Investments poised to shrink for fourth year in a row

The new political crisis has increased chances investments will shrink for a fourth consecutive year. With uncertainties surrounding the continuity of the Michel Temer government, business confidence should be affected, harming prospects of improvement in gross fixed capital formation (GFCF, a measure of what is invested in machinery and equipment, construction and research).

In this uncertain context, some firms have reduced projections for investments in 2017, in some cases starting to forecast a drop in the demand component that has fallen the most in recent years. Investment has declined by no less than 29.8% since the third quarter of 2013. In the series of the Brazilian Institute of Geography and Statistics (IBGE), which starts in 1996, there is no record of a remotely similar contraction.

GFCF shrank almost 20% between the fourth quarter of 2008 and the first quarter of 2009 in the wake of the global financial crisis, but soon recovered — in the last three months of 2009, it had already surpassed the level seen in the third quarter of 2009.

In the first three months, GFCF fell 1.6% on seasonally adjusted basis compared with the previous quarter, a worse-than-expected performance by market estimates — the average estimate of economists polled by Valor Data pointed to a 0.3% decrease. In the last 14 quarters, the component dropped in 13 — the only exception was a 0.1% gain from April to June last year.

The monetary-easing cycle and positive outlook to move reforms forward in Congress, especially the pension reform, were pointing to a recovery of investments this year, but the new crisis has clouded the outlook. For 2018, Tendências Consultoria Integrada reduced its GFCF growth projection to 6.8% from 9.2%.

This context is aggravated by the “absurd idle capacity in industry and in the installed park of constructions,” as pointed out by economist Francisco Pessoa Faria, of LCA Consultores. “If the crisis can affect a demand component more strongly, that is investment.”

As for Tendências, it has maintained its projection of a 0.3% GDP expansion in 2017, even with the worsened prospects for investments, because the consultancy now expects a better performance of both household spending and the external sector.

According to Tendências’ calculations, a 1% drop in the manufacturing industry’s confidence in one month generates a negative impact on GFCF of 0.021% after two months. Although the impact is apparently weak, this analysis incorporates a 1% decline in confidence for just one month. The decline in confidence should continue for at least the next two quarters and be more intense.

The first goal is to reduce idle capacity. In some cases, some investment should be made to restore capital depreciation, says economist Luiz Castelli, of GO Associados. The company exchanges an obsolete machine for a newer one, but without major plans of expanding production capacity.

The fall in gross fixed capital formation has led the investment rate to sharply shrink in recent years. In the first quarter, it stood at 15.6% of GDP, compared with the 20.7% of GDP seen in the same period of 2014. It ‘s a lower number than many emerging countries. Last year the rate stood at 19.5% of GDP in South Africa, 21.6% of GDP in Chile, 25.6% in Russia, 31.4% of GDP in India and 44% Of GDP in China, according to the International Monetary Fund.

Such a low investment rate has extremely negative consequences for the economy, as highlighted by Alberto Ramos, director of research for Latin America at Goldman Sachs. The stock of declining capital impairs productivity, reduces potential growth (which does not accelerate inflation) and will hinder the recovery of economic activity, he writes in a report. Given the high idleness in the economy, the country could grow for several quarters above its potential pace without causing relevant inflationary pressures. But, once installed capacity is met, Brazil will possibly have to move to discouraging rates in order to avoid price hikes.

Source: Valor Econômico

Real estate once again drawing attention despite political crisis

The acquisition of real estate assets is once again drawing the attention of asset managers focused on the industry, despite the intensification of the political crisis in the country. The asset managers look at the long term and get ready for the moment in which the economy resumes growth and starts heating up demand, mainly for warehouses and office space. There are those who are also interested in the residential segment. There are talks for new financing efforts, and those who already have firm funds available seek assets for disbursing part of them.

Even with the worsening of the political crisis, Hemisfério Sul Investimentos (HSI), Brazil’s largest platform for real estate private-equity funds, maintains its intention announced in January of disbursing between R$1 billion and R$1.5 billion in the purchase of assets this year. “It’s not a temporary hiccup that’s going to change our strategy, with which we remain optimistic,” said Thiago Costa, the HIS partner responsible for acquisitions. Resources for financing acquisitions are part of a $750 million fund for which financing was concluded one year ago.

