Bringing Brazil to Wall Street

Global Finance, Jan 2004 by Green, Paula L

In late November a group of executives from the top Brazilian companies visited New York City in order to bring their message direct to Wall Street. They wanted to show investors that Brazil has great potential.

Corporate financial executives are still feeling the heat when it comes to anteing up extra money to keep their defined benefit pension plans properly funded.

The honeymoon period may be long past for the Brazilian presidency of Luiz lnacio da Suva (Lula), but Brazilian executives are optimistic that the economic uptick achieved during the past year will continue in 2004.

While acknowledging impediments such as high interest rates, an aging infrastructure system and a complicated tax structure, corporate executives say Lula's administration has gained the confidence of the general public as well as investors during its first year in power.

"The year 2003 was an adjustment year, when all the ghosts that were frightening the population disappeared-negative expectations to inflation, debt defaults or radical decisions," says Luiz Gonzaga Murat Jr., chief financial officer of Sadia, Brazil's largest poultry processing company. "The PT [Workers' Party] government is working in a very pragmatic way, and confidence in Brazil was re-established." Murat was one of nearly two dozen Brazilian executives participating in Brazil Day, a conference held in New York City in November for financial analysts, investors and other businesspeople interested in the investment climate in South America's largest economy.

While always popular among the general population for his commitment to social reforms, the left-leaning leader of Brazil's Workers' Party had many international and domestic investors worried after his successful October 2002 election. But LuIa has soothed the nerves of the business community since assuming power in January 2003 by taking steps to improve the country's fiscal and economic health.

For business executives attending Brazil Day, the administration's progress in pension reform, in handing the central bank more autonomy, and facilitating declines in interest rates and inflation are all examples of its commitment to stabilizing the economy.

Jose Luiz Acar Pedro, executive vice president and investor relations director at Banco Bradesco, says Lula's administration has achieved a balance in the economy: "Interest rates were kept at high levels in the beginning of the administration in order to fight against inflationary pressures.The remedy was successful, and the inflation rate is under control according to the government's goals," says Acar. "Additionally, conditions for the longterm sustained growth of the Brazilian economy have been put in place, generating a reduction in unemployment levels and an improvement in income levels."

High interest rates are frequently cited as an obstacle that Brazilian companies-especially small and mid-size businesses without easy access to international capital markets-encounter when trying to run and expand their operations.

"The cost of capital is a problem," says Joao Cox, president ofTelemig Celular and Amazonia Celular, two cellular companies based in Belo Horizonte. "That's inefficient for Brazilian companies and will be a problem for them as they compete with other companies from around the world." He adds that even good creditors have to pay 20% annual interest.

Osvaldo B. Schirmer, executive vice president and chief financial officer at Brazilian steelmaker Gerdau, adds,"There's room for further decreases, but the central bank has been prudent in reducing interest rates in pieces."

During meetings in New York, several business leaders agreed that the upgrades in Brazil's sovereign ratings by international rating agencies last year should ease Brazilian corporations' ability to raise funds in the international capital markets. Acar noted that Brazil's improving risk profile will help Brazilian companies raise money in the future through bond issues.

Export Growth Continues

Another bright spot in the Brazilian economy has been the growth in exports. While still a small portion of a huge economy, the trade surplus has provided the Latin nation with much-needed hard currency to help pay down its foreign debt.

At the conference, Brazilian Minister of Development, Industry and Trade Luiz Fernando Furlan estimated that Brazil would register a trade surplus of $23 billion in 2003 as exports tallied $70 billion for the year. Brazilian trade officials recorded a trade surplus of $13.1 billion in 2002. "But we need exports to grow by 14% to 15% a year," said Furlan, who added that the Brazilian government is working on several fronts to help improve the business climate for corporations operating in Brazil.

One primary goal is to reduce bureaucracy by simplitying the country's complex tax structure and reducing the tax burden on exporters. Another is to upgrade the country's deteriorating infrastructure-including highways, railroads and ports-in order to boost trade with neighboring South American countries as well as nations overseas.