Brazil: the lady everybody still wants to dance with – TozziniFreire Advogados

For many years Brazil’s economy had been hailed as the “next big thing”, now even among the BRIC countries it continues to stand out

It is significant that Brazil continues to receive significant investor interest and positive media coverage, while it is the relative ill-health of many other developed countries´ economies that is making the headlines, says José Luis de Salles Freire, Chairman of leading Brazilian firm TozziniFreire Advogados.

“Economically, Brazil is doing better than most of the rest of the developed world and for two major reasons: there has been no domestic financial crisis, and, rising commodity prices have improved industrial and agricultural revenues.”

Brazilian banks remain financially sound, the amount of credit in the commercial and consumer markets is at consistent levels, and tax cuts have been well received, he says.

“The government has done a good job of continuing to stimulate demand in key sectors, such as through incentives to support car manufacturing – which has seen a drop in international exports but a rise in domestic sales – the construction industry and domestic ‘white goods’ manufacturing sectors.”

Transactional M&A activity may be down by volume but by value it remains consistent. It is significant that Brazilian acquisitions tend not to be as highly leveraged as those regularly seen in the US or across Europe, with strategic investments more often than not made by companies using their own funds, says de Salles Freire.

“We continue to see significant levels of investment, including foreign direct investment, across various sectors and have experienced a number of very large transactions, albeit there is an evident reluctance among sellers not to be ‘squeezed’ by buyers.”

Another buoyant area of activity is the projects sector, he says. Brazil will hold the FIFA World Cup in 2014 and this is generating a significant amount of infrastructure and logistics activity across the 12 host cities.

“We still see relatively few public-private partnership structures as most projects continue to be developed very much on a concession basis.

Nonetheless the government is embarking on an ‘accelerated’ infrastructure programme across the country, but particularly in the north east of the country.”

Significant also is the continuing development of the country’s oil and gas sector, with much debate currently surrounding the concession models to be used on the newly discovered “ultra deep” Carioca-Sugar Loaf and Tupi oil fields, says de Salles Freire.

“There is discussion over what stance the government will take in relation to the ultra deep reserves; whether it is open to new bidding structures or will look to continue to protect the position of the state oil company Petroleo Brasileiro through the traditional concession system.”

No new blocks have yet been allocated but foreign energy companies – including Galp Energia, its subsidiary Petróleos de Portugal, and Repsol – have clearly been successful in developing previous Brazilian exploration blocks.

“But despite this success, economic issues have begun to limit new Portuguese and Spanish investment with continuing activity notable only in the tourism and real estate sectors,” says de Salles Freire.

Significant, he suggests, has been the recent decision of some foreign-owned banks to raise funds through the Brazilian capital markets rather than invest new external funds.

Brazil’s own companies, including its multinationals, continue however to target new growth opportunities, domestically, regionally and internationally, he says.

“What is significant though is the pace of growth. Brazilian companies continue to expand notably across the lusophone world but perhaps more slowly than their US or European peers because this tends to be self-funded.”

Africa remains a focus of foreign investment, notes de Salles Freire, with an evident focus towards Angola, where construction companies such as Odebrecht are now major operators, and Mozambique which this year has seen the announcement of a $1.3bn investment by mining giant Vale to develop the country’s coal industry.

Brazil itself may have experienced a relative drop in foreign direct investment over the past year, says de Salles Freire, but it must be noted that 2008 was a record year, with investments totalling almost $45bn.

“The year to date has nonetheless already seen close to $20bn of foreign investment, which compared to other countries – including the BRIC countries – is high. We have always known Brazil had tremendous economic potential. It is now being realised.”