Brazil offers some of the most tantalising import opportunities for corporates looking further afield than lacklustre home markets, writes Sarah Rundell.
Although Latin America’s biggest economy has stalled, with growth put at a sluggish 2% in 2012 compared to over 7% in 2010, demand for imports is expected to pick up from diverse and fast-growing sectors.
Discoveries of enough deep water oil to make Brazil the world’s sixth largest producer will need the goods and services of specialist oil groups. A nationwide US$66bn infrastructure spend, only a fraction of which will go on projects for the Fifa World Cup and the Rio Olympics, plus a similar government budget to overhauling the armed forces over the next 20 years, promise lucrative openings.
Importers are already meeting demand from strong private sectors spanning renewable energy, aviation, textiles and agriculture. It’s not surprising export credit agencies (ECAs) are beefing up their coverage of Brazil to promote and support their domestic industries.
US importers have the competitive edge over closest trade rivals China, Argentina and Germany when it comes to filling Brazilian contracts. A flurry of autumn deals includes US SMEs supplying two thirds of the goods and services for the construction of a giant aquarium in Fortaleza, backed by a US$105mn direct loan from the US Export-Import Bank (US Exim).
Elsewhere the bank provided guarantees for Texas-based Air Tractor in a US$900,000 contract to supply crop spraying aircraft to biofuel and soybean growers, and a US$32.1mn loan guarantee to a São Paulo renewables group, to help finance wind turbines from Arkansas’s LM Wind Power Blades. “It’s the kind of support that has helped make Brazil the eighth biggest market for US goods, up from 16th in 2007,” says Xiomara Creque, regional director for Latin America at US Exim. “There is so much opportunity for growth in Brazil and as we get closer to the Olympics and World Cup, we will see even more transactions.”
Other fast-expanding ECAs have US success in their sights. Since opening a São Paulo office in 2008, Italian ECA Sace’s Brazilian exposure has tripled to €1.3bn with an estimated €300mn worth of insurance and financial products and services, including new guarantees on loans in local currency, in the pipeline.
“Oil, gas, steel, civil aviation, textiles, glass, plastic; you name it, Italy exports into every sector in Brazil,” says Flávio Bertolossi, head of Sace’s Brazilian operations, who lists recent export finance transactions with mining giant Vale, Brazilian-Mexican joint venture Braskem Idesa, Petrobas, Rivoli, Itaù BBA and construction group Ghella. The agency is also increasingly providing financial guarantees and insurance services to Italian corporates borrowing to expand within Brazil. “As long as there is an Italian angle we do pretty much anything,” says Bertolossi.
UK companies such as stadium operators and sports authorities will use their Olympic experience to bid for contracts ahead of Rio 2016, but it’s Brazil’s US$236.5bn plan to harness oil and gas reserves that could be the richest seam for UK corporates. “Oil and gas presents by far the biggest opportunity for the UK. The Petrobras business plan is potentially worth £12.2bn in attainable value to UK business,” says Andrew Snook, senior manager of UK Trade and Investment’s (UKTI) Latin America unit, tasked with doubling UK exports to Brazil from £2bn to £4bn by 2015.
State oil group Petrobras is expected to invite tenders from 2012/13 for floating production, storage and offloading (FPSO) vessels in a bidding process for which the UK is already primed. ECA UK Export Finance, formerly ECGD, has a £1.3bn exposure in Brazil that includes the recent guaranteeing of a US$1bn loan facility to Petrobras arranged by HSBC to finance supplies of goods and services for offshore drilling and exploration activities. Last March Petrobas nominated US$500mn-worth of UK contracts for potential financing under this line, relating to vessels and exploration rigs, sub-sea oil and gas pipelines, floating production storage and off-loading vessels.
But despite ECA largesse, Brazil isn’t a straightforward market for importers. Irrespective of ECA support, many banks are reluctant to lend. Just like in other regions, dollar scarcity and Basel regulations have left Brazilian importers struggling to access long-term dollar finance from local and foreign lenders. “All exporters into Brazil are suffering from a lack of availability of funds,” says Thomas Baum at consultancy PwC in Frankfurt which is working with German ECA Euler Hermes underwriting federal guarantees to Brazil. “European banks were very important credit suppliers to Latin America. Take the case of Chile, where almost the total credit supplied to Chilean companies for trade finance purposes came from French banks. They have been badly affected,” says Sace’s Bertolossi.
