EMTA SPECIAL SEMINAR
BRAZIL 2014: JUGGLING POLICY VS. POLITICS
Wednesday, January 8, 2014
Sponsored by
Bank of America Merrill Lynch
One Bryant Park, 2nd Floor Auditorium
(42nd St. and 6th Ave.)
New York City
2:45 p.m. – Registration
3:00 p.m. – Keynote Address
Special Focus on Brazilian Presidential Election
Dr. Murillo de Aragão
GlobalSource Partners and Arko Advice
4:00 p.m. - Panel Discussion
Alberto Ades (Bank of America Merrill Lynch) – Moderator
Alberto Ramos (Goldman Sachs)
Siobhan Morden (Jefferies)
Jim Barrineau (Schroders)
Lisa Schineller (Standard & Poor's)
5:00 p.m. – Cocktail Reception
Additional support provided by Goldman Sachs and Jefferies.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
EMTA Brazilian Seminar Focuses on Presidential Elections, Economy and Possible Ratings Downgrade
President Dilma Roussseff remains likely to be re-elected President of Brazil for a number of factors, according to noted Brazilian political analyst Murillo de Aragao. De Aragao discussed the upcoming elections during a keynote address at EMTA’s Special Seminar on Brazil, held in New York on January 13, 2014. Bank of America Merrill Lynch hosted the event, which drew 185 market participants.
President Roussseff retained a high approval rating, despite a dip in polls in mid-2013, and “presidents with high approval ratings tend to get re-elected,” De Aragao observed. The President’s coalition, the largest in Congress, allows her six minutes of free political advertising, twice the time allotted to her nearest rival, Aecio Neves, which has served as a significant advantage. Opposition parties have thus far not succeeded in taking advantage of the national unease and “grumbling,” and have failed to provide a coherent alternative to the President, he argued.
Economic growth was the main reason why former presidents Lula and Cardoso were re-elected, and a deteriorating economic environment could create problems for the president. However, unless Brazil’s strong employment numbers suffered a dramatic reversal, or inflation spiralled out of control, the economy was likely to play in Dilma’s favor. De Aragao added that Brazil’s hosting of the 2014 World Cup was a “mystery factor, which could harm or boost Dilma,” although he did not expect it to be a significant factor either way. A new corruption scandal remained a risk for Dilma’s re-election –“we often have corruption scandals in government; but lately they have hurt the opposition more than the government,” he stated.
Other conceivable winners of the October elections included center-right candidate Neves, who receives the second-highest amount of free advertising time on tv, and whose party controls important states; and Eduardo Campos of Brazil’s PSB party, who faces a tougher challenge to make it to the second round. De Aragao acknowledged that Campos and Neves could unite in a second round challenge to Dilma, while arguing that they were unlikely to form an anti-Dilma coalition before the first round. He declared that the power of Green Party candidate Marina Silva, now allied with Campos, was “over-emphasized,” and that she suffered from a precarious party structure.
De Aragao advised investors to monitor the political effects of the US FOMC’s tapering policy on the Brazilian economy, and to stay alert for possible protests (with 10,000 police being hired to address any World Cup embarrassment for Brazil). “However, I am more concerned with unknown factors; we have to have something really extraordinary to change the status quo,” he affirmed.
Reforms were unlikely in 2014, although De Aragao saw possible progress in 2015. The government recognizes that its tax system discourages investment in Brazil, and was likely to debate a more investor-friendly environment in the future.
As for controversial Finance Minister Mantega, he was likely to be replaced in a second Dilma administration, according to de Aragao. Dilma was unhappy with his performance, but she remained resistant to appear to be acceding to calls from the press for his ouster. De Aragao speculated that former Central Bank presidents Mereilles and Tombini were possible successors, while adding that any ratings downgrade would not result in an earlier exodus for Mantega. “That would give power to the ratings agencies that the government doesn’t want to give them...would the head of the Fed be fired if the US was downgraded?” he asked rhetorically.
A panel following de Aragao’s presentation covered a range of views on Brazil’s economic outlook, moderated by Bank of America Merrill Lynch’s Alberto Ades. Asked to describe the “new normal,” Jim Barrineau (AllianceBernstein) forecast 2-3% growth going forward. “We all know that potential GDP increases could be higher, but lower growth is inevitable due to both the macro-economic environment and political factors,” he reasoned.
Lisa Schineller of Standard & Poor’s discussed FDI into Brazil, which she described as continuing to be fairly robust, though noting that it has already declined. She expected it to continue to moderate, and not fully cover the current account deficit. Schineller emphasized the importance of diversified FDI.
Goldman Sachs’ Alberto Ramos addressed steps that could be taken to boost the Brazilian economy. Ramos stressed the importance of improved education in Brazil, and urged policymakers to invest more and open up the closed economy. He also expressed frustration at the regulatory environment, and an inefficient use of tax revenue (“a tax burden of 40% of GDP only works if a good share of it is geared towards investment and the government provides good public services, but that does not seem to be the case.”) Pushed by Ades if changes were possible within the next 5 years, Ramos viewed educational advances as possible, while dismissing the likelihood of more open trade.
The independence of the Central Bank post-election remained an issue for Siobhan Morden of Jefferies, who forecast 2% growth in Brazil this year. In order to regain credibility, she believed the Central Bank would have to over-hike the SELIC rate, and she remained unsure if the administration was willing to accept the resulting political cost. Barrineau was in comparison less negative on the Central Bank, noting that other countries such as Mexico had allowed inflation to exceed targets without strong market reaction.
Addressing the deterioration in Brazil’s fiscal and external accounts, Schineller, whose firm issued a negative outlook on Brazil’s sovereign rating in June 2013, stated that she monitored both. Brazil’s weaker fiscal trends include a declining primary surplus, lack of clarity around the fiscal target, and an increasingly reliance on one-off revenues in 2013. However, she highlighted that the composition of Brazil’s government debt profile still remained “much improved compared with five years ago.”
Ramos dismissed suggestions that Brazil could lose its investment grade rating, while conceding a downgrade was possible. “The boat can still rock a lot before it sinks...Brazil is not in a crisis, it’s just an uninspiring performance with most of the issues structural” he opined.
Ramos and Barrineau agreed that a one-notch downgrade has already been priced in by the market, with Barrineau speculating that a relief rally might follow a ratings drop. On the other hand, he cautioned that a downgrade, accompanied with a continued negative outlook, was not anticipated, and might prompt a market sell-off.
Schineller stated that one of the reasons for the current negative outlook was uncertainty with post-election policies, and the agency would be watching post-election policy signals. As for timing of any possible downgrade, “we might move before the election, or after the election, or not at all,” she stated.
Morden added that tapering has also been somewhat priced into Brazilian bond levels. “If the UST move is gradual from 3% to 3 ½%, then I think we can expect limited contagion; however, if the process is disorderly, then 13% yields are not the ceiling on 10-year local debt,” she surmised. Repricing is at the early stage, though, as the markets are just starting the unwinding of global liquidity.
Speakers were then asked to compare Brazil to other EM credits. “Brazil doesn’t look that bad compared to the other ‘Fragile Five’ economies,” asserted Barrineau, who added “they have to work on the fiscal side, as many EMs do.” Morden compared Brazil to Argentina, noting some commonalities, but also stressing Brazil’s greater political checks and balances, stronger business sector lobby and a more accountable president (to her own party). However, Morden saw little room for near-term optimism. “Dilma persists in following an economic model that is failing and that stubbornness is a concern; three years of low growth and the President hasn’t done anything,” she concluded.