SUMMARY: This is a formal presentation of the Providence Fixed Income Fund (“the Fund”) to assist prospective investors in the evaluation of personal financial decisions. The fund has been structured around the Brazilian Factoring Market taking into consideration the favorable differences currently existing between the interest rate markets of the United States and Brazil. The result is that Providence Companies has been able to develop a smart high yield investment instrument where the amount of risk in the investment is proportionally less that the favorable high ROI actually experienced. This fund is the ideal vehicle to invest in one of the strongest economies of the world today and enjoy the high interest rates prevailing in the country for the last several years. Since this is expected to continue in the future, by investing in the Fund, investors are able to tap into the high yield Brazilian money markets for short periods not exceeding nine (9) months at a time. Background on the Providence Companies The Providence Companies (“Providence” or the “Firm”) is an investment management firm focusing its investments in Brazil, more specifically the sectors of financial services, commercial paper, factoring, diversified transportation, trade and trade receivables (or “the Sector”). The primary objective of the Firm is to create significant capital appreciation for its investors by buying high quality negotiable instruments at a discount. For that purpose Providence has a Brazilian subsidiary duly authorized as a financial institution to purchase negotiable instruments in the open factoring market. Such instruments are purchased at a discount of approximately four (4%) per cent per month (or 48% annualized) allowing significant gross markings to the Firm, being this the main reason why the proposed ROI is possible for our investors. Executive Memorandum Geographic Brazil Focus: Business Factoring Focus: Corporate Brazilian LTDA Formation: & Delaware Corp. Transaction Short-Term Profile: Note Interest Rate: 12.0% per annum Minimum Amount: US$ 100,000 For More Information, Contact: The Providence Companies USA Office 240 Crandon Boulevard Suite 228 Key Biscayne, Florida 33149 T | 786.866.5824 F | 866.850.2522 Brasil Office Rua Fidencio Ramos 223 Suite 74 Edificio Palladio Sao Paulo, Brasil CEP 04551-010 T | 55-11-3044-5353 Antonio Buzaneli Managing Director T | 305.469.5568 E[email protected]
An alternative fixed income solution specializing in the factoring of receivables in Brazil.
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SUMMARY:
This is a formal presentation of the Providence
Fixed Income Fund (“the Fund”) to assist prospective investors in the evaluation of personal financial decisions. The fund has been structured
around the Brazilian Factoring Market taking into consideration the favorable differences currently
existing between the interest rate markets of the United States and Brazil. The result is that Providence Companies has been able to develop a
smart high yield investment instrument where the amount of risk in the investment is proportionally less that the favorable high ROI actually
experienced. This fund is the ideal vehicle to invest in one of the strongest economies of the
world today and enjoy the high interest rates prevailing in the country for the last several years. Since this is expected to continue in the future, by
investing in the Fund, investors are able to tap into the high yield Brazilian money markets for
short periods not exceeding nine (9) months at a time.
Background on the Providence Companies
The Providence Companies (“Providence” or the “Firm”) is an
investment management firm focusing its investments in Brazil,
more specifically the sectors of financial services, commercial paper, factoring, diversified transportation, trade and trade receivables (or “the Sector”). The primary objective of the Firm is to
create significant capital appreciation for its investors by buying high quality negotiable instruments
at a discount. For that purpose Providence has a Brazilian subsidiary duly authorized as a financial
institution to purchase negotiable instruments in the open factoring market. Such instruments are
purchased at a discount of approximately four (4%) per cent per month (or 48% annualized) allowing
significant gross markings to the Firm, being this the main reason why the proposed ROI is possible for our investors.
Factoring, known in Brazil as ‘Fomento Mercantil,’ is a service
activity that includes ongoing advisory work on credit, risk,
accounting, inventory, and working capital management, in tandem with the irrevocable purchase of credit rights, in the form
of receivables that arise from the sale of goods or services with
maturities ranging from 30 to 300 days. The factoring company
assumes the credit risk associated with the negotiable
instruments, which has remained historically low for the last 10
years due to the severe penalties existing for defaulted credits.
