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R 301739Z SEP 08
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UNCLAS SECTION 01 OF 04 SAO PAULO 000522 
 
SIPDIS 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DEPT OF TREASURY FOR JHOEK, BONEILL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: PROSPECTS FOR BRAZILIAN INVESTMENT AMID CRISIS 
 
REF: A. Sao Paulo 0486; B. Rio de Janeiro 0159 
 
¶1.  (U) Summary:  Prominent Investment magazine Latin Finance hosted 
its 6th Annual Brazil Investment Forum in Sao Paulo on September 18. 
 While the original intent of the conference was to explore 
financing growth and investment in Brazil, taking advantage of 
Brazil's out-performance of its emerging market peers, the U.S. 
subprime crisis and collapse of Lehman Brothers on September 15 
redirected attention to the impacts of the current financial crisis 
on the Brazilian economy (Ref A).  With robust economic growth in 
2007 and record foreign direct investment, attendees generally 
agreed that Brazil had strong economic fundamentals with which to 
anchor its economy.  The Brazilian Development Bank (BNDES) said 
investment grew in all sectors, with retained earnings and BNDES 
loans as the two largest financing sources.  Representatives from 
large Brazilian companies told the audience that their balance 
sheets were strong and had no plans to alter investment plans over 
the next few years.  Several commentators noted, however, that 
smaller firms would face higher capital costs as a result of less 
international credit.  Many pointed to consolidation and 
acquisitions as many companies would be unable to finance their 
operations at higher costs as one of the biggest consequences of the 
crisis.  Although private equity would now face fewer competitors, 
industry analysts suggested many Brazilian family-owned companies 
were unprepared to work with private equity funds.  Overall the mood 
of conference participants was of cautious optimism, stating that 
Brazil was well prepared to confront the external crisis, but with 
careful attention to worldwide events and conditions.  End Summary. 
 
Investment in 2007 
------------------ 
 
¶2.  (U) The Brazilian Development Bank (BNDES) is the largest 
Brazilian credit bank, disbursing 17 percent of total credit in 
Brazil in 2007.  About 40 percent of BNDES disbursements were for 
infrastructure projects, 30 percent for private-sector manufacturing 
and industrial projects, eight percent to agriculture, and 10 
percent for exports.  Between January and July of this year, BNDES 
approved R$ 28 billion more than it disbursed (approximately 14.74 
billion USD using 1.9 Reais/dollar).  Ernani Torres Filho, 
Superintendent of Economic Research for BNDES outlined Brazil's 
investment performance in recent years.  Investment has grown faster 
than GDP in the last 13 quarters in a row.  BNDES estimated that 
investment would reach 19.7 percent of GDP in 2009 and 21 percent by 
¶2010.  (Note:  This still lags significantly behind the other BRIC 
economies where investment in infrastructure is considerably higher: 
Russia (21 percent), India (34.6 percent), and China (40.4 percent). 
 End Note.)  Through 2011, the manufacturing sector would receive 
the most investment, about R$ 627.1 billion, followed by housing 
with R$ 534.9 billion and infrastructure with R$ 304.6 billion. 
Torres noted that although investments would be concentrated in the 
oil and gas and mining sectors, all sectors are growing fast. 
Shipyards would have the greatest growth increase, by about 68 
percent between 2008 and 2011.  Infrastructure growth in electricity 
is expected to be 18.7 percent and 45 percent in ports development 
and expansion.  According to a BNDES' study, companies' retained 
earnings and BNDES loans are the two largest financing sources; 
however, Torres noted that the private sector was necessary because 
public funds and retained earnings are not enough to fund Brazilian 
companies' investment plans. 
 
Big Business Feeling No Pain 
---------------------------- 
 
¶3.  (U) In a panel on the opportunities in Brazil, representatives 
from the large multinational corporations in Brazil generally 
thought that Brazil would fare well against the U.S. financial 
system crisis and explained that the large Brazilian conglomerates 
were well capitalized and would not initially feel the pinch of the 
worldwide credit crunch.  As a result, they expected some 
consolidation among the smaller firms as credit access grew scarce. 
Jose Olympio Pereira, Managing Director and Head of Investment 
Banking for Credit Suisse said that this was the first external 
crisis that Brazil had faced in recent years, but that Brazil was 
resilient due to the virtuous investment cycle and less dependence 
on foreign debt.  He thought that credit would be tight and the 
question would be how Brazil would finance its growth.  He explained 
 
SAO PAULO 00000522  002 OF 004 
 
 
Bovespa's decline as a pull-out by foreign investors (nearly 70 
percent of the total), many of whom are selling off their 
investments due to cashflow problems.  He underscored that Brazilian 
companies are healthy and that long-term horizon investors would 
continue to invest in Brazil.  He also pointed to infrastructure, 
electricity generation, and real estate as positive sectors for 
investment. 
 
