Tuesday 29 August 2017 by FIIG Research Trade opportunities

Don’t be afraid of haircuts in Brazil

Brazil’s economy finally looks like it is coming out of recession. We have added two new Brazilian companies, Petrobras and Vale, to our US dollar DirectBond list 

brazilian haircut

Outlook on the Brazilian economy

Brazil is the 9th largest global economy according to nominal GDP. It has a population of 206 million, heavily concentrated on the coastline, with direct access to the Atlantic Ocean. The economy is finally emerging from a severe and protracted recession given a fall in commodity prices in 2015 and political turmoil that resulted from the impeachment of President Dilma Rousseff coupled with widespread dissatisfaction of the political system.

Despite a slow recovery, trade is important to Brazil’s economy with the value of exports and imports making up 27% of GDP. Generally high rates and transparent monetary policy make Brazil attractive to fixed income investors worldwide.

The World Bank’s assessment released on 4 June 2017, projects that the country’s economic recovery will be weak and slow with its real GDP forecast to grow at just 0.3% this year, 1.8% the next and 2.1% in 2019.[1]

Other key points to note:

  • As of March 2017,[2] Brazil’s economy is 8% smaller than it was in December 2014 with unemployment rates rising to 12.6%[3] (12.9 million unemployed) but this is projected to decline towards the end of this year
  • After battling high double digit inflation since 2015 (4.1% year over year in April), the Selic (short term interest rate) now stands at 11.25%. The Central Bank is expected to continue easing the Selic rate and end the year at 8%, according to World Bank analysts
  • The overall tax burden is 32.8% of domestic income
  • Government spending was 39.5% of total GDP output over the past three years with public debt equivalent to 71% of GDP
  • Industrial production growth increased 4% in May 2017, the highest annual gain since February 2014
  • Manufacturing PMI fell to 50.5 in June 2017 which was slightly below market consensus of 51
  • As political scandals and uncertainty continue to weigh, consumer and investor confidence remain undermined with little improvement
  • Inequality remains high despite achievements in poverty reduction over the last decade 

Brazil remains one of the biggest global players in mining which accounted for 5% of GDP in 2015.[4] It is the world’s second largest exporter of iron ore which makes up 80% of mining exports and provides 30% of global demand.[5] The Brazilian mining industry is expected to invest approximately US$53.6 billion between 2014 and 2018.[6]

Brazil’s oil and gas sector ranks sixth among 89 assessments in the 2017 Resource Governance Index[7].

Access to Brazilian credits

If you like the Brazil story, we have recently added some companies with significant exposure to the Brazilian economy. These include Petrobras (both USD and GBP) and Vale:

Petrobras Global Finance

Petrobras Global Finance is a debt issuing vehicle that operates as a subsidiary of Petroleo Brasileiro S.A. (Petrobras). Petrobras is an integrated energy company, focusing on oil and gas and headquartered in Rio de Janerio, Brazil. The company controls significant oil and energy assets in 16 countries in Africa, North America, South America, Europe and Asia. The Brazilian government owns 54% of Petrobra’s common shares with voting rights and the total direct and indirect State ownership is 64%.

Vale Overseas Limited

Vale Overseas Limited operates as a subsidiary of, and issues debt guaranteed by Vale S.A, which is based in Rio de Janeiro, Brazil. As of February 2017, Vale is the world’s largest producer of iron ore and nickel reaching a new output record of 349 million tonnes of steelmaking ingredient. The company currently owns and operates the largest iron ore embarking port in the world (Vitoria, Brazil) as well as nine hydroelectricity plants and a large network of railroads, ships, and ports used to transport its products. Vale’s energy business is focused at power production to fulfil the needs of its mining operations. The Brazilian government owns 12 golden shares that give it control over certain company actions. 

Company Currency Rank Credit rating Coupon type Minimum parcel size Maturity date Yield to worst* 
Petrobras Global Finance GBP Senior unsecured, wholly guaranteed by Petrobras Please contact your FIIG dealer Fixed 100,000 14 December 2026 5.25%
Vale Overseas Limited USD Senior unsecured, wholly guaranteed by Vale S.A Please contact your FIIG dealer Fixed 10,000 10 August 2026  4.24%

*Prices accurate as at 29 August 2017

References


[1] World Bank June 4th Report

[3] According to IBGE, the agency responsible for recording Brazil’s economic figures. 

[4] Brazil Mining report Q4 2016. 

[5] Brazilian Mining Institute, October 2016. 

[7] The 2017 RGI assesses how 81 resource-rich countries govern their oil, gas and mineral wealth. 

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