Factoring must be based on commercial sales and is governed by
Brazil’s Civil Code. It can be conducted only with ‘legal persons’
or enterprises and not with individuals. The most common accounts receivable are duplicatas (commercial invoices), which
account for almost 90 percent of all factoring receivables. Others
are checks, bills of exchange, bills of lading, warrants, promissory notes, and post-dated checks (which can be issued to cover mercantile sales, as in commonplace in Brazil).
There are over 700 known factoring companies in Brazil, which
provide services to more than 65,000 small and medium
enterprises. Eighty percent of these enterprises belong to the
industrial sector, with a monthly turnover of around US$10 billion (R$27 billion) as creditor rights resulting from mercantile
sales, representing approximately 6 percent of all domestic
sources of financing. Factoring companies had more than 6,000
employees and were estimated to provide another 710,000
indirect employment opportunities. Thus, factoring is a sizeable industry in Brazil and an important source of finance for a
number of firms. Overall delinquency ratio for receivables is
estimated to be around 3.8 percent across all sectors.
Key Points
Factoring is an important alternative to the banking sector for the
financing of small and medium enterprises. Given difficulties of
entry into the formal banking system, factoring companies have
found an important market niche.
Factoring companies work at a much smaller scale than banks, in
close association with their creditor. Accounts receivables are
already expected cash flows and, thus, a company eliminates its
clients’ business risks through factoring.
Factoring enables quick and relatively inexpensive access to
financing by Brazilian standards. While an interest rate of 48% per year in any loan product is
considered totally unacceptable in the United States, ironically, it is considered in Brazil the most
inexpensive financing alternative available in t he market to the average borrower. Alternatives such
as bank credit based on the discount of invoices as well as bank credit in the form of personal or consumer overdraft facilities are much more expensive.
Providence is a licensed factoring company in Brazil and member of by ANFAC (Brazil’s national trade
association covering all factoring companies in the country), specifically the only foreign entity that holds such membership in Brazil due to Providence’s excellent reputation, past operating history in
Brazil and solid financial references. BPA Fomento Mercantil Investimientos e Participações,
LTDA is the wholly owned subsidiary of Providence Companies and operates the factoring business
By the same token, Brazil’s benchmark rate is not 0.25% but instead 11.25%. A Certificate of Deposit in a Banco Itau or Banco Safra
would earn 12.5% a year. Brazil had controlled its inflation for the
past decade with high interest rates (to be discussed in more detail
in the following pages).
An 12% return is a high return commensurate with high risk in the
United States market. However, in Brazil, its considered low to
moderate low risk. In the United States, an investment that yields
12% is assumed to carry a 11.75% risk premium (12% less 0.25%). In Brazil, however, 18% minus Brazil Benchmark 11.25% equates to
a 6.75% risk premium. Comparing apples to apples, investing in the
United States in factoring for a risk premium of 6.75% plus 0.25%
benchmark results in a total return of 7% a year. Seven percent per
year in the United States is indicative of low to moderate low risk comparable to buying commercial paper from a Fortune 1,000
company. This explain how the Fund can pay 12% per year to its
Holders under a low to moderate risk product structure. The Fund
does not incur in high risk transactions, the high yield is just the
result of the large differences currently existing between the two
economies.
Why isn’t everyone else investing in Brazil ? The answer is simple:
They are. However, most people only have access to Brazil through
Emerging Market Mutual Funds issued by national and international
institutions. Providence Fixed Income Fund is another alternative but offers better returns as this Fund does not carry high
commissions, tax inefficiencies, fees, etc.
In Numbers:
1.3 Billion checks processed through the banking system.
This represented approximately US $580 Billion
Approximately 43% of these were post dated.
Less than 2% of processed and cleared checks are returned (NSF)
Executive Memorandum
13
Providence Companies Management
Antonio Buzaneli Managing Director
Antonio Buzaneli brings 27 years of experience in creating & growing
businesses, with a deep expertise in operations, global trading, expansions
and consolidation. Mr. Buzaneli has worked in a variety of different industry
verticals, including development & construction, retail consumer goods,
wholesale distribution, finance, commodities, agriculture & fisheries, and manufacturing.
Mr. Buzaneli has founded and grown companies with international
operations, from inception to multi-million dollar revenues, through a broad
knowledge of finance, risk management and distribution structures.
