With Brexit and the Trump presidency, ‘uncertainty’ has become the new bogeyman of business on both sides of the Atlantic. But looking south to the southern hemisphere, specifically to Brazil, and the impact of uncertainty makes our northern concerns look little more serious than wondering what features the latest iPhone will have. Brazil is Latin America’s largest economy, however, little there can be taken for granted, which creates both challenges and opportunities.
The Car Wash Scandal
A key component of the uncertainty in Brazil is the waterfall of explosive corruption scandals since the “Car Wash” investigation started in 2014. Luiz Inacio Lula da Silva (“Lula”), the ‘superstar’ president who served from 2003 to 2010 (and is still considered the most popular candidate for the next election in 2019), was found guilty of corruption and money laundering in July 2017. He was sentenced to nearly 10 years in prison, but is currently free pending an appeal. Dilma Rousseff, Lula’s successor, was impeached and removed from office in August 2016 over financial irregularities. Her replacement, former vice president Michel Temer, played a key role in her impeachment, but now faces the same fate. This was after recordings materialised that implicated Temer in bribing the previous House Speaker, Edwardo Cunha, who is now serving a prison sentence of his own. Temer was charged on the matter, but since the Brazilian Congress did not reach a majority decision to put Temer on trial, he managed to avoid investigations (after some highly criticised manoeuvrings in government prior to the vote)
Since the “Car Wash” scandal started, one after another company, politician and prominent businessman has been implicated. One was the state-controlled oil company Petrobras, which allegedly accepted bribes in return for awarding contracts to construction firms at inflated prices. More recently, there was a scandal in the meat industry, whereby health inspectors were allegedly bribed to approve the sale of rotten meat, leading to import bans on Brazil’s meat from several countries around the world.
With the high level of unemployment, the increase in crime and the protests against the government, huge uncertainty reigns over the Portuguese-speaking nation.
Brazil’s long term prospects
However, it is not all gloom… the only way is up for Brazil and we must look at the long term prospects – because it doesn’t take much to see the potential in Brazil. The fact that corruption is being prosecuted is a good thing. Corruption is a legacy problem that Brazil is now dealing with; it’s better to have all the revelations in one go and start with a fresh slate. Despite the allegations against Temer, many believe that it is better to let him serve his term and not force an election too early (as this would create other issues such as direct or indirect election). He has vowed to see his term through and pull Brazil from its worst recession in history. The flow of new capital into Brazil shows evidence of confidence in the country. In fact, Temer’s policies are seen to be more market friendly and have given more confidence to the market. Labour reforms were recently passed and the passing of planned social reforms will be key to market confidence in Brazil and key for investors to keep an eye on.
For international re/insurers active in Brazil, dramatic currency fluctuations could have a serious impact on achieving budgets. GBP or USD backed underwriting in Brazil can start to feel like foreign exchange trading. A premium received on one exchange rate and claims paid on a wildly different exchange rate can make profit uncertain, however this is not a new problem for international companies.
Still, for those with an eye to the long-term, M&A could be a worthwhile opportunity. Dollars will go further, and local regulators are increasingly open to foreign investment. Although the regulatory environment remains difficult as always, it is improving. Critically, new entrants must be able to work with short-term business plans but with a long-term investment due to the uncertainty that pervades the Brazilian market.
For those with the stomach for it, Brazil presents both opportunities and challenges, as the next instalment of this blog will discuss. Read part 2
Co-authored by Marcio Ribeiro