HSI – which has R$10 billion in assets under management – is interested in warehouses, residential segment, office space and shopping centers. In the first quarter, HSI bought a finished warehouse and two under construction. In the residential segment, the asset manager has purchased land and announced in April a joint venture with Nortis, of businessman Carlos Terepins, for the development of residential projects of medium and high standards in the city of São Paulo, to be launched in early 2018.

“Short term volatility can’t mask long-term opportunities, says RB Capital partner, Marcelo Michaluá. RB’s main bet are well-located distribution centers. The company has R$2 billion in assets under management invested in real estate and infrastructure funds.

Hedge Investments announced that it plans to begin raising money in the second half through funds – totaling between R$1 billion to R$1.2 billion – for real estate investments in warehouses, office space and shopping centers. The financing will be carried out over 18 months.

André Freitas, a partner at Hedge, thinks the industry’s recovery will take place first in the warehouse segment, likely by the year’s end. Potential tenants have already begun to seek, Mr. Freitas said, construction projects built to suit. The asset manager hopes for an improvement in the office-space market in two years, but believes that the recovery for Triple A standard spaces could begin in 2018. The expectation for the shopping center segment is for the recovery to occur in three years.

Credit Suisse Hedging-Griffo (CSHG) — which has R$5 billion in real estate assets under management and oversees 45 ventures – has already announced that it plans to raise new capital through a real estate investment fund (FII). CSHG plans to double the total amount of assets under management within three years.

For Bruno Laskowsky, director for real estate assets at CSHG, the markets for commercial office space, shopping centers and warehouses are likely to resume growth in late 2018 or in 2019. This year the asset manager will focus on increasing profitability of office space, shopping centers and warehouses segments, with the reduction of vacancy and improvement of asset quality.

Brio, whose control is shared by Jereissati Participações and Sollers Investimentos will raise in the coming months more than R$100 million for investment in the medium-high and high-income residential segment. The asset manager focused on the real estate market spent three years practically in a holding pattern.

Brio plans to use the proceeds to buy stakes in medium-high and high standard residential projects in São Paulo, that are less dependent on bank financing. The asset manager believes the perspective the country will advance reforms justifies its expectation of economic recovery.

RBR Asset Management, which has R$700 million under management distributed in six investment vehicles, recently purchased its first corporate building in São Paulo for R$41.3 million. The asset manager intends to make new acquisitions of corporate properties for lease in well-located areas in the city.

In the residential segment, RBR purchased four plots — three of them with a profile suited to federal program My House, My Life — and will acquire four to six other areas this year. The payment of land will be made only after the projects’ development registration. “Brazil still brings many uncertainties, says one of RBR’s partners, Ricardo Almendra. Projects under the housing program will be launched this year, while ventures for the middle and upper-middle classes, starting in 2019.

Mr. Almendra said the investments planned for development are maintained, even with the worsening of the political crisis, but “filters for debt transactions have become more restrictive.” RBR purchases real estate receivables certificates (CRIs) and participates in the issue of these securities.

The coordinator for real estate investments at Provence, Vitor Morosine, says that the company’s perception is that there are more opportunities in the 2 and 3 income brackets of My House, My Life housing program, financed with resources from the Workers’ Severance Fund (FGTS), and high standard properties, which depend less on credit. “But what’s most important is that they are very good partners in what they do and that they have proven experience,” Mr. Morosine said.

Source: Valor Econômico

Analysts see possibility of 100-basis-point rate cut in July

The minutes of the latest Monetary Policy Committee (Copom) meeting reiterated aspects already addressed by the Central Bank last week, but sounded slightly dovish, that is, leaning to rate cuts, in relation to the statement of the decision of cutting the rate by 100 basis points. This way, it maintains alive the possibility of repeating the 100-basis-point cut in the Selic benchmark rate at the July’s meeting, analysts say.

In a sign of that, interest rate futures traded on B3 fell on June 5, the largest drop in 11 days. The difference between the interbank (DI) rates of January 2019 and January 2018 declined by half, to 7 basis points on Tuesday from 16 basis points in the previous day. The 9 point-decline was the steepest in two weeks. In practice, this shows the market sees greater chances of stability in the Selic over the next year. Recently the interest rate curve had embedded a 100 basis-point gain in the policy rate in 2018.

