Is Brazil Set For A Surge?Bill Hinchberger
The "fulcrum of productive activity is passing from the state sector to the private sector," says Brazil's new President, Fernando Henrique Cardoso. Completing that shift will be the key to continued success in Cardoso's radical anti-inflation strategy during his four-year term, which began on Jan. 1. As Finance Minister last year, Cardoso slashed inflation from more than 40% per month to just 2% in December with his Real Plan, which includes a new currency, the real, now worth $1.17. Rising business confidence, buoyed by the plan, is expected to expand gross domestic product by close to 5% this year, up from more than 4% growth in 1994.
That prospect may be dimmed a bit, but not drastically, if repercussions from Mexico's peso debacle crimp the flow of international capital. Brazil's stock market dropped by 15% in the two weeks following the Mexican collapse. But Cardoso's strategy does not depend on the huge inflows of foreign portfolio investment that Mexico used to finance its huge trade deficit. Although Brazilian imports are rising, Brazil still expects to run a $5 billion trade surplus this year. And the real is backed by massive hard-currency reserves totaling more than $40 billion.
"We could see the real drop a bit, which is not really a bad thing," says Robert Barclay, an analyst at Baring Securities Brasil who expects the central bank to let the market set the exchange rate. And the warning from Mexico will force more discipline on Brazil's government and politicians. "I think this is healthy," Barclay says. "Mexico was living beyond its means."
If anything, the dire consequences of Mexico's overspending may help Cardoso persuade Brazil's Congress to enact further reforms that are needed to underpin his Real Plan, from revamping social security to overhauling federal revenue-sharing with the states. It should also help Cardoso win support for measures to attract private investors to put money into sell-offs of state-run companies and into badly needed infrastructure, from power plants to telecommunications.
Among the prospective beneficiaries are 142,000 So Paulo cellular-phone users, who now encounter frustrating delays trying to place calls at peak hours, and 820,000 Paulistas who have had their names on a cellular-phone waiting list for as long as a year. Cardoso promises to spur $75 billion worth of infrastructure investment, half of it from private sources, over the next four years (table). Among other measures, he plans to push Congress to shrink the monopoly of Telebrs, the state telecommunications company, to allow concessions to private companies in areas such as cellular phones and data transmission.
Such investments will help Brazil's recovery from the "lost decade" of the 1980s, when economic recession halted work on projects from mass transit to power plants, including 18 unfinished hydroelectric plants scattered across the country. Completion of these and many more projects will be needed to head off bottlenecks if Brazil's new price stability triggers a surge of industrial expansion. "If Brazil grows by 5% a year, we're going to have an energy shortage," predicts Antonio Hermann Azevedo, executive vice-president of Banco Itamarati, a leading So Paulo-based bank.
DEBT-LADEN STATE. Cardoso, who was a leftist sociologist before he became a politician, sees privatization as an answer, more as a pragmatic necessity than an ideological crusade. The federal government has no money to finance investments or cover losses of state-run companies. And revenue from privatizations will be needed to offset an estimated $7 billion federal deficit this year.
Brazilian states, most of which own electric utilities, could also jump on the privatization bandwagon. Minas Gerais, a leading industrial state, plans to sell off a state-run bank. And for heavily indebted So Paulo state, "there is no other option" but privatizations, predicts Banco Itamarati's Azevedo.
This year, Cardoso is expected to put assets on the block ranging from Light, the Rio de Janeiro electric utility worth an estimated $2.5 billion, to shareholdings in Copene, a major petrochemical complex, and in other petrochemical makers worth an estimated $4.3 billion.
The richest prize, though, is Companhia Vale do Rio Doce (CVRD), the profitable mining, forest products, and transport company worth an estimated $16 billion. "Cardoso needs to have an important success in privatization early on," says Andres V. Gil, chief of Latin American practice at New York law firm Davis Polk & Wardwell. "CVRD is the jewel." The company could be split into separate businesses, such as forestry and mining, and sold through international share offerings.
It's unlikely that Cardoso could push constitutional changes through Congress to end the monopolies of Telebrs and Petrobrs, the state oil company. But he will prod Telebrs and Petrobrs to set up joint ventures with private companies in those sectors. Setting up such partnerships could involve tough bargaining, however. Tenneco, British Gas, and Australia's BHP are partners with Petrobrs in the Brazilian segment of a proposed $2.1 billion, 3,400-kilometer gas pipeline from fields in eastern Bolivia to So Paulo. But Petrobrs and the World Bank, which offered to finance the pipeline, are deadlocked over the bank's demand that the private partners must have majority control.
The pipeline is one of a batch of major ventures the Clinton Administration is targeting as U.S. business prospects in Brazil. Last summer, President Clinton and other top Administration officials contacted their Brazilian counterparts to back Raytheon Co.'s successful bid for the contract to build SIVAM, a $1.5 billion satellite-based system to monitor the Amazon region. To help U.S. companies win other key projects, "we would mount a full-court press, with all the relevant administration officials," says Jeffrey E. Garten, Commerce Under Secretary for international trade. Targets include So Paulo's $1 billion subway expansion, $930 million worth of facilities on the Tiet-Parana Rivers waterway, and a $300 million renovation of railway locomotives--a contract General Electric Co. and a Brazilian partner are competing for.
CLEARING OBSTACLES. Electric power may be the biggest opening for private investors. By 2000, Brazil needs to add 20,000 to 30,000 megawatts of generating capacity, says Carlos Sussekind, executive director of Promon, a leading Brazilian engineering company. The electric-power market is drawing a stream of prospective investors, including an average of two visits a week to Promon from U.S. banks, utilities, and independent power producers.
Chase Manhattan Bank is launching a holding company, Power do Brasil, in partnership with Rede, Brazil's biggest private-power distributor. "We are thinking about being shareholders in the energy sector, environmental technology, and telecommunications," says Power do Brasil Associate Director Renata Siebert de Moraes. Another prospector is Southern Electric International Inc., a subsidiary of Atlanta-based Southern Co. Brazil's needs "are so big that we will have multiple opportunities there," says Chief Financial Officer Raymond C. Hill.
Brazil's Congress still needs to clear away legal and regulatory obstacles to such projects. But despite the shock waves from Mexico that are buffeting Latin markets, Brazil seems poised for a surge of new investments in infrastructure. They will speed Cardoso's shift to an economy driven by the private sector.