After a poor 2012, the central bank forecast growth of 4% for 2013; it has already cut this to 3.1%. International investors are going elsewhere in the region. With domestic investment falling, Brazil will do well even to hit that target.
The linked challenges of political risk and a slowing economy have hit investor appetite at home and abroad. Investment – already at low levels – has stalled, slowing GDP growth to 1% in 2012. Consumption has become the government’s only policy to sustain growth, but that engine is spluttering, with consumers overleveraged and persistent inflation complicating demand-side initiatives. The central bank has belatedly begun to increase the Selic policy rate. It was raised 25 basis points to 7.5% in mid-April, a lukewarm response to inflation that now exceeds the target band of 4.5%, plus or minus two percentage points. Most economists had expected a 50bp rise to signal intent to the market, restore some of the bank’s credibility concerning its inflation-targeting mandate (although when did you last hear a central bank official even discussing the reduction of inflation to the mid-range target?) and have a stronger impact on the inflationary problems.
“The combination of weak growth and worrisome inflation, alongside interventionist policies, has dented foreign investor confidence. The local business sector seems to be cautious about investment decisions, and gross fixed-capital formation has underperformed what the low level of interest rates would suggest,” says Joyce Chang, global head of fixed-income research at JPMorgan, who says that longer-term reform is required to reawaken international interest in the country. “At the beginning of [president Dilma] Rousseff’s mandate, she approved public-sector retirement system reform, but more recent measures have focused on short-term stimulus or reducing costs through tax exemptions. Markets will look for structural measures that move beyond fiscal exemptions to focus on long-term growth.”
The data support Chang’s assertion. A couple of years ago, Brazil was implementing controls to fend off capital inflows from abroad. Now there are questions as to whether or not FDI is slowing, and, if so, how the country could fund its current-account deficit. Interest in the country from international investors is waning. Although Latin America bucked the trend for equity-fund outflows at the beginning of the second quarter – with the other three main emerging market fund groups experiencing net outflows – Brazil suffered a seventh consecutive week of outflows, according to data provided by EPFR. At the beginning of April, international investors had taken more than $1.4 billion out of Brazilian equity funds at the same time as Mexico equity funds had taken in more than $1.2 billion. In the first quarter of 2013 the Bovespa equity index had its worst three-month period in 18 years, falling 7.55%.
Debt capital market transactions from Brazilian issuers have also slowed. Although it’s hard to identify the precise cause of the reduction of debt capital raised in the markets by Brazilian companies, the drop-off is stark: in the first quarter of 2013 total issuance was down 60% from the $30.1 billion in the same quarter in 2012. Data supplied by Dealogic show that deal activity fell to 30 deals, from 52 in the same period in 2012, the lowest number since 2009. International issuance, at $8.5 billion, accounted for 71% of the total first-quarter volume, down 11 percentage points in a year and the lowest first-quarter proportion since 2008.
Some of the fall in volumes might be because companies pre-funded debt financing needs last year when conditions in the market were near-perfect. The fall in the proportion of international financing can also be explained by better pricing and tenor becoming available in the local markets, but when combined with the net equity outflows it is clear that the appetite for Brazilian credit and equity is waning.
Even more noteworthy is the M&A data data: in the first quarter of 2013 there were 135 deals of Brazil-targeted M&A worth a combined $5.1 billion. That figure is down 79% from the first quarter of 2012 ($24.2 billion) and down 68% quarter on quarter from the fourth quarter of 2012 ($15.7 billion). The biggest deal in the quarter was E.On’s $702 million acquisition of 24% of MPX Energia – a distressed-sale situation and a change in tone for landmark Brazilian acquisitions of recent years.
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