Mr. Buzaneli has served in several executive positions including CEO, President, COO, and Country Manager for various international companies,
including one of the largest distributors of dried marine products in the
world. He has been involved in all aspects including pre-revenue strategy,
through successful startup and operation – including capital acquisition,
corporate structure & governance, executive selection & team building, organization establishment, product optimization, building sales &
distribution channels, vertical integration, highly structured finance &
acquisitions, supply chain creation & management, and international trading
integration & optimization.
Mr. Buzaneli brings a deep strategic perspective to organization development, including the identification of brand new opportunities, segments and
possible paths for future sustainable growth.
Mr. Buzaneli holds a law degree from Anchieta Law School in Brazil, as well
as a Harvard Business School executive management course with specialization in international trade & finance. He has multicultural
experience & is multilingual – English, Italian, Portuguese and Spanish –
enabling him to integrate cultural differences to help focus deliverable
results.
Married, a father of four and a grandfather, Antonio is highly involved in church activities and devotion, believing in the motto that “true leadership is
achieved through service”. He enjoys recreation time with his family and
friends, martial arts, and marine sports. Jose Ordoñez Managing Director
Jose M. Ordoñez brings 16 years of experience in the Banking, Real Estate
and International Trade verticals. Mr. Ordoñez began his career as a credit analyst with a regional bank in Miami, Florida. Within a few years, he rose to
become Vice President in the Corporate Lending Division. Throughout his
long-standing financial career, he structured and provided term financing,
fixed income products, credit lines, construction loans, land acquisition,
general real estate lending and co-directed and expanded the Small Business
Lending Group (SBA). He generated approximately $150 million dollars in new loans while employed by the bank.
In 2003, Mr. Ordoñez was recruited as the Vice President of Finance for a
major tobacco growing conglomerate in Miami, one of the largest tobacco leaf
growers worldwide. Their distinguished client list included, multinational brands, such as Consolidated Cigar, General Cigar, Altaldis and Imperial.
Among his responsibilities were developing new banking relationships as well
as organizing, developing and implementing new structured financial
Executive Memorandum
14
products for the firm. He also led the group to create a platform for ancillary business development.
Fueled by his extensive experience in commercial finance, real estate,
marketing and the banking industry, in early 2005, Mr. Ordoñez was asked
to lead a rapidly growing local commercial real estate development company.
He was responsible for increasing the revenue from $15 Million annually to approximately $350 Million annually in a period of 32 months. Concurrently,
Mr. Ordoñez led the restructuring of all the banking, legal and investment
relationships, improving the overall financial health of the entire enterprise.
At its peak, under the leadership of Mr. Ordoñez, the company went from a
local presence to a regional Southeastern United States presence with over 30 active projects.
Mr. Ordoñez graduated from Florida International University with a
Bachelors Degree in Finance & International Business. He is multilingual –
English, Portuguese and Spanish. He is married, is a father of two and is
very active in his church and community. He enjoys spending time with his family and friends, and is an avid sports participant and fan.
Julio E. Rivera Managing Director
Mr. Rivera has over 28 years experience in banking covering multiple
disciplines. During his banking career Mr. Rivera developed advanced
expertise in real estate lending, focusing on construction project financing
and corporate banking. He worked at Citibank, N.A., Royal Bank of Canada, Chase Manhattan Bank, and most recently 11 years at FirstBank Puerto
Rico, an Institution with $18 Billion in assets. At FirstBank, Mr. Rivera
headed the Construction Financing Division in Puerto Rico and his group
provided the industry credit approval for all construction loans including
those from the U.S. and the British Virgin Islands as well as from
FirstBank’s Florida Division in the U.S. During this time Mr. Rivera gained vast experience in the execution and control of highly complex real estate
transactions, contract negotiations, business presentations, staff
management, court litigation, as well as being designated as an expert
witness over the years.
Mr. Rivera then moved on and partnered with close associates to create a new company dedicated to high-impact workshops for self-help human
transformation in Puerto Rico providing both capital and management
expertise. Additionally, Mr. Rivera invested in and became executive producer
of a film production in Montreal, Canada. He is working on the movie project
currently in its development stage. The project is unique and has tremendous expectations given the potential social/political impact it may
create on a global basis. Given his diversified background, Mr. Rivera
continues to seek opportunities and associations in multiple business
ventures where he can fulfill personal visions and lifelong missions.
