Features : A Steady Recovery Begins To Take Shape

It may not be the spectacle of growth that President

Lula promised, but Brazils economic recovery is becoming more robust and sustainable.


Although recent economic data point to a gradual economic recovery in Brazil that began last year, some local corporates have yet to benefit from the turnaround. First-quarter earnings reports were a mixed bag. While some analysts believe certain companies are being left behind on account of their domestic focus, others argue high interest rates are to blame. Still others contend poor governance may be a culprit.

First-quarter earnings presented some surprises, as a few companies came in below market expectations. While the nations energy generation and distribution sectors were boosted by government tariff hikes, electric utilities Cemig and Eletropaulo, for example, undershot analysts forecasts. Telecom provider Embratel reported a 10.8% year-on-year increase in net revenue and 14.8% rise in Ebitda, but overall profits were still down. Likewise, oil giant Petrobras saw net profits decline by 28.4%, with net revenue down 5.3% and Ebitda down 8.5%.

The outlook for the second quarter is improving, but exporters seem to be taking the lions share of recovery benefits. Decent value in the exchange rate provides profits for most export-related activities, and so exporters have been profiting most, says one Brazilian investment banker, who feels electrical utilitiesmeeting increased demand from a rebounding industrial sectorand mobile telephony companies are also poised for a strong quarterly showing.

Exporters may still fare best, as the nations recovery, evidenced by 2004 GDP growth expectations of 3.5%, appears to be export driven. Mays record-high $3.1 billion trade surplus brought the year-to-date surplus to a hefty $11.2 billion that month. The ongoing adjustment to the trade side is offsetting a lower availability of capital, said a report by Credit Suisse First Boston. We expect the trade surplus to reach at least $24 billion this year, leading to the second consecutive year of a current account surplus.

Some analysts disagree that exports are driving the comeback and feel improved domestic sales will be reflected in the second quarters earnings outcome. According to the national statistics agency, retail sales rose 11.6% over the year to March in value terms. The largest gains were in automotive and furniture sales, which rose 32% and 36.6% year-on-year, respectively, in March, aided partly by an increase in credit availability. Interestingly, more basic items did not fare as well, with the ABRAS supermarket association reporting a 2.4% year-on-year decline in sales for the first quarter of 2004.

We believe that the upswing in economic activity that got under way late last year will continue in the months ahead, with domestic consumption and investment growth taking over as the main drivers, ABN AMRO commented in a report published in June. According to the bank, consumer demand should benefit more from rising incomes than from expanding credit, while investment spending should be supported more by the accelerator effect rather than by valuation and cost-of-capital effects.

Financing remains a problem, as high interest rates may hold back both investments and consumer spending. We remain concerned that the high level of real interest rates will hold the economy back a bit, though we believe that growth is here in 2004, says Bear Stearns. While the central banks benchmark Selic rate has been held at 16% since the beginning of the year, the average monthly rate on bank loans stands at 44.7%.


While most Americans can live on credit for as long as two years by re-mortgaging their homes or juggling credit cards, Brazilians live under much tighter credit conditions, contends InfoAmericas, a Miami-based consulting firm, in a research paper published last year. According to the firm, many Brazilians are loath to use credit cards unless they can pay back the charges without incurring interest, while middle-class consumers use post-dated checks as a form of short-term financing.

While the elite can bank offshore, the vast majority keep their savings in local currency at home where they earn less than the inflation rate, adds InfoAmericas. For all these reasons, large-ticket purchases can be put off for years until enough cash is saved. Then consumers tend to move quickly to replace an aging refrigerator, computer or car.

Companies seeking financing alternatives have helped revive local debt and equity markets. Brasil Telecom, a telecom provider, for example, in June approved a 500 million real ($160 million) five-year non-convertible debenture issueits fourth such deal. In June the Inter-American Development Bank (IADB) approved a partial credit guarantee of up to $68 million for a local real-denominated bond issue for Telemar, the countrys largest telecom operator, in a seven-year deal expected to total the equivalent of $170 million. In a move to stimulate the debenture market, the IADB itself launched a real-denominated bond in April.

In May Natura Cosmeticos, a leading producer of consumer products, launched an IPO, the first on the So Paulo stock exchange since February 2002. That deal was followed by IPOs in June for Gol, a low-cost airline carrier, and for Amrica Latina Logstica (ALL), a logistics and railway company. Other deals are said to be in the pipeline.