For some analysts, the document released on June 5 seemed a Central Bank (BC) attempt to secure more flexibility in the monetary policy decisions. The reason would be precisely the scenario of uncertainty which, according to the Copom recommended last week, “not predicting the possible pace to be adopted in the future.”

In paragraph 19 of the minutes, the Copom makes clear that the current conditions give room to the continuity of the monetary easing and that this understanding already takes into account the risks to the baseline scenario and the estimates of length of the cycle.

A little later, in paragraph 22, the members say they consider “adequate” a “moderate” reduction of the pace of rate cuts. But they stress that this pace will continue depending on how the economic activity performs, on the balance of risks, on possible reassessments of the estimate for length of the cycle and on inflation projections and expectations.

In general, the market has still been avoiding changing dramatically its expectations for GDP and inflation. According to the median of projections in the BC’s Focus survey, the market reduced the expected GDP growth in 2018 from 2.5% on May 16 — before the eruption of the political crisis — to 2.4% late last week, the latest available data.

In the same period, the forecast for inflation index IPCA in 2017, for example, was lowered to 3.9% from 3.92%. And the projection for 2018 rose slightly (to 4.4% from 4.37%), but still below the midpoint target, of 4.5%.

Source: Valor Econômico

Petrobras and Banco do Brasil join governance model of state companies

The two largest state-controlled companies listed on the Brazilian stock market, Petrobras and Banco do Brasil, have decided to adopt initiatives to shield their governance by joining additional commitments for good practices. Both requested exchange operator B3 for a certificate of inclusion in the program Highlight in Governance of State Companies.

Petrobras went further and announced it is beginning studies to join B3’s Level 2 of corporate governance, the segment with the strictest requirements for companies that have preferred shares.

Yet this is not the first time that the oil company has made such a move. Fifteen years ago, in 2002, when Pedro Parente, now its chief executive, was chairman of the board, Petrobras adopted all measures for this migration, but had the initiative vetoed by the Office of the Attorney General of the National Treasury (PGFN).

Together, Petrobras and Banco do Brasil account for about 11.5% of the Bovespa Index and have nearly R$260 billion in market capitalization, out of a total of R$2.24 trillion for all companies in that bellwether index.

Of voluntary participation, B3’s program for state companies — launched over a year and a half ago — establishes a series of guidelines to try and raise the governance, control and transparency level of these companies.

For the program certification, the company must comply with requirements such as having and disclosing guidelines about the composition of board, management and fiscal council. Moreover, it must have policies on diversity of experiences and skills and the minimum of 30% of independent board directors.

State companies also need to establish and publicize internal mechanisms to avoid that their managers act in benefit of public policies that go beyond the public interest defined in the creation of the company and in its social objectives.

The concern with the governance of state-controlled companies gained relevance after Operation Car Wash uncovered a giant corruption scheme at Petrobras, whose estimated loss in the company’s financial statements was at least R$6.2 billion. The importance of the matter made Congress pass the Law of Responsibility of State Companies (Law 13,303) in June 2016.

The board of Banco do Brasil in December approved joining B3’s program for state companies. On July 5, the bank’s shareholders will vote on the matter in an extraordinary general meeting.

Petrobras has not yet released dates, but already said it has adopted all measures required by B3 for state companies. “For us to be able to apply for the governance program of state companies, we’ve worked for more than a year. Now, we will begin the process related to Level 2,” Mr. Parente said in a press conference. He said the company would study which measures need to be implemented.

The current management wants to show the governance established at the company is what best serves the interests of Petrobras and its shareholders. “We will create conditions so that what happened in the past will not happen again in the future.”

Mr. Parente also stressed that, with the steps taken toward a more effective governance, he expects the company to have more favorable financing terms. “We do expect it to bring benefits such as funding costs etc.” he said, adding that the improvement in costs that the company has been noticing now reflects more “the entirety of the effort” and not a specific matter.

In 2002, when it tried to join Level 2, Petrobras faced a big discussion about two rights granted to preferred shareholders in that special listing segment and obtained from the stock exchange, at the time, the permission for some exceptions.

The company would not establish in its bylaws the tag-along right for preferred shareholders, as Level 2 demands — the right that secures to shareholders the control premium through a mandatory offer in case of sale of most of the voting stock.