Mr. Rivera is a Magna Cum Laude from the University of Puerto Rico where he obtained a Bachelor Degree in Business Statistics and was awarded by
the government of Puerto Rico, Economic Development Administration
among hundreds of qualified participants, with a full scholarship for post
graduate work. With this opportunity, Mr. Rivera completed a Master of
Science in Operations Research and a Master in Business Administration with a major in Management Science.
Executive Memorandum
15
S.E.C. COMPLIANT DISCLAIMER
THIS INVESTMENT PRODUCT HAS NOT BEEN REGISTERED AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY JURISDICTION. THIS PRODUCT MAY NOT BE OFFERED, SOLD, HYPOTHECATED, GIVEN, BEQUEATHED, TRANSFERRED, ASSIGNED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF (“TRANSFERRED”) EXCEPT PURSUANT TO (I) A REGISTRATION STATEMENT WITH RESPECT TO THIS NOTE THAT IS EFFECTIVE UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAW, OR (II) ANY EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAW RELATING TO THE DISPOSITION OF SECURITIES, PROVIDED THAT AN OPINION OF COUNSEL IS FURNISHED TO THE COMPANY, TO THE EXTENT REASONABLY REQUESTED BY THE COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES LAW IS AVAILABLE.
Through the 1980s and 1990s, the Brazilian economy suffered from rampant inflation that subdued economic growth. After several failed
economic initiatives created by the government to consistently control
inflation (some plans brough inflation to zero in the short term, but was
unsustainable over the medium term), in 1994 the Plano Real was
introduced. This plan brought stability and enabled Brazil to sustain
economic growth over that of the global economy through the coming decade.
The Plano Real (Real Plan, in English) was a set of measures taken to
stabilize the Brazilian economy in early 1994, under the direction of
Fernando Henrique Cardoso as the Minister of Finance, during the presidency of Itamar Franco.
According to economic academics, one of the causes of inflation in Brazil
was the inertial inflation phenomenon. Prices were adjusted on a daily basis
according to changes in price indexes and to the exchange rate of the local
currency to the U.S. dollar. Plano Real then created a non-monetary currency, the Unidade Real de Valor ("URV"), whose value was set to
approximately 1 US dollar. All prices were quoted in these two currencies,
cruzeiro real and URV, but payments had to be made exclusively in
cruzeiros reais. Prices quoted in URV did not change over time, while their
equivalent in cruzeiros reais increased nominally every day.
The Plano Real based its actions on an analysis of the root causes of
inflation in the post-military dictatorship Brazil that concluded that there
was both an issue of fiscal policy and severe, widespread inertial inflation. It
created the Unidade Real de Valor (Unit of Real Value), which served as a
key step to the implementation of the current currency, the real. At first, most academics tended not to believe that the Plan could succeed. Stephen
Kanitz was the first public intellectual to predict the future success of the
Real Plan.
The Plano Real: (i) introduced a new currency called the Real (plural Reais) on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy,
the short-lived cruzeiro real was substituted in the process, (ii) enacted a
series of contractionary fiscal and monetary policies, restricting its expenses
and raising interest rates. By doing so, the country was able to keep
inflation under control for several years. In addition, the high interest rates
attracted enough foreign capital to finance the current account deficit and increased the country’s international reserves, (iii) put a strong focus on the
management of the balance of payments, at first by setting the real at a very
high value relative to the U.S. dollar; and later in 1998, by a sharp increase
on domestic interest rates to maintain a positive influx of foreign capitals to
local currency bond markets, financing Brazilian expenditures.
The Real initially appreciated (gained value) against the U.S. dollar as a result of the large amount of capital inflows in late 1994 and 1995. It then
began a gradual depreciation process, culminating in the 1999 January
Brazilian currency crisis, when the Real suffered a maxi-devaluation, and
fluctuated wildly. Following this period (1994–1999) of a quasi-fixed
exchange rate, an inflation-targeting policy was instituted by new Central
Bank president Arminio Fraga, which effectively meant that the fixed-exchange period was over. However, the currency was never truly "free",
being more accurately described as a managed or "dirty" float, with frequent
Central Bank interventions to manipulate its dollar price.
