What would economic stability look like for Brazil?

May 18, 2017
<p>Latin America&rsquo;s economy has gone through both boom and bust in recent years and is now targeting political and corporate governance reform&nbsp;</p>

At a glance

All change
A political impeachment has ignited enthusiasm for governance reform – both political and corporate – in Brazil, leaving investors, corporates and the general public cautiously optimistic about the future.

Work still to do
The World Bank predicts an imminent return to GDP growth for Brazil, but also recognizes it as only the 123rd easiest country to business in, demonstrating the challenge that lies ahead to reform a range of prohibitive laws and policies.

Strategic IROs
IROs who have successfully navigated the choppy waters of the last few years have done so by being open and honest with their investors, and providing a regular flow of information back to company executives and directors.

You don’t have to go back very far to recall a time when Brazil was one of the fastest-growing economies in the world, briefly overtaking the UK as the world’s fifth-largest economy. It’s remarkable, then, that the country just recorded it’s eight consecutive quarter of economic contraction. According to data from Ipreo, the total value held in Brazilian companies peaked in Q1 2011 at more than $470 bn, but by Q4 2015 that number had fallen to just over $135 bn. 

The country has been through the ringer: a far-reaching political corruption scandal, drying up foreign investment, and widespread discontent about public funds being used to host two major sporting events have left many questioning what the future holds for Brazil’s economy.

Yet green shoots of recovery are sprouting. The World Bank projects imminent GDP growth in Brazil, starting modestly with a 0.5 percent gain in 2017 and growing to 2.2 percent in 2019 – creating a U-shaped graph of economic performance. But the World Bank also ranks Brazil as the world’s 123rd easiest place to do business, placing it behind countries like Iran, Rwanda and Kosovo. In fact, it’s only the 23rd easiest country to do business in Latin America and the Caribbean. So what needs to happen to bring investment in Brazil’s companies back to the highs of 2011?

Political reform
For many years the Brazilian government was marred by allegations of corruption. This led to a large-scale investigation of political corruption, ultimately prompting the impeachment of Dilma Rousseff on August 31, 2016. The new government, led by Michel Temer, has a clear mandate to reform the country’s political and corporate governance standards – and good progress now could ensure victory for his party at next year’s general election, though Temer himself won’t be running. He is quoted as saying Brazil needs ‘a government to save the country’.

The very presence of a new president who prioritizes these issues is leading to increased optimism about what the future holds. ‘If the country continues to deliver in political terms what it is trying to then it could be a very good new start,’ says Carlos Lazar, director of investor relations at Kroton Educacional. ‘The reforms the government is working to put in place could be a game-changer, especially in attracting international investors to focus on Brazil.’

President Temer has already restricted public government spending increases. He also has his sights set on pension, education, tax and employment reform, all before the end of his tenure in 2018. By February, the stock market had risen by 37 percent in local currency terms, buoyed by the hope these reforms provide.

‘Establishing a fair and transparent marketplace is key to improving the business environment in Brazil,’ says Edgar Piedra, managing director and head of Latin America for BNY Mellon’s DR business. ‘Brazil is also known for its very complex labor and tax laws and positive changes would lead to significant positive results.’

But these reforms aren’t guaranteed. Such sweeping changes would be deemed ambitious if they were fronted by a legitimately elected president, so Temer’s position as an unelected successor to Rousseff poses a challenge. In addition, Temer himself is dogged by allegations of corruption: a request for his impeachment was submitted to Brazil’s government in 2015, though it hasn’t been fully investigated yet.

Corporate governance reform
Outside the political sphere, there is a sense that the business community is doing what it can to project an attractive image to investors around the world. The BM&F Bovespa stock exchange, based in São Paulo, already has four corporate governance-focused indices and is committed to benchmarking itself against other international stock exchanges when it comes to corporate governance standards.

‘Brazil is looking to other markets on what the greatest transparency levels are,’ says Piedra. ‘International investors are requesting voting rights more and more, and Brazil is doing more to respond. We are seeing some changes to make voting rights more compatible with international standards.’

The BM&F Bovespa is currently reviewing its corporate governance standards, something Kroton is supportive of. ‘Brazil is having a conversation about the stock exchange and governance standards, which is very important from the perspective of attracting foreign investors,’ Lazar says.

One of the most surprising statistics from BNY Mellon’s 2015 global IR study is that 92 percent of companies surveyed in Brazil did not have a formal policy for communications between board members and investors. ‘Without doubt, as the trend of board members communicating with investors directly continues, there has to be some level of policy and procedure around that,’ Piedra says.

The challenging economic environment of the past has led in some cases to an elevated role for IR professionals. BNY Mellon’s 2015 research also found a particularly close relationship between IROs and their executives and board members – 20 percent of the firms surveyed in Brazil said the IRO reports directly to the board, compared with just 4 percent globally.

‘The role of the IRO is evolving and becoming significantly more strategic,’ Piedra says. ‘We continue [since the 2015 report] to see connectivity with the C-suite and the board.’

Of course, a key role for any IR function is granting transparency and access to investors and analysts in a timely manner. While the temptation for many outside the IR function would be to keep their heads below the parapet until there are concrete answers to questions about strategy, performance or operations, Lazar believes his experience of weathering the recent economic storm in Brazil has made him a better IRO.

‘We’re always trying to provide information to investors,’ he says. ‘We don’t hide and we don’t wait to be contacted. We continue to travel to roadshows. Hopefully the downturn is coming to an end but, even in the worst periods for the company, you have to be close to the investors and close to the market.’

A new day or a false dawn?
A new government. A commitment to revised corporate governance standards. A robust and investor-centric IR community. Do these factors change the inflow of investment to Brazil? Will the country return to the rapid growth of the past?

There will be many investors watching with interest to see whether promises to investigate and root out political corruption and improve corporate governance are realized, or whether it’s just empty rhetoric. In recent years we have seen the economies of Canada and Australia – two other resource-rich countries – perform well, suggesting there would be an appetite for investors to be more bullish about Brazil in the future.

Indeed, Ipreo’s statistics show that perhaps the positive curve of the projected U-shaped economy has already started: after the all-time low of value held in Brazilian companies in Q4 2015, Ipreo has seen value increase every quarter. In Q4 2016, this metric had grown by $85 bn to just over $220 bn overall. So good news – though still less than half the peak value of Q1 2011. In this tale of two economies, we will watch with interest to see which side of Brazil’s economic personality will define the next few years.

This article appeared in the Summer 2017 issue of IR Magazine. 

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