In Brazil, Santander and HSBC remain the most proactive lenders but other Spanish and German banks are starting to retreat. They are being forced to strengthen their capital buffers and have grown cautious of lending outside established markets. “Few European banks have a Brazilian strategy. Most look at Eastern Europe, Asia, the Middle East and Turkey. They’re not focused on Latin America,” says PwC’s Baum. In 2011 Brazil was still the largest South American market for Hermes but the volume of cover has fallen from €1.8bn in 2010 to €1.4bn. However, although overall volumes fell, more easily accessible short-term cover for German SMEs exporting to Brazil rose.
The sovereign debt crisis has also made some lenders question the strength behind some ECAs. Deals backed by Japan’s Nexi, US Exim, Hermes and Scandinavian agencies are the most aggressively sought after, says Ralph Lerch, head of export finance at Commerzbank. Sace’s Bertolossi reassures: “In Sace’s case the non-payment risk of the bank is transferred
to the Italian government, but there isn’t a corporate in Brazil that has a better rating than Sace.”
Other culprits also lie behind the export finance squeeze. Covered long-term finance is subject to a Brazilian withholding tax. “Export finance is usually exempt from withholding tax but this isn’t the case in Brazil. It means increased long-term financing costs for Brazilian importers,” says Lerch. The German lender offers Brazilian clients seeking long-term finance and sourcing from Germany alternative, tailored products to side-step the tax conundrum including a two-year revolving facility.
In other developments, local banks are also looking to structure products with foreign ECA cover for the first time. São Paulo-based Banco Pine is working with Hermes to fund refinancing medium and long-term capital investment loans for
its corporate customers.
Withholding tax is only one of many taxes that importers have to juggle. The Brazilian government has hiked import tariffs on over 100 goods from potatoes and bus tyres, to chemical and pharmaceutical imports, in a bid to counter disappointing domestic growth and tilt the playing field in favour of local manufacturing. A 30% jump in taxes for some auto categories without national or regional content is particularly vexing for the UK’s niche automotive sector.
Now, in a carrot to investors, the government has introduced a sliding scale that offers foreign manufacturers planning investment in Brazil the ability to earn credits against the tax increase by meeting progressively more rigid local content and investment requirements.
Signs that the policy is working could be read into recent investments like car maker VW’s plans to invest €3.4bn in upgrading factories in Brazil. Chemical group BASF plans to build a local factory and German utility group Eon says it will spend €350mn on a 10% stake in Brazil’s MPX Energia as part of a bigger scheme to run and build gas-fired power plants
in the country. The alternative view is that the government will struggle to attract long-term investment if it continues to hit imports. “I don’t think it will bring positive results for the economy,” warns Sace’s Bertolossi. “In the oil, gas and auto sectors it does make sense to produce in Brazil. But if importers into these sectors start losing out to local players, will it lead to more investment? I don’t think so.”
The problem is compounded by tariff hikes having an extra bite. Import tax rises coincide with a government strategy to cap the Brazilian currency, which hit a 12-year high against the dollar last year, at the 2-reals-per-dollar mark. Brazil has always had high tariffs, but until now the affect has been muted by the overvalued Brazilian currency.
Red tape also trips importers. The difficult business environment is encapsulated in heavy-handed bureaucracy including complex administration procedures and labour laws. It pushed Brazil down to 126th place on the World Bank’s latest ease of doing business ranking. “There are no quick wins in Brazil – success comes through building up strong relationships and taking the time to understand the market,” says UKTI’s Snook.
“Companies face complex import regulations and minor mistakes can lead to problems,” says PwC’s Braum, who flags up rules around pre-clearance as a particular bug bear and says local partners are essential to help clear goods through customs. “Only Brazilian importers can use local subsidiaries as their import entity. Foreign importers have to be registered.” Checking the credit quality of Brazilian buyers is often complicated, he adds. Although big companies write financial reports it takes longer to analyse mid-market players.
Other complications can also arise. “There have been times when the government confiscates the goods if the importer hasn’t paid for them,” says Domicio dos Santos Neto at Santos Neto & Montgomery Advogados in São Paulo. “It prevents the creditor bank getting a hold of the goods to force the company to pay for them.” Non-payment by Brazilian counterparties is less of an issue than it used to be however. Sace’s risk index shows a fall in the risk of non payment over the last five years amongst SMEs of 29% and amongst big business of 12%.
Brazil, the sixth biggest global economy since nudging the UK down a notch, offers such promise to importers that the trials and tribulations are worth it. Growth has stalled, but ECAs say demand is starting to pick-up again and are steadfast in their countercyclical support. “It’s not growing as fast as we’d like it to but it’s definitely steady. Going forward we’re expecting much more,” says US Exim’s Creque.