The currency’s appreciation was crucial to keep inflation under control. Mainly, it assured the supply of cheap imported products to meet the
domestic demand and forced domestic producers to sell at lower prices in
order to maintain their market shares. This was especially important in the
period immediately following the adoption of the new currency, when the
sudden drop in inflation caused a surge in demand. The increased imports,
therefore, were essential to avoid demand-side inflationary pressures that would undermine the stabilization plan.
Macro Economic Overview
Market Conditions
As the largest and most populous country in South America, the tenth
largest economy in the world and the fifth largest country in the world in
both area and population, Brazil is well-positioned for continued growth.
The nation has well-developed manufacturing, mining, agricultural and
service industries, as well as a large labor pool. Brazil's macroeconomic fundamentals are currently very strong, and both the long and short-term
outlook for the country are positive. Brazil has an increasing balance of
payments surplus, continued government commitment to fiscal discipline
and inflation control, increasing export volume growth, decreasing interest
rates and strong foreign direct investment, all of which are expected to strengthen the economy.
The favorable macro
economic environment
has also played a
significant role in the growth of the real estate
industry in Brazil.
Continued economic
expansion, including a
rapidly growing international corporate
presence and growth of
local companies, is
increasing demand for
residential and
commercial real estate development. Industrial real estate development activity, particularly in warehouses and logistics centers, is directly tied to
growing internal demand, consumer purchasing power and increasing trade.
These economic effects have put added pressure on developing distribution
centers to get manufactured goods into retail locations for consumer
consumption. Prices for Class A office space are anticipated to increase as the vacancy rate is expected to continue falling in 2009. The residential real
estate market is further supported by favorable demographics including a
young and growing population, with the prime home buying age group
Executive Memorandum
18
Brazil Recent Economic Growth
expected to grow at a fast pace over the next 20 years. In addition, Brazil has a large housing deficit that has primarily been the result of low levels of
mortgage availability in the country. However, mortgages are becoming
more readily available and affordability is expected to increase significantly
over the coming years due to a combination of the following factors: (i)
declining interest rates, (ii) higher availability of credit primarily benefiting
the lower and middle income segments, (iii) extension of mortgage terms, (iv) increasing number of loans granted using saving account funds, and (v) a
more beneficial regulatory framework to mortgage lenders. Moreover, the
hospitality sector is expected to benefit from the robust business
environment and the emergence of Brazil as a major tourist destination.
During the 1990's, the Brazilian economy did not experience the same level
of robust growth as other major emerging economies like India, Russia and
China. Beginning shortly after the settling of global economic and political
changes in 2001-2002 and the Brazilian presidential elections of that year,
the Brazilian economy has gradually risen to achieve consistent growth and a development cycle of significant investments.
Already an economic power in natural resources and agriculture, Brazil has
improved its management of internal and external economic policies which
has resulted in strong monetary inflows and a strengthening currency. This
combination has helped Brazil reach levels of domestic and foreign investment not seen for more than three decades. The country has become
an attractive destination for investments in spite of recent global economic
slowdowns. For the second consecutive year, Brazil’s GDP in 2007 grew by
more than 5% which was enough to allow Brazil to become a net foreign
debt creditor for the first time in its history. Also a first, the country’s sovereign debt was upgraded to investment grade by two recognized global
rating agencies, Standard & Poors and Moody’s. Many of the recent changes
in the Brazilian economy are a result of an overhaul of the administrative
and institutional environment, creating more attractive markets and
business conditions, as evidenced by its GDP growth shown in Exhibit 1.
Exhibit 1 – Brazilian GDP growth on a solid upward trend
Executive Memorandum
19
While some years resulted in slower GDP growth than others during this
period, the overall trend in Brazil since 2002 has been upward. During this
time Brazil has established itself as a major player in the global commodities
market, and concerns of radical economic and political changes with the
election of leftist President Luiz Inacio Lula da Silva in 2002 have proven
unfounded. Combined with the expansion of foreign direct investment
("FDI"), as shown in Exhibit 2, several other relevant macroeconomic
landmarks were noted in the 2003-2007 period:
Stable political outlook (President Lula reelected in 2006)
Continuous improvements in foreign investment regulatory environment
Controlled inflation allowing for further interest rate reductions,
credit expansion and employment growth.
Stable monetary and fiscal policies.
