Brazil: is the recovery over?
Joe Leahy talks to Alex Bettamio, Latin America president at Bank of America Merrill Lynch, about the Brazilian economy and where investors can look for growth in the long term.
Filmed by Henry Morton. Edited by Ben Marino
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I'm here in New York with the President for Latin America of Bank of America Merrill Lynch, Alex Bettamio. Alex, can you tell us a little bit about the Brazilian economy? We're recovering from recession, but what does the year ahead hold? And what about next year when we have presidential elections?
Over the last two years, Brazil has gone through the deepest recession of its history for sure. However, with the recent change in policies, basically the structural change that has been approved at a Congress level, it has created a new environment that is bringing business back. So we think the economy might have growth in 2017 at about 1%. We believe the real world around 3% will start in 2018, and that's very positive. So we remain confident with we're seeing in terms of new market levels. If you see the new levels of people as well as what's happening on the effects side and the flow of new capital coming into Brazil through either financial investors or strategic investors with large M&A transaction that took place, it shows definitely evidence of confidence is back to the country. There is still a major reform to pass through Congress, which is the social reform, which certainly, once it is done, will be another sign of recovery and the positive message to the markets. We remain confident that the court must take the right approach to the issue they were having before.
And next year we have an election in Brazil that at this stage is very uncertain. We don't really know who the candidates are going to be. How do you see the market situation evolving until then? For this year, it remains stronger than next year, people will go on hold or how do you see the environment?
Sure. I think the market will react with the policies in place. And certainly who is ahead of the polls when it comes time. At the moment, the market's certainly feeling much more comfortable with the current administration because of the clear market-friendly policies they have presented. And that is important.
Certainly, the market needs to have confidence. And as we see the economy recovering, most likely the election will be driven by those policies, and certainly the candidate will come from someone associated with those actions that I would affect and if that happens suddenly will be even more positive for the market. And what are some of the external risks that could particularly affect Brazil do you think?
Well, I think the most important risk right now would be if they don't get approved, the social reform. This would be certainly not positive for the economy. And as such, that would make the market to be extremely reactive and concerned with the future of the budget.
So that would be certainly very important to see that reform to be approved. And once that is approved, I believe, as we're seeing already, inflation come down, and that's bringing interest rates down, we might see actually a nice recovery of the-- more money actually I would say moving from the fixed income side to the equity side, which will boost then more transactions as we're seeing happening already in the capital markets. If you pay attention to what's happening today on the equity side, there has to be a sizable amount of transactions that has been announced. And that's certainly a consequence of the investors more comfortable with the prospects of Brazil in 2017 to 2018.
So you think on the M&A and on that ECM side, could we see a sort of a normalisation back to levels of 2011, 2010, this year or next.
Yeah, yeah, very much. I think that's what the market wants. I think the market wants to be back in business. And we have been for pretty much a year and a half without transactions being done. So certainly there is a expectation to recover those levels, which is some very healthy levels. And that's really what happened if we see the reform going through.
In what areas of M&A, what sectors do you see being strong if they're recovering?
Oh, we just saw a very sizable transaction with the financial markets. And over the last year, we saw large Chinese investors coming to invest on energy. So I would say energy definitely will drive most of the investment moving forward. And we might see also investments now mean real estate, because as we see the declining interest rates, most likely the asset class of real estate will benefit, and we might see transaction take placing in that field. But I would say the amount of interest from foreign investors in Brazil is quite high right now, so I believe that we might see more transactions coming in large scale.
Just on the corruption investigations, Lava Jato, how has that affected investors? Has it made them more careful, more reluctant before investing in Brazil? How do they see that?
Yes. It's totally this. I think the Lava Jato in a way is very positive, because it shows that the country is facing one of its main legacy issues. At the same time, makes an investor to make sure that he's making the proper decisions. So that's a very point important to anyone to make sure from the compliance point of view, and diligence point of view, and reputational point of view they are making the proper investment. And certainty, that increases the bar, or increase the level of scrutiny that any investor has to make.
So due diligence has become-- always was important, but it's become a sort of more important in Brazil?
It has. It has. But it also, just everything starts with know your client. So we at Bank of America Merrill Lynch has always given a tremendous amount of attention to doing business with the right clients. So we-- for us, we feel actually very comfortable with the selection that we have done in the past, because at the end of the day, it's everything about would you do business with?
But having said that, yes. For anyone, it's a very important element when you're doing business to make sure you're doing the right diligence just to avoid being caught by surprise.