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A year of uncertainty in Brazil

Antonio Felix de Araujo Cintra
2014 has started, and with it a new wave of projections, predictions and, why not use the proper name, guesses for the global economy and markets. In this article I will join the wagon and offer some ideas as to what will happen in Brazil this year.

This year promises to be one to ring the changes, in which a late carnival, the FIFA World Cup in June and July, and presidential elections in October (and, depending on the outcome of the first round, again in November) may cause the economy to move at a slow pace.

At the same time, the global economy seems to be moving towards normality. Economic activity is increasing in most of the relevant markets and interest rates are starting to move up to more normal levels. So what are the consequences of such events and trends for those interested in investing in Brazil?

Let us look first at the uncertainties. It is a common saying that nothing starts in a new year in Brazil until carnival is over. Hopefully, the fact that carnival this year will only begin in March will change this perception. My feeling is that action will start earlier than usual this year.

The World Cup is a more complicated event, considering that for a month, everyone will be focused on football. It is unlikely that many companies and banks will be aiming to close major transactions in Brazil during the period of the games. In addition, there is the possibility of mass demonstrations that may result in a further retraction of economic activity during that period.

As to the elections, these will be the seventh general elections since the end of the military dictatorship. The country is now used to the periodical change of democratically elected presidents, and regardless of the winner, no one is predicting a major shift in the workings of the economy. Regardless of discussions as to the actual management of the economy, there is no sign that the government will lose control of fiscal and monetary policies. The discussions range more around the gradation of the policies aimed at managing the economy than their principles. For instance, it seems unlikely that Brazil will follow the path of some of its less successful neighbours in South America and let inflation go out of control.

It is important to note that despite some resistance that has set back the process, the Federal Government has finally started to implement some important measures to improve the country's infrastructure. For example, the government has granted the concession to operate the main airports of Brazil to some major players; work on improvements and renovations of the airports is now well under way.

The operation of some important highways has also been transferred to the private sector under concession arrangements. This will generally improve the conditions for the transportation of goods, and especially the transportation of agricultural products to the coast for exportation.

New port regulations will probably result in some major investment in the sector (some have already been announced). The Federal Government also intends to give a boost to the railways, with new regulations aimed at providing more competitive conditions for the private sector.

Moreover, the positive results of the pre-salt bid of late last year, which granted exploration rights of a huge oil reserve to a consortium of international companies, will cause large-scale investments in the sector for the next several years.

Therefore, despite some well-publicised uncertainties, there are a number of good opportunities for those interested in doing business in Brazil, either participating directly as suppliers of goods or services to the operators of the new concessions described above, or by taking advantage of the improved logistics and transportation infrastructure that will result from such concessions.

Finally, it is also important to note that the new operators will need a great deal of capital to finance all investments that they are required to make under their respective concession agreements. This will open up opportunities for those willing to provide capital markets and project finance funding to such projects.

Antonio Felix de Araujo Cintra

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