Diversified export base with no single trade partner representing more
than 20% of exports
No significant ethnic or religious conflicts.
Exhibit 2 - FDI inflows are reaching record levels
Although FDI remains a key determinant of potential real estate
development demand, there is also growing local demand for real estate
because of historically low quality supply and rising internal purchasing
power in Brazil. Local demand for quality real estate has been growing in all
asset classes during the last four years. Local corporate demand growth is
attributable to business expansion and efforts to improve market share from
foreign competitors or through partnerships with established multinationals.
Housing demand has been triggered by rising income levels, the advent of
expanded credit availability and general employment increases. Brazil is
considered to be a “young country” with demographics that support a
sustainable expansion of domestic consumer demand and family formation,
especially when compared with other mature and even some emerging
economies – see Exhibit 3 on the following page.
Executive Memorandum
20
Increasing Domestic Demand
Exhibit 3: Young Population - Savings & Growth Potential
Pent-up demand for low income residential units is particularly strong in
Brazil. Because of the country’s history of high inflation and high interest
rates, mortgage markets did not allow for affordable housing to be financed
in conjunction with the increase in the urban population. However, since the
implementation of inflation targeting by the Brazilian Central Bank, and the
ensuing gradual decrease in interest rates and reduction of taxes, the
expansion of credit availability and disposable income, the residential sector
has experienced unprecedented growth as illustrated by Exhibits 4, 5 and 6
below.
Exhibit 4 - Total Credit to GDP (a Measure of Macroeconomic Stability)
is Directly Affected by Credibility of Inflation Targeting
Executive Memorandum
21
Exhibit 5 - Total and Mortgage Credit / GDP in Brazil is still very low, a
legacy of high inflation / high interest rate history
Exhibit 6
Executive Memorandum
22
Consistent GDP Growth & Low
Inflation
Record Foreign Direct Investment &
International Reserves Improved External Accounts Low Credit Usage Compared to Other Countries
Executive Memorandum
23
Growing Mortgage Markets & Controlled
Inflation
More Sources of Stability
In 2007, Brazil was able to successfully place external debt denominated in
Brazilian Reais (BRL – Brazil’s currency), which was considered a major accomplishment given that in 2002 most international creditors positioned
Brazil in the group of countries carrying a default risk. For much of this
decade internal demand growth has helped the country to become more
detached than in previous cycles from external risks and the effects of
economic downturns in mature markets such as the U.S. and the EU.
Domestic consumption in Brazil increased 6.5% in 2007 when compared with 2006. In March 2008 formal unemployment recorded its lowest level in
twenty years according to IBGE (Brazilian Institute of Geography and
Statistics). These trends are occurring at a time when first-time homeowners
are directing a significant share of their income to mortgage payments.
Because of the long term profile of FDI applied to mature industries and manufacturing, the foreign exchange outlook in Brazil is expected to
stabilize. This trend is supported by favorable foreign trading pattern and a
high level of international reserves – See Exhibits 7 and 8 below.
Exhibit 7 – Soaring international reserves are a testament of favorable
trading and investment patterns
Executive Memorandum
24
Exhibit 8 – Controlled inflation and favorable investment/trade outlook
should bring currency stability
Brazilian real estate capital markets have changed rapidly. This evolution is
evidenced by the large number of real estate companies that went public on
the São Paulo Stock Exchange (BOVESPA) during 2007. A total of 21
companies were listed resulting in approximately BRL12 billion being raised
for companies largely in the residential sector. While the majority of these companies were established in the major centers of Sao Paulo, Rio de
Janeiro and other capitals with a high concentration of urban population,
some companies were conglomerates with interests in industrial and office
sectors. More than 40% of the capital raised through public offerings came
from international investors.
A continuation of political stability in Brazil will support reduced country
investment risk premiums. Country risk reduction, in turn, encourages the
flow of new capital into local real estate debt and equity markets, provided
the host country liberalizes its financial sector. Exhibit 9 describes how the
cost of borrowing has fallen since 2002 in Brazil. This trend of falling rates was consistent in 2006 and 2007, when private banks began competing for
mortgages directly with state sponsored banks.
