Market Outlook 2013: Brazil

In his presentation at the Market Outlook event, Garman asserted that Brazil is going through a very important turning point. For the last few years, growth rates averaged close to 6 %, making it one of the fastest growing economies in the world with many natural resources that have potential to be exploited and a commercial market that is growing significantly.

However, in the past several months there has been a turn in investor sentiment as GDP slowed to just 2.7% for 2011. In 2012, the DGP growth may only reach 2%. Garman cited the government’s proclivity for interventionism, including strong arming banks to lower lending rates as one reason for the decline. Also, while Brazil’s policy of helping local industry through local content requirements for infrastructure and oil and gas projects is admirable, it has created a bottleneck for expansion.

According to Garman, the decision to make Petrobras lead operator will continue to slow the pace of production in the pre-salt. Petrobras’s production curve is showing a substantial decline, and the fact that there is no flexibility on local content requirements is not helping the situation. Also, Petrobras is completely overstretched, and posted its first losses this year.

On the other hand, there is a growing recognition in the current administration that they need to work with the private sector to attract a larger cycle of investments. “They recognize that they can’t do it all through state funding, that they need private investors for the huge infrastructure projects that must be undertaken,” said Garman. There has been a big movement toward privatization of airports, and legislation that would increase foreign capital in airlines is expected to be approved. Regulatory overhaul of ports is coming in the next few months, and the focus will be on concessions for new port construction. Rail and highway projects are also being opened up, according to Garman, so it does bode well for private investment and better growth across the country as overburdened state institutions and bureaucratic hurdles will be out of the way.

This is especially important now as Brazil gets ready for the World Cup and the Olympics. They must build out the infrastructure.

For manufacturers wishing to do business in Brazil, Garman cautioned investors not to think that local content rules will go away. He also stressed that, just as the unbridled optimism last year was excessive, so, too, is the pessimism now. The policy environment in Brazil has proven to be inconsistent but in the current moment, investors are under-appreciating the forward momentum.

Kate Kunkel is Senior Editor of Valve Magazine. You may reach her at kkunkel@vma.org