Taxes are another area of concern. Brazils overall tax burdenincluding federal, state and municipal taxesrose to 35.7% of GDP last year, up from 35.5% in 2002. This is one of the highest tax burdens among countries with a level of development comparable to that of Brazil, said Goldman Sachs, which noted the tax burden stood at 29.7% in 1998. The tax burden in Brazil is unevenly distributed and distortionary. This imposes a large burden on legitimate businesses and pushes many workers into the informal sector of the economy.

Despite these issues, the Planning Ministry expects the investment rate to rise to 19.7% of GDP, compared with last years 18%. Several companies have already unveiled ambitious investment programssuch as Petrobrass $53.6 billion program for 2004-2010while foreign investors are also making a comeback after FDI fell from $16.6 billion in 2002 to $10.1 billion in 2003. This year, FDI is expected to rise to $13 billion. A survey of large multinational firms conducted by the United Nations Conference for Trade and Development (UNCTAD), published in June, found Brazil was outranked only by China as the country that offers the most opportunities for foreign investors in 2004-2005.

But attracting greater investment flowsboth foreign and domesticmay also hinge on the corporate sectors ability to tackle basic governance issues. According to the Institute of International Finance (IIF), a Washington-based association of global financial institutions, Brazilian companies must improve their governance practices, including extending voting rights to small shareholders and increasing the number of independent directors on their boards. The IIF notes that, while market capitalization as a share of GDP has averaged 100% in Chile and 130% in the US over the past 10 years, it was only 30% in Brazil. The IIF argues that companies must become more open in a country where 52% of the top 100 non-financial firms are family-controlled.

Analysts will be looking closely at second-quarter earnings to determine whether a recovery is truly under way. Most already agree that the effects of Brazils traditional boom and bust cycles may be diminishing. The ongoing recovery is probably short of the spectacle of growth promised by President Lula da Silva one year ago, said ABN AMRO, but it is probably closer to balanced growth than any of the Brazilian upswings that have occurred since the economy emerged from hyperinflation in the mid-1990s.

Brazils best Banks



Banco Ita

Banco Ita has posted nearly $1 billion in annual pre-taxincome for five years in a row, making it one of Latin Americas most profitable financialinstitutions. While most Brazilianbanks were struggling to survive the fallout from last years sharp currency devaluation, Ita posted $1.09 million in net income. The bank has grown through high-profile acquisitions.



Banco do Brasil

Banco do Brasil offers the Brazilianagricultural andagribusiness sectorsawide portfolio of financialproductsto support their expansion. The bank has increased its agricultural credits by easing requirements and making loans available to a larger cross-section of farmers, while committing to raising its financial support for the 2005-2006 harvest by 30%.




Hedging-Griffo is a major player in the Brazilian agricultural futures market and provides clients with advice on hedging strategies. It is a financial intermediary in both domesticandinternational commodities transactions and acts as broker for hedgers on international markets forsuchkey Braziliancommodities as coffee, orange juice, sugar, cotton, cocoa and soybeans.



Banco do Brasil

As a government-owned commercial bank, Banco do Brasil extends export credits to a broadmixof clients, including stategovernments, public and private corporations and SMEs. Italsomanages export credit lines provided to Brazil by international entities such as the US Eximbank and the Japan Bank for International Cooperation.



Banco Bradesco

Banco Bradesco, Brazilslargest private bank, offers clients a wide variety of foreign exchangeservices. The banks forex division has a strong focus on the countrys growing foreign trade sector, where it helps clients complete trade transactions. It also handles a large portion of money remittances sent home by Brazilian workers residing abroad.



Banco Pactual

For more than twodecades, Banco Pactual has beenBrazils leading local investmentbank. Amid last years toughLatin American market conditions, Pactual provided corporate clients withfinancing solutions by bringing new debt and equity issues to market. Much of its success is based on its relatively small scale, allowing for greater flexibility and execution speed.



Banco Nacional de Desenvolvimento Econmico e Social (BNDES)

As the Brazilian federal governments economic development bank, BNDES is legally committed to supporting projects that contributetothe countryseconomic and social growth. As such, BNDES finances many of the countrys large-scale infrastructure development programs, including industrial modernization projects aimed at boosting the countrys competitiveness.



Banco do Brasil

A one-stop tradefinance shop, Banco do Brasiloffers clientsservices that include forex transactions, standby letters of credit, trade draft discountsand other guarantees to facilitate import and export operations. It also has a trade regulation consulting division and is involved in the federally funded Proex export financing program.



