On The Ground: Infrastructure Dominates The Conversation


BMI View: A recent trip to Brazil to attend a conference and client meetings provided BMI 's Country Risk team with a number of insights into the political and economic realities on the groun d in the country. In particular, we gained a more in-depth perspective on the evolving landscape for infrastructure construction and financing, in addition to getting the sense that confidence and growth potential in the private sector remain high despite a relatively weak macroeconomic outlook.

BMI travelled to Brazil in late May in order to meet with clients, attend a conference, and gain on-the-ground political and economic insights . W ith real GDP growth hitting the lowest level since 2009 last year, prompting a widespread reassessment of Brazil's growth potential by international investors, its turn to host the 2014 FIFA World Cup and 2016 Olympic Games fast approaching , and a general election next year , the re were a number of pressing topics on the minds of local analysts and investors .

From the time we landed at São Paulo's Guarulhos airport until we departed back to New York, there was no escaping Brazil's evolving infrastructure story. A number of projects are still und er construction at the airport ( with work even ongoing at a few sites when we landed on a Sunday morning ) in the hopes that they will be completed in time to accommodate the thousands of visitors expected to descend upon the city in almost one year for the FIFA World Cup. A consortium led by Invepar , a group of pension funds from Brazilian state-owned companies, and South African operator ACSA were awarded the Guarulhos contract in February 2012 at the same time that concessions were awarded for airports in Brasilia , Natal and Campinas . Given the relative dearth of experienced operators bidding on the concessions and the high premiums paid, our Infrastructure team remains sceptical about the viability and timeliness of these projects ( see 'High Premiums And Cheap Credit Distort Litmus Test For Airports', February 6, 2012 ). In addition to these projects , and numerous signs announcing various construction sites as part of the government ' s PAC II growth acceleration programme, infrastructure was a major topic of conversation amongst analysts and investors .

Airport Sector On The Rise
Brazil - Airport Industry Value, US$bn

Infrastructure financing, including the nascent debentures market, and the omnipresence of state development bank Banco Nacional de Desenvolvimento Econômico e Social (BNDES) were major themes, with some disagreement emerging over the long-term role of the bank. While some domestic investors seemed to envisage BNDES as a productive partner, others clearly had a more negative assessment of the bank, hoping that increasingly competitive projects and growing credibility would incentivise greater private sector involvement, and therefore minimise BNDES's role in the coming years. While our Infrastructure team acknowledges that BNDES is likely to remain the primary source of infrastructure financing in the medium term, we believe that at some point the bank will need to pare back its funding if the government is serious about attracting greater private investment in the sector. In addition, while many analysts acknowledged the increased focus on infrastructure development during President Dilma Rousseff's tenure, they noted that there are still significant improvements to be made, as well as a substantial divide between what the government is saying it will do, and what the government is actually doing.

A Slow Recovery
Brazil - Selected Components Of Real GDP By Expenditure, % chg y-o-y

There also seemed to be a perceived divergence between growth prospects on the macroeconomic and microeconomic fronts, with confidence in Brazilian companies remaining high despite a relatively weak economy. Indeed, our views on slower real GDP growth over the medium term, expansionary fiscal policy, the central bank's shaky inflation-fighting credentials, and the need for further increases in the Selic target rate this year were largely shared by our peers (see 'Expansionary Fiscal Policy Here To Stay', April 16 and 'Rate Hike Strong Signal Of More Hawkish Monetary Policy', May 30). Meanwhile, both foreign and domestic investors remained more optimistic about potential for individual private companies to perform well in spite of these conditions, given robust management structures, strong balance sheets and considerable sector-level growth potential. While several of our Industry teams also see strong potential for expansion in Brazil in the coming years, we remain wary of any major divergences in the outlooks for Brazil at the microeconomic and macroeconomic levels.

Our trip to Brazil largely confirmed our major macroeconomic views, while providing more specific insights into issues at the forefront of local analysts and investors minds. While the Brazilian economy was not booming, with the major shopping streets and centres busy and business carrying on as usual, perhaps the situation on the ground is not as dire as the headline growth numbers suggest.

This article is tagged to:
Sector: Country Risk
Geography: Brazil