Brazil’s Harried Horizontal Gaze
Despite paltry corporate profits and more scotched IPOs keeping Brazilian stocks at the bottom of the regional pack, central bank head Tombini predicted second half economic and market turnaround accompanied by a “horizontal” top to bottom structural reform campaign to lift administrative and business competitiveness. His declaration came as commodity and consumption setbacks saddled GDP growth in the 1.5 percent range, and bank lending slowed to a 2-year low as 90-day arrears reached 6 percent of portfolios. With pared benchmark interest rates and riskier categories like auto finance souring private banks retrenched as state rivals particularly Banco do Brazil and CEF were ordered to fill the gap. President Dilma Rousseff has demanded the taps remain open and that high spreads end as borrowers pay an average 25 percent difference. Her approval rating is steady at 75 percent amid the slowdown, corruption trials which will soon put an original key adviser in the dock, and a walkout threat by civil servants pressing wage increases. Their salaries already absorb over 4 percent of GDP, and unions are a stalwart constituency for the ruling Workers Party. An alternative could be tax relief but officials are wary of endangering the traditional primary surplus as contingent liabilities pile up with sporting event and infrastructure-related commitments from development agency BNDES. In external accounts the current account gap has widened on decreased exports while foreign portfolio and direct inflows are on track for $10 billion and $50 billion, respectively. Fixed-income allocation revived toward mid-year as capital controls were eased and real intervention targeted the 2/dollar level. Trade credit has been fully rolled over but buyer appetite has waned for large corporate bond issuers like Petrobras which under a new chief executive has scaled back ambitious investment programs. Japanese retail trusts have reduced interest at the margin, while dedicated US and European funds have overwhelmingly preferred dollar-denominated sovereign instruments. On the equity side while public activity sputters private venture capital continues to flourish as the country ranks only behind the US in attractiveness in industry surveys. In July a $125 million vehicle was raised for internet startups as sponsors look to tap middle-class habits prevalent elsewhere.
Other services providers in the media and telecoms space are seen to benefit from the upcoming World Cup and Olympics splurges, as the current London games are closely evaluated for precedents. A recent research piece from rater S&P summarizing the experience of other hosts found that “cost overruns are a near certainty” as London’s budget has already doubled from the first calculation of $6 billion. Polls show that the $1.5 billion estimated return from the event is widely doubted, and the agency already discounts completion of all Brazilian projects including airports at this takeoff stage.