João Nogueira Batista, who was chief of investor relations in 2002, explained that it was established that, as a company controlled by the federal government, this debate would have to be carried out in Congress as part of a discussion about privatization, if it were to happen.

The other big issue, which led to the PGFN veto, was about voting rights for preferred shares in some special matters, like mergers, alterations of shareholder rights, modifications of social object, dividend policy, among others.

The president of the Securities and Exchange Commission of Brazil (CVM), Leonardo Pereira, said that Petrobras joining Level 2 would be a very relevant development for the Brazilian market. “An excellent message to the other state companies,” he said.

Mr. Nogueira Batista said joining the governance segment would work as a sort of shielding to Petrobras’s shareholders, something that was also pursued during his term — even though the migration had not materialized.

In the attempt of lowering barriers that emerged at the time, Mr. Nogueira Batista said a solution was to adopt a set of governance guidelines that the board would have to follow in certain circumstances, in a sort of code of conduct, in place of establishing in the bylaw the voting right for preferred shareholders. Mr. Cunha said that code was entirely modified and the original is nowhere on the internet.

Source: Valor Econômico

Temer focuses on economy in attempt to remain in office

In the decisive week for new chapters of the crisis — likely to be aggravated by the plea bargain of Rodrigo Rocha Loures and the disclosure of new wiretaps conducted by the Federal Police at the request of the prosecutors’ office — President Michel Temer is doubling down on the economic recovery, and on the lack of a consensus name to replace him, to gain muscle and stay in office. He ordered his economic team to formulate a new “package of kind policies” he intends to announce in coming days.

The Palácio do Planalto, the presidential office, expects to gain time to adopt the measures and accelerate the economic recovery. In this line of action, the timetable outlined by the government includes the labor reform’s passage on June 1st, on the Senate’s floor, and the first vote on the pension reform on the Chamber of Deputies’ floor on June 13.

Aiming to keep the economy producing good news, Mr. Temer ordered new policies with popular appeal from the minister of Planning, Dyogo Oliveira, who worked actively with his team during the weekend. The Office of the Chief of Staff and the government leader in Congress, Senator Romero Jucá (PMDB of Roraima), are also involved in designing the plan.

On another front, Mr. Jucá will command the strategy to vote on labor reform on June 6 on the Senate floor. This plan will entail passing it in the morning in the Economic Affairs Committee and on the same day, in the afternoon, taking it to the floor. To do that, Mr. Jucá will have to get the signature of most leaders of the allied parties in an urgency requirement.

This mechanism suppresses analysis steps at the Social Affairs Committee and at the Constitution and Justice Committee. In the case of the PMDB, Mr. Jucá will face the resistance of leader Renan Calheiros (Alagoas), who advocates a broad discussion of the bill in the thematic committees. On the other hand, he will have the support of the president of the Constitution and Justice Committee, Senator Edison Lobão (PMDB of Maranhão), who has remained faithful to Mr. Temer, at the request of ex-President José Sarney.

In the Chamber of Deputies, the offensive of the governing leaders also targets the economic agenda. The government will try to pass a bill that would allow foreign stake in airlines up to 100%, a from businesses that has been supressed for several years. Another effort will be made at the resumption of talks to try and vote, on June 13, on the pension reform in a first round.

The goal is to show that Mr. Temer maintains political strength in Congress. Presidential aides reject the notion of some leaders, even of the PSDB, that the reforms would go through without Mr. Temer in the presidency. They claim Mr. Temer is the only politician amid the crisis with the necessary skill and ability of political coordination to push through controversial policies in Congress in a situation of turbulence.

One example they recall is the recent vote on the bill to validate tax incentives, which had 405 votes on the floor of the Chamber of Deputies’ last week and untied a legal knot that had persisted for decades.

In the hypothesis of his removal, however, the Planalto’s Plan B is the candidacy of Chamber Speaker Rodrigo Maia (Democrats, DEM, of Rio de Janeiro), in the Electoral College. He is an appealing name for the deputies, who have more votes in the college, because it opens the post of house speaker.

Another name that emerged over the last few days for a potential Congressional in-house election was of Senator Armando Monteiro (Brazilian Labor Party, PTB, of Pernambuco), former minister of Development in the Rousseff administration. A moderate with good positioning in the business world, Mr. Monteiro would be an option to the interim president of the PSDB, Tasso Jereissati, of Ceará.

Source: Valor Econômico