Exhibit 9 – Lower
interest rates now,
but still trending
down, alongside inflation
Executive Memorandum
25
Recent Highlights
Dilma Rousseff
In perhaps the most significant step since she took office on January 1st,
2011, President Dilma Rousseff has differentiated herself from former leader
Luiz Inácio Lula da Silva by supporting the UN vote to monitor human rights in Iran. It marks Brazil’s first change in foreign policy under the new
administration and demonstrates Brazil’s desire to become a permanent
member of the UN Security Council.
A national poll requested by the National Confederation of Industry was released on April 1, 2011 and indicates that the presidency of Dilma
Rousseff has the approval of 73 percent of the population. The rejection of
the first woman to assume the presidency of Brazil is only 12 percent.
Policies on employment, environment, education and poverty reduction were
approved by the citizens, while the tax and health strategies have been
rejected, the survey notes. This high level of popularity has been surpassed only by the former president, Luiz Inacio Lula da Silva, whose popularity the
early days of government reached 75 percent. Respondents were asked how
Rousseff's administration compares with that of Lula and 64 percent believe
it is the same, 12 percent believe it is better, while only 13 percent think the
current government is worse. For 14 percent of respondents, Rousseff has a governing style very different from its predecessor and 40 percent believe it
is a little different, but 39 percent think there is no difference.
Newly Discovered Oil Reserves
An enormous offshore oil discovery could help Brazil join the ranks of the
world's major exporters, but full-scale extraction is unlikely until 2013 and
will be very expensive. The "ultra-deep" Tupi field off the coast of Rio de Janeiro could hold as much as 8 billion barrels of recoverable light crude,
and initial production should exceed 100,000 barrels daily, says Guilherme
Estrella, exploration and production director of Brazilian state oil company
Petroleo Brasileiro (PBR). Petrobras, as it is known, will start pilot pumping
in 2010 or 2011 but full production would take several more years, Estrella said late Thursday.
Tapping the Tupi field will cost billions of dollars, but Petrobras is flush with
cash for strategic investments because of growing production and high
international oil prices. Petrobras, which currently has 16 billion barrels of
proven reserves, is investing more than $200 billion in five years as it taps the so-called pre-salt fields lying two miles below the ocean surface and
another two to four miles beneath the seabed. Brazilian lawmakers passed a
bill last year making Petrobras the operator of all new exploration licenses in
the pre-salt and other areas deemed strategic. Rights to explore more than
half of the region are yet to be auctioned. The oil producer controls or has stakes in 85 percent of all the existing licenses. The area likely holds 60 new
fields with an average size of 2.2 billion barrels, according to the study.
However, the way in which the oil revenues will be spent is more interesting.
As President Dilma Rousseff recently said, oil is Brazil’s “passport to the
future”. It is obvious that a large part of the revenues should go to education, as standardized tests in Brazil prove a poor education system.
Federal funding could also be used in forming high-skilled professional jobs
and encouraging research. Additionally, Brazil needs to improve its decrepit
infrastructure. Airports and highways need improvement in order to
facilitate economic production and efficient public transportation—especially with the upcoming World Cup and Olympic games. Oil revenues should also
be used to curtail inequality through government programs like Bolsa
Família, which gives families stipends for ensuring their kids stay in school.
In April 2011, Brazil’s credit rating was raised one level by Fitch Ratings, which cited the economy’s growth prospects and budget cuts under President Dilma Rousseff. The country’s foreign debt rating was increased to BBB, the second-lowest investment grade and in line with Mexico, Russia and Thailand, from BBB-. The outlook is stable, Fitch said in a statement. The ratings company last boosted Brazil’s ranking in May 2008. Standard & Poor’sand Moody’s Investors Service rate the country one step lower.
Latin America’s biggest economy may grow 4.1 percent this year after
expanding 7.5 percent in 2010, the fastest in more than two decades,
according to the median estimate of 14 analysts surveyed by Bloomberg.
Rousseff, who took office Jan. 1, pledged to cut this year’s budget by 50.7
billion reais ($31 billion) to help the central bank contain inflation. “The Rousseff administration has displayed signs of greater fiscal restraint, which
coupled with healthy growth prospects should allow for a fall in Brazil’s
heavy general government debt burden,” Fitch said in the statement.