Banco do Brasil

In a country hard hit by sharp currency devaluations and still tackling the ever-present inflation bogey, Banco do Brasil offers clients effective treasury and cash management solutions. Last year the bank appointed The Bank of New York to provide CLS third-party settlement services, allowing it to integrate and optimize its treasury, trading and cash management functions.



Companhia de Bebidas das Americas (AmBev)

Already the worlds fifth-largest brewer, AmBev has announced a merger with Belgiums Interbrew that will create the worlds largest brewing company. InterbrewAmBev will have a 14% global market share. AmBev holds a 70% share of the Brazilian beer market and is one of the worlds most profitable beverage companies, with ROE above 30%.



Braskem is Latin Americas largest petrochemicals company and one of the five largest private industrial companies in Brazil. Already a leader in Latin Americas thermoplastics market, the firm is committed to R&D; investments that will further boost its role as an international player. It ranks as one of Brazils top exporters.


Construtora Norberto Odebrecht

Odebrecht took on its first international construction project in 1980, and its name continues to show up at building sites worldwide as a leader in the fields of engineering, procurement, construction and management. The organizations Vision 2010 program aims to make it one of the five largest business groups in the southern hemisphere.


Natura Cosmeticos

Just a struggling cosmetics store in 1969, Natura has blossomed into Brazils largest consumer products company, with a focus on personal well-being and social responsibility. More than 355,000 independent consultants conduct direct sales of Natura products nationwide. Its portfolio includes more than 510 beauty and personal hygiene products.


One of the worlds leading aerospace manufacturers, Embraer is taking the lead in the development of a new generation of regional and executive jets that is helping to fill its order book. As of March, its order backlog totaled $10.9 billion, and international airlines continue to place orders for Embraers more cost-effective aircraft.


Companhia Paranaense de Energia (COPEL)

Ranked as one of Brazils largest energy companies, Copel has more than 3 million clients and supplies nearly 6% of Brazils energy. It not only serves its home state of Paran, but also exports its surplus output to other Brazilian states. COPEL will celebrate its 50th anniversary in October.



Sadia is Brazils largest exporter of meat-based products, but its product lines extend far beyond meats to include pasta, margarines and desserts. Established in 1944, Sadias brand products are sold in more than 65 markets worldwide, for which it has become one of the worlds leading producers of quality chilled and frozen foods.


Companhia Vale do Rio Doce (CVRD)

CVRD is the worlds largest iron ore miner, with operations extending far beyond Brazil. In May CVRD announced some $5 billion worth of production agreements in China. Recent market buzz has it that the company may be in talks to acquire a controlling stake in Canadas Norandaa major producer of zinc and copper.


Votorantim Celulose e Papel (VCP)

Despite its role as one of the worlds leading pulp and paper producers, VCPs environmental awareness projects have become a model for other Brazilian companies to follow. The companys exports have been soaring in recent years, with export revenues nearly doubling to $373 million in 2003 from $199 million in 2002.


Petroleo Brasileiro (Petrobras)

Petrobras is a fully integrated oil exploration, production, refining, sales and transport company. Petrobras operates 93 production platforms, more than 10 refineries and nearly 16,000 kilometers of oil and gas pipelines. Using its own resources, the company is in the midst of a 2002-2005 $4.2 billion investment plan to boost its refining capacity.


Companhia Brasileira de Distribuio (CBD)

CBD remains Brazils largest retailer. The conglomerate operates the Po de Aucar and Sendas supermarkets, CompreBem discount grocers, Extra hypermarkets and Extra Eletro home appliance stores. The various formats allow CBD to tap a broad spectrum of consumer types, while its network of regional distribution centers keeps its stores well-stocked.


Tele Norte Leste/Telemar

Telemar is Brazils largest telecommunications company, with some 18 million phone lines installed. In addition to its strong performance in the fixed-line market, it also offers Internet, data transmission and mobile telephony services and continues to gain market share in all segments. Telemars operating region covers 64% of Brazilian territory and produces 40% of GDP.

Souza Cruz

A subsidiary of British American Tobacco (BAT), Souza Cruz holds a nearly 78% share of the Brazilian market for tobacco products and is one of the top five largest private companies operating in Brazil. Last year Souza Cruz commemorated the centennial of its founding by a Portuguese immigrant. Today the company exports to more than 50 countries.

Companhia de Saneamento Basico do Estado de So Paulo (SABESP)

As the water utility for the state of So Paulo, Sabesp services some 25 million clients and produces 90,000 liters of treated water per second. The company not only is the largest water and sewage company in Latin America, but is also rated as one of the worlds most efficient firms in its sector.

Santiago Fittipaldi