Issue 6 - December 2011
Brazil’s Fortunes
Brazil’s burgeoning middle class is pushing for stronger corporate governance to protect its investment interests.
Jim O’Neill, head of global economics, commodities and strategy research for Goldman Sachs, coined the term BRIC in 2001. With it, he drew the world’s attention to Brazil, Russia, India and China and their eye-popping economic potential. These countries have delivered, Brazil included. It is South America’s largest economy, and Brazil’s 2010 gross domestic product growth reached 7.5%. Although Brazil struggled more than the other BRIC countries during the recent economic slowdown, its recovery is outperforming many industrialized nations, including the United States.
But Brazil still lags the United States and other developed countries in a key area — corporate governance at its stock market, the BM&FBOVESPA. For example, only 23 of the 500-plus listed companies trade more than 50% of their shares on the exchange. One important reason is that over the past 10 years, the Brazilian government has increased its investments and control in many publicly traded companies. Although its goal is to influence business decisions in the interests of local economic growth, these decisions often rankle investors, sap profits and drive down stock prices.
Ironically, the counterforce to these trends is the very group many government actions are meant to bolster — the burgeoning middle class. Its investment savvy and expectations are on the rise and forcing the BM&FBOVESPA to respond.
A Reversal of Fortune
In the late 1990s, Brazilian President Fernando Henrique Cardoso launched economic reforms to stabilize the Brazilian economy. The Real Plan eliminated the country’s staggering hyperinflation, which reached more than 2,500% in 1993. The government also began privatizing state-owned companies to leverage the power of a market economy.
Cardoso’s successors, however, Presidents Luiz Inácio Lula da Silva and Dilma Rousseff, have been reversing this trend. The Brazilian Development Bank now has significant investments in more than 150 Brazilian companies. The government is a major shareholder in many, and its actions lay bare the governance issues.
Petrobras arguably is the poster child. It is Brazil’s largest energy company and the fourth largest oil and gas company in the world. The government holds a 56% stake along with golden share rights. Petrobras’s share price peaked at more than $70 in 2008. By September 2011, shares were trading around $25.
Many analysts attribute fluctuations in Petrobras’s share price to government intrusions that have had a decidedly negative impact on profitability. Most oil drilling in Brazil, for example, is offshore, and Petrobras is a world leader. Oil rigs are a major investment, costing up to $1 billion each. When Petrobras decided to build new rigs, it sought bids from companies in South Korea and Singapore, major centers of shipbuilding and offshore industrial equipment. Bids from these companies were almost 50% lower than those from Brazilian firms. Yet the government insisted that Petrobras “buy local” to support job creation and economic growth. Ironically, such actions are eating away at middle-class investment wealth. In 2000 the government allowed — and encouraged — individual investors to purchase Petrobras stock with funds from their government-run retirement accounts. Routinely, individuals are forced to place these moneys in a government fund that yields less than a typical savings account. However, for some, their Petrobras investments have been worse.
Companhia Vale do Rio Doce also was a victim of government intrusion. CVRD is the largest mining company in the Americas and the largest iron ore miner in the world. From 2001 to 2010, shares in CVRD produced a total return of 38%, which, according to CVRD, was the highest among its peers. In early 2011, its stock was trading around $35 per share. By the end of August 2011, the price had fallen to about $28 per share.