While 2015 was an altogether forgettable year for Brazil’s economy an interesting fact that emerges from our global view of the corporate deal marketplace at BankerBay is that sometimes the corporate deal flow looks healthy even when macroeconomic conditions deteriorate.
For the most part it seems logical that there would be a direct correlation between the general health of a country’s economy and the health of that country’s market for corporate deal making. But an interesting fact that emerges from our global view of the corporate deal marketplace at Aurigin (formerly BankerBay) is that sometimes the corporate deal flow looks healthy even when conditions in the economy deteriorate.
That certainly seems to have been the case for Brazil where 2015 is an altogether forgettable year for the economy. After leading global growth through most of the Global Financial Crisis, some analysts estimate the economy shrank by as much as 3.5% last year. And although official numbers have not been published yet, it appears for the first 10 months of year that the Brazilian economy shed more than 900,000 jobs in various sectors while at the same time inflation was beginning to accelerate.
Brazil’s inflation is set against a backdrop of deflation fears elsewhere in the world, caused by slowing Chinese growth and falling oil and commodities prices. Most of Brazil’s price pressures are homegrown, underpinned by loose fiscal policy and successive increases in the minimum wage regardless of productivity gains. By year-end inflation had pushed well above the upper limit of the central bank’s target range of 6.5% and ended 2015 in double digits. At 14.25 percent, the Brazilian central bank benchmark Selic rate is the highest among major global economies and although the central bank expects inflation to ease back to the target range this year policymakers are under tremendous pressure to resume rate hikes at its next meeting on Jan. 20 to rein in inflation.
To add to inflation woes, the Brazilian real plunged 33 percent last year pushing up the price of imports and is forecast to weaken a further in 2016, according to currency experts in the latest Reuters poll.
Dismal as the economic news in Brazil has been, if anything the political news has been far worse, certainly from an investor’s perspective. Major figures across the political landscape have been embroiled in scandal. President Dilma Rousseff faces a potential impeachment fight in Congress based on allegations of falsifying government accounts. Meanwhile the opposition leader in Congress Eduardo Cunha who is leading the impeachment charge against the president also stands at the centre of corruption charges brought by a lobbyist who has testified that Cunha is the recipient of more than $5 million in bribes. And to top it off, the state oil company Petrobras is embroiled in a long-running corruption probe that has implicated scores of top Petrobras executives, as well as politicians and financiers from around the country.
The succession of scandals is of crisis proportions, leading analysts to speculate about various scenarios for the next 18 months, none of them particularly appealing. The Brazilian judicial system, which has demonstrated considerable independence in handling these corruption cases, could force new elections or the House of Representatives could vote to impeach Rousseff in which case she would be forced to step down for at least 6 months to face trial in the Senate. Perhaps the least worst scenario is that President Rousseff can muddle through in a weakened political state through the end of her present term in 2018. In any case, the climate of extreme uncertainty would seem to be just the sort of thing that keeps most investors on the sidelines.
And yet, notwithstanding all the bad economic and political news coming from Brazil, deal flow from Brazil so far is still holding up. Aurigin data shows Brazil still accounts for a substantial majority of the potential opportunities in South America across the board in all the categories we track: capital investment, mergers & acquisitions and project finance. Although a slew of Brazilian companies are up for sale, there are a significant number of companies looking to refinance businesses by taking advantage of the weaker currency.
Indeed, buyers are keen to invest in Brazil as well. A few big ticket M&A deals that closed towards the end of last year suggests a healthy investor appetite, which again could in part be due to lower acquisition costs stemming from a weaker currency. Coty Inc., for example, agreed to buy the personal-care and beauty division of Hypermarcas SA for about $1 billion in cash late last year, followed by shoe manufacturer Alpargatas SA selling two brands to a group of investors led by Carlos Wizard in a deal worth 48.7 million reais ($12.8 million).
The overarching question is the political scenario at the moment and will remain the focal point for investors in Brazil. Any indication the government cleans up its act and shows the ability to pass fiscal measures will result in a faster recovery of assets, including the real. Watch this space for more on Brazil over this year.