The extra yield investors demand to own Brazilian bonds instead of U.S. Treasuries narrowed 2 basis points, or 0.02 percentage point, to 168 at 3:20
p.m. New York time, according to JPMorgan Chase & Co. The Bovespa stock
index rose 0.5 percent. The real pared its drop and was down 0.1 percent to
1.6090 per dollar.
Brazil’s net debt fell to 40 percent of gross domestic product in February from 60 percent in January 2003, when Dilma Rousseff’s party, the
Workers’s Party, first won the presidency. Rousseff has pledged to slash
spending to ensure net debt will continue to drop as a percentage of GDP
and help the central bank fight inflation.
The Future Leader Of Wind Power
Brazil wind farm capacity making a total of 786 MW. Brazil has massive
wind power potential. The regulator contracted 71 wind turbines projects for
a wind power capacity of 1,800 MW. Far from the bright lights of Rio de Janeiro, the north-easterly Brazilian states of Ceara and Rio Grande del
Norte are blessed with some of the strongest and most consistent winds in
the world.
With such high potential, it is not surprising that Brazil’s wind power
industry has been taking off massively in the last couple of years: the
country added 264 MW of wind farm capacity in 2009 and by mid-2010,
another 180 MW were installed, making a total of 786 MW.
In December 2009, the Brazilian energy regulator hosted the first wind
power only auction, which contracted 71 wind turbines projects for a total
capacity of 1,800 MW. Two additional auctions took place in August 2010,
resulting in an additional more than 3 GW of tendered capacity for
September 2013.
Overall, it seems clear that as for other industries, Brazil is likely to become
a world player for wind energy, providing a hugely important platform for
Europe’s companies to grow and build up their portfolios. All that is needed
in order to ensure that the possible future is truly durable is to reinforce it
The latest China-Brazil trade deal, which was announced in April 2011 is
worth up to $1.5 billion. In fact, as the two countries entered into their 3rd
annual BRIC summit with their Indian and Russian counterparts, Brazil
made it clear that it sees China as a model for its own industrial development.
Brazil and China have entered into an increasing number of trade
agreements as the Red Dragon has sought to shore up supplies of raw
materials to fuel its growth. Brazil, among other things, is the world's largest producer of iron ore and often a counterpoint in negotiations between China
and Australian miners. China actually passed the United States as Brazil's
biggest trading partner in 2009, as trade between the two countries tripled
in the past five years to $62.6 billion.
Brazil's loss has been China's gain. That much was made apparent at this year's iconic Rio's Carnival, where 80% of the costumes on show were made
in China. The tariffs impelled Chinese tech giant Foxconn Technology Group
to look at moving some of its manufacturing operations to Brazil. Though
still under consideration, the $12 billion investment would make products
by such Foxconn clients as Apple Inc., Dell Inc., and Hewlett-Packard Company more affordable in Brazil. It's understandable. China's economy is
expected to grow 9.6% in 2011 -- more than twice the rate of Brazil's 4%.
Through the state-owned development bank, BNDES, the Brazilian
government has wielded credit as a national economic development tool,
increasing lending to many companies in recent years. In addition, federal or state governments hold a stake in as many as one in five Brazilian
companies. For example, the Brazilian government owns 54% of the
common shares of oil giant Petrobras, more formally known as Petroleo
Brasileiro SA.
Bad Checks in Brazil Lowest since 2004
Serasa, the leading consumer credit information service in Brazil reported
the lowest experience of bad checks (returned for not sufficient funds). In
2010, 1.76% of checks around the country have been returned, as shown by
the indicator Serasa of bad checks, reaching the lowest level since
2004. That year, the return rate was 1.58%.
In December, compared with the same period last year, fewer checks were
returned: 1.72% of the total issued, as against 1.87% in December 2009. In
the previous month, in November, the volume of bad checks presented
elevation. In the period, 1.68% were returned checks.
The decrease recorded in the cumulative return of checks in 2010,
compared with previous years, due to consumer preference for forms of
financing with longer maturities that pre-dated and the possibility of making
minimum payments, as the card credit, according to economists Serasa.
For the year, Amapá was the state with the highest percentage of returned checks (10.79%).On the other side is Sao Paulo, which recorded the lowest
percentage, 1.32%. Among regions, the North was the highest percentages of
return checks in the period, 4%. In the opposite appears the Southeast, with