¶4.  (U) Despite the external scenario, Luis Felipe Schiriak, CFO of 
Votorantim (family owned, multinational corporation with 50,000 
employees conducting business in the industrial, financial, and 
information technology areas among others) said the company had not 
altered any of its planned investments.  He noted that Votorantim's 
business calculations were in flux, but that the Brazilian internal 
market was growing so fast that it continued to experience supply 
shortages.  Schiriak said that Votorantim had prepared an 
international bond issue but lacked the market.  Aymar Giglio Jr., 
Treasury and Finance Director of Supermarket Chain Pao de Acucar, 
said that the company expects strong medium and long-term growth, 
but will be more cautious over the short-term.  He explained that 
Pao de Acucar had all of its funding needs met until 2011. 
 
¶5.  (U) Luis Largman, CFO of Cyrela Brazil Realty was optimistic 
about the Brazilian real estate sector.  Cyrela is fairly well 
insulated and has enough money to fund five years of construction at 
competitive rates, but would need to be more conservative.  He said 
that demand for housing would continue despite the external crisis. 
Largman underscored that housing is relatively more affordable in 
Brazil; he said the average home in Brazil costs two to three annual 
salaries, while in London it is approximately 50 salaries.  Pereira 
added that Credit Suisse had already identified some consolidation 
in the real estate sector because the cost of capital for larger 
firms is half that of small and medium size Brazilian companies. 
 
¶6.  (U) Francisco Gros from OGX Petroleo and Gas was somewhat less 
optimistic despite OGX's IPO that captured USD 4.16 billion in June 
(Ref B).  He noted that while for many Brazilian firms it was 
business as usual, companies have no map from which to make 
predictions about the future business climate.  He reminded the 
audience that Brazil had paid the price of complacency in the 1970s, 
only later paying the price.  Despite his uncertainty, he believes 
the floor for oil prices is about USD 90 given the escalation of 
production costs and relative demand.  He noted that the pre-salt 
reserves have an estimated USD 30 to 40 per barrel cost in the best 
case scenario.  (Note: The Federation of Industries of Sao Paulo 
Director Thomas Zanotto noted in a recent meeting that the cost was 
closer to USD 70 to 80 a barrel.  End Note.)  He similarly believed 
other commodity prices would stabilize given Chinese and Indian 
demand and the logistics bottlenecks of expanding the supply of 
various commodities. 
 
¶7.  (U) Wilson Ferreira Jr. the CEO of CPFL Energy believed that the 
Brazilian energy sector would muddle through the crisis.  Despite 
the critical shortage of electricity infrastructure, a slower 
economy would help alleviate demand.  He noted that the 
infrastructure gap was partly due to a lack of regulation and 
institutions to encourage investment.  CPFL estimated that the 
Brazilian economy needed R$ 87 billion in infrastructure, but only 
received R$ 52 billion.  Of that, last year Brazil made only 60 
percent of the needed transportation investments, 75 percent in 
electricity, 92 percent for oil and gas, and 96 percent for 
telecommunications infrastructure.  He pointed to proper regulation 
and positive investment climate within telecomm as an explanation 
for why that sector nearly met its infrastructure investment needs 
last year. 
 
¶8.  (U) Carlos Camargo, Aerospace Giant Embraer's Head of Capital 
Markets and Investor Relations said that Embraer has a very robust 
cash position which should not require them to change any 
investments.  Similarly, he did not foresee credit tightening as a 
problem for Embraer's clients in the near-term because they lock in 
financing 24 months prior to the delivery date.  He added that 70 
percent of 2009 deliveries have already been financed, but that 
clients could find it more difficult for 2010 financing.  Despite 
the recent events, Camargo boasted that Embraer continued to sign 
new contracts and suggested that Embraer's high net worth client 
base was removed from the crisis. 
 
