Too Big to Fail

Brazil's acting President Michel Temer arrives to speak, at Planalto presidential palace in Brasilia, Brazil, Thursday, May 12, 2016, after the Senate voted to suspend President Dilma Rousseff pending an impeachment trial. In his first words to Brazilians as acting president, the former vice president said his priority will be reviving Latin America's largest economy. (AP Photo/Felipe Dana)

Brazil is a country that is currently the center of global attention, due to the political evolutions and scandals that have erupted during the past two years related to its leadership, and this is something that has worsened the country’s competitiveness, driving away foreign investments. The growth of the country has generally dropped by 5%, while there is a general sentiment of dissatisfaction with the current political situation, the corruption and the general inequality which divides deeply the land, from São Paulo to Rio de Janeiro.

It does remain, though, one of the most important business markets and one of the most rapid-developing ones, with the ability to become one of the most dominant economies by 2050. (Smith 2014) It is also no longer news that Brazil has already moved from the stage of a simply “promising land” to the stage of “land of opportunities”, and what we argue here is that Brazil can still be a country that investors need to look at, when choosing their investment areas, despite the recent scandals which have deeply affected the country at many levels.

The main argument that we are using that Brazil is simply “too big to fail”[1]. It intends to discuss the recent scandal, by giving the right answers to an incident that has deeply affected the country, but which should surely not be seen as an obstacle for the future investors. It will also move on to describe how the scandal can actually turn out to be a great opportunity for business in the country, which is estimated to grow a lot within the next years. Moreover, this analysis shall present the key sectors in which Brazil seems to thrive such as e-commerce, education, healthcare, infrastructure, technology – and what does it take to understand and enter the Brazilian market.

 

The corruption scandal: why is it such an important factor to the market?

What is exactly the Petrobras scandal, which has affected so much the economy, the people of Brazil, and has now effects on the foreign investments? To give a short summary of what is Petrobras and what really happened a couple of years ago, founded in 1953, Petrobras is a national oil company and the second-largest open market oil extractor in the world. When it was revealed that an estimated amount of 3 billion dollars were stolen from the company in forms of bribes, kickbacks, inflated contracts, money laundering operations with more than 100 elites implicated in the scandal, the Lava Jato operation[2] began, which is investigating the parties involved.

There are three reasons why this scandal has managed to have such an impact into the Brazilian society and to the investor’s behavior: first of all, when it was discovered back in 2007 that Brazil was actually sitting on pre-salt[3] oilfields, that is to say a gold mine, the whole country was mobilized. At that time, the company was semi-nationalized, but the state control returned back in 2010, making the nationalizing process into a “patriotic cause”. (Leahy 2016) In that sense, the scandal that hit Petrobras got to immediately hit the Brazilian society, not because of the novelty of the fraud but mainly because of the scale it took, in one of the most important state owned companies. It also raised directly questions about corruption in the country, anti-corruption lawmaking and most importantly, issues of trust. It is also very important, as the currently  suspended President of Brazil, Dilma Rousseff is being linked involvement with this scandal as well as being accused of manipulating the federal budget to disguise a growing deficit. Finally, the financial hit that Petrobras received has been major, leaving the company indebted and out of the bond markets, and leaving a currency that is extremely undervalued.

 

Meet Michel Temer – the new President of Brasil

He is relatively unpopular, and his numbers are quite low, but, given the current situation, it seems that these numbers can only start moving upwards. An election would simply not be a solution for the country, and if an election does not occur, Temer might be the hero of the day, who will bring back a certain political stability and most likely, an economic recovery. The Senate however has opened a public consultation to call for new elections already in august 2016.

With the political situation having reached the bottom and all sectors being affected due to this political unrest, the scandal has been a major opportunity for the country to take a look at its’ own legal gaps and to strengthen anti-corruption legislations – and indeed, right after the outbreak of the scandal, Brazil didn’t lose any time: it immediately strengthened its anti-corruption laws with the Clean Companies Act. Implemented in 2014, the law—which applies to all industries—targets bribery, bid rigging and