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August 2011 Brazil Business Review

By: Phillip Lee
Editor, Brazil Business Today

The U.S. credit rating downgrade dominated Brazilian news in early August, but Brazil said it had no plans to sell its U.S. Treasuries or change its foreign currency reserves, despite being the fourth largest holder of U.S. treasuries. Brazil's president even criticized Standard and Poor's for the downgrade.

Nevertheless, Brazil's stock market, already at its lowest level in two years, felt the effects of the U.S. downgrade. Later in the month stocks began to bounce back on improved inflation forecasts, but the Bovespa still ended August down 4% for the month and 18.4% for the year.

Although Brazil itself made no drastic policy changes after the U.S. downgrade, the Union of South American Nations met to discuss coordinating policies of member countries to deal with the continuing economic crises in the U.S. and Europe. One of South America's biggest concerns is currency appreciation. The Brazilian real is the world's most expensive currency, prompting the government to slap a tax on currency futures in late July. Despite such continued efforts, the Brazilian currency remains strong, closing August at 1.59 reais to the dollar, just slightly weaker than its 1.55 start for the month.

Although Brazil boasted that it was in a strong position to weather another global crisis immediately after the U.S credit rating downgrade, the country is now beginning to react to the economic downturn in developed markets. On the last day of August, Brazil's central bank cut its benchmark interest rate from 12.5% to 12%. The cut came after reports showed industry results and industry job creation fell short of expectations during the month of July. The move came as a surprise and is most likely a signal to Brazil's industry that the central bank will act to keep Brazil's economy growing.

Market developments of note for foreign investors during August included:

  • Government efforts to slow Brazil's economy coupled with the global economic downturn are beginning to have some effect, driving down Brazil's economic growth forecasts.

  • The Japanese credit rating agency R&I upgraded Brazil's credit rating to BBB. Moody's, Standard and Poor's and Fitch have also upgraded the country's credit rating recently, suggesting Brazil's economy may be further decoupling from the U.S. economy.

  • Brazilian billionaire Eike Batista lost around US$ 2 billion from a 9% drop in market value of his oil, gas, mining and transportation conglomerate EBX.

  • The Ministry of Finance said it will raise its primary surplus target from R$ 81.8 billion (US$ 51.5 billion) to R$ 91 billion (US$ 57.3).

  • Loan defaults in Brazil hit the highest level since February 2010.

  • President Rousseff reaffirmed her stand against corruption after losing four ministers and other high government officials.

  • China became a leading export market for Brazil's cooperatives, though many are starting to question Brazil's dependence on China.

  • Brazil named a new Minister of Agriculture after the previous minister stepped down following corruption allegations.

  • HSBC said Brazil's initiatives to stem the appreciation of its currency and enhance the competitiveness of industry are efforts to avoid "Dutch disease".

  • Brazil's Northern Region saw the highest growth in exports during the first seven months of the year.

Notable M&A activity:

  • Japanese food and beverage maker Kirin agreed to pay 199 billion yen (US$2.6 billion) for a controlling stake in Brazilian beer and soft drink company Schincariol Group.

  • Pioneer Corp and the Asia Optical Group announced a manufacturing joint venture in Manaus City, Brazil.

  • Hydro development company SN Power said it will take a 40.65% stake in Brazilian renewable power company Desenvix.

  • Toshiba established a semiconductor design house joint venture with its Brazilian affiliate.

  • Brazil's antitrust authority approved the filing for the airline merger between Chile's LAN and Brazil's TAM.

  • Walmart hired UBS AG as its adviser for the potential purchase of Carrefour's Brazilian unit.

  • Shopping center owner Westfield Group made its first new market entry in 11 years with the purchase of a 50% stake in Brazil's Almeida Junior Shopping Centers SA.

  • Brazilian meat processor Marfrig said it will pursue acquisitions despite losses.

  • M&A transactions in the insurance sector grew by 66.7% in the first half of 2011.

  • The Brazilian Development Bank increased its holding in meat giant JBS from 17% to 30.4%.

  • QGEP Participacões , a Brazilian oil and natural gas company, signed a contract to buy a stake in an offshore exploration block from the local unit of Royal Dutch Shell.

Other investment activity:
  • Brazil's stock index, the Bovespa, closed at its lowest level in nearly two years at the beginning of August.

  • Second quarter profits for Brazil's largest private bank, Itau Unibanco, were up nearly $2 billion over last year.

  • Brazil's Banco Votorantim said it aims to raise US$768 million through three renewable energy-focused private equity funds.

  • Pioneer Corp announced a joint venture with Taiwan's Asia Optical Co. to produce digital cameras in Brazil.

  • Sony added the LM Brazilian High Dividend Equity Fund to its investment trust offerings.

  • Gold mining company Brazil Resources Inc. commenced trading on the OTCQX international market to facilitate trading for U.S. investors in particular .

  • The Brazilian tourism company controlled by Carlyle Group, CVC, announced plans for an initial public offering.

  • The Brazilian development bank announced about US$ 2.6 billion in financing for the country's oil and gas sector.

  • The government announced plans to boost microcredit through uniform interest rates.

  • Banco do Brasilsaid it will launch its offer to buy more shares in Argentina's Banco Patagonia starting September 1.

  • American agribusiness and food company Bunge announced plans to invest US$ 2.5 billion to increase its sugar and ethanol production in Brazil.

  • Petrobras announced plans to build the world's largest sugarcane ethanol distillery.

  • The government cut certain taxes to spur telecom investment in the construction of fiber optic cable networks.

  • G5 Advisors, Evercore Partners Inc.'s joint venture in Brazil, announce plans to raise US$ 1 billion for Brazilian equity funds.

Comments and questions:

Currently living in Brazil, Phillip Lee is a partner with Clairfield International's Brazilian affiliate. He has an MBA in Finance and International Business and has had a distinguished twenty-year career in mergers & acquisitions, strategic market entry and financial management in some of the world's fastest growing economies.
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