SAO PAULO 00000522  003 OF 004 
 
 
 
Financing Alternatives 
---------------------- 
 
¶9.  (U) While Brazil's capital markets have grown more 
sophisticated, several commentators said that Brazilian small and 
medium firms would face a liquidity crunch, which would eventually 
lead to a more "lean and mean" Brazilian economy.  Henrique Teixeira 
Alvares, founding partner at NEO Investimentos, said that Brazilian 
companies that had done their homework would have access to the 
limited international credit.  He said creditors would be looking 
for efficiently-run companies to put their money.  Frederico 
Flossbach, the Deputy Director of the Andean Development Corporation 
(CAF) told the audience that the CAF also finances itself from 
international capital markets, but should be in a good position to 
capture the limited financing.  Indeed, the head of Investor 
Relations for Localiza Silvio Guerra posited that the crisis created 
opportunities for companies that are able to finance themselves to 
buy out competitors struggling to get access to financing.  Alvares 
suggested that companies willing to absorb the higher borrowing 
costs would have ample available financing. 
 
¶10.  (U) Francisco Gros pointed out that Brazil would be competing 
with hundreds of solid companies available at liquidation prices, 
which could undermine FDI flows as investors opt to acquire existing 
companies rather than new investments.  Flossbach argued that the 
Brazilian Central Bank would keep interest rates high to avoid 
capital flight, which could slow Brazilian economic growth in 2009. 
Guerra suggested that the Middle East and Asia could replace the 
U.S. and E.U. as important liquidity sources.   Claudio Ramos from 
KPMG's Financial Advisory Services commented that the crisis has all 
but eliminated possible funding for IPOs, given that nearly 70 
percent of investors were from the U.S. and the E.U.  He noted, 
however, that companies that completed successful IPOs last year 
would be in a better position to acquire others.  Ramos posited that 
we would see buy-outs of companies listed on Bovespa, noting that it 
would a difficult environment to defend against takeovers. 
 
The Losers - Small and Medium Size Firms 
---------------------------------------- 
 
¶11.  (U) In a frank side discussion about the recent events, several 
participants expressed concern to Econoff about small and medium 
size banks in particular.  Fernando Meibak from Sunrise Investments 
and Claudio Goncalves from Plurimax Asset Management, both based in 
Sao Paulo, said that many smaller banks had financed auto loans at 
fixed rates without the deposits to back them up, and instead 
expected falling interest rates and had relied on short-term 
financing.  They also suggested that the agriculture sector was in 
bad financial shape.  Fernanda Dezotti, Planning Manager for Clean 
Energy Brazil told Econoff that many ethanol mills had maxed out on 
debt to expand and were now hoping that foreign investors would bail 
them out. 
 
Private Finance to the Rescue? 
------------------------------ 
 
¶12.  (U) The credit tightening and stock market decline worldwide 
has opened the door for private equity in Brazil, according to 
several conference participants.  Joao Marcelo Eboli from CPR 
Companhia de Participacoes explained that private equity funds would 
be looking for companies with high-quality leadership and that 
industrial firms would be a natural first choice.  Ramos agreed that 
private equity would most likely seek out sectors more closely tied 
to internal demand and infrastructure.  Despite this opening, 
Nicolas Wollack, CEO of Axxon Group affirmed that many Brazilian 
companies were ill-prepared for private equity, lacking a level of 
professionalism and understanding about the different role that a 
private equity partnership implied for a company's decision making. 
Marcelo Xando Baptista from Verax Financial Services commented that 
while family companies had used IPOs as a financing tool, private 
equity would impose technology and culture that many family 
companies were not ready to accept.  He further commented that 
private equity was easier to incorporate into a business model in 
good times and would be more difficult now. 
 
Comment 
 
SAO PAULO 00000522  004 OF 004 
 
 
------- 
 
¶13.  Brazil's economy is strong, perhaps in the best position in 
years to defend itself against the U.S. crisis.  In fact, while many 
emerging markets suffered after the first signs of the U.S. subprime 
crisis emerged last August, Brazil continued to out-perform. 
Despite the U.S. economic downturn, Brazil forged ahead by becoming 
a net external creditor in February, and then achieving recognition 
as an investment grade sovereign in April.  The decline of foreign 
capital in Brazil is more about investors pulling money out of 
Brazil to have liquidity in the U.S.  Even with a strong economy, 
however, Brazilian authorities will need to remain vigilant and take 
steps to counter the slowing of investment inflows.  Some mergers 
and acquisitions could strengthen the Brazilian economy and make it 
more efficient, but eventually reforms would be needed to make 
Brazil more competitive.  End Comment. 
 
¶14.  (U) This cable has been cleared/coordinated with Embassy 
Brasilia. 
 
WHITE