp currency devaluations and still tackling the ever-present inflation bogey, Banco do Brasil offers clients effective treasury and cash management solutions. Last year the bank appointed The Bank of New York to provide CLS third-party settlement services, allowing it to integrate and optimize its treasury, trading and cash management functions.



Companhia de Bebidas das Americas (AmBev)
Already the world’s fifth-largest brewer, AmBev has announced a merger with Belgium’s Interbrew that will create the world’s largest brewing company. InterbrewAmBev will have a 14% global market share. AmBev holds a 70% share of the Brazilian beer market and is one of the world’s most profitable beverage companies, with ROE above 30%.


Braskem is Latin America’s largest petrochemicals company and one of the five largest private industrial companies in Brazil. Already a leader in Latin America’s thermoplastics market, the firm is committed to R&D; investments that will further boost its role as an international player. It ranks as one of Brazil’s top exporters.


Construtora Norberto Odebrecht
Odebrecht took on its first international construction project in 1980, and its name continues to show up at building sites worldwide as a leader in the fields of engineering, procurement, construction and management. The organization’s “Vision 2010” program aims to make it one of the five largest business groups in the southern hemisphere.


Natura Cosmeticos
Just a struggling cosmetics store in 1969, Natura has blossomed into Brazil’s largest consumer products company, with a focus on personal well-being and social responsibility. More than 355,000 independent “consultants” conduct direct sales of Natura products nationwide. Its portfolio includes more than 510 beauty and personal hygiene products.


One of the world’s leading aerospace manufacturers, Embraer is taking the lead in the development of a new generation of regional and executive jets that is helping to fill its order book. As of March, its order backlog totaled $10.9 billion, and international airlines continue to place orders for Embraer’s more cost-effective aircraft.


Companhia Paranaense de Energia (COPEL)
Ranked as one of Brazil’s largest energy companies, Copel has more than 3 million clients and supplies nearly 6% of Brazil’s energy. It not only serves its home state of Paraná, but also “exports” its surplus output to other Brazilian states. COPEL will celebrate its 50th anniversary in October.


Sadia is Brazil’s largest exporter of meat-based products, but its product lines extend far beyond meats to include pasta, margarines and desserts. Established in 1944, Sadia’s brand products are sold in more than 65 markets worldwide, for which it has become one of the world’s leading producers of quality chilled and frozen foods.


Companhia Vale do Rio Doce (CVRD)
CVRD is the world’s largest iron ore miner, with operations extending far beyond Brazil. In May CVRD announced some $5 billion worth of production agreements in China. Recent market buzz has it that the company may be in talks to acquire a controlling stake in Canada’s Noranda—a major producer of zinc and copper.


Votorantim Celulose e Papel (VCP)
Despite its role as one of the world’s leading pulp and paper producers, VCP’s environmental awareness projects have become a model for other Brazilian companies to follow. The company’s exports have been soaring in recent years, with export revenues nearly doubling to $373 million in 2003 from $199 million in 2002.


Petroleo Brasileiro (Petrobras)
Petrobras is a fully integrated oil exploration, production, refining, sales and transport company. Petrobras operates 93 production platforms, more than 10 refineries and nearly 16,000 kilometers of oil and gas pipelines. Using its own resources, the company is in the midst of a 2002-2005 $4.2 billion investment plan to boost its refining capacity.


Companhia Brasileira de Distribuição (CBD)
CBD remains Brazil’s largest retailer. The conglomerate operates the Pão de Açucar and Sendas supermarkets, CompreBem discount grocers, Extra hypermarkets and Extra Eletro home appliance stores. The various formats allow CBD to tap a broad spectrum of consumer types, while its network of regional distribution centers keeps its stores well-stocked.


Tele Norte Leste/Telemar
Telemar is Brazil’s largest telecommunications company, with some 18 million phone lines installed. In addition to its strong performance in the fixed-line market, it also offers Internet, data transmission and mobile telephony services and continues to gain market share in all segments. Telemar’s operating region covers 64% of Brazilian territory and produces 40% of GDP.

Souza Cruz
A subsidiary of British American Tobacco (BAT), Souza Cruz holds a nearly 78% share of the Brazilian market for tobacco products and is one of the top five largest private companies operating in Brazil. Last year Souza Cruz commemorated the centennial of its founding by a Portuguese immigrant. Today the company exports to more than 50 countries.


Companhia de Saneamento Basico do Estado de São Paulo (SABESP)
As the water utility for the state of São Paulo, Sabesp services some 25 million clients and produces 90,000 liters of treated water per second. The company not only is the largest water and sewage company in Latin America, but is also rated as one of the world’s most efficient firms in its sector.

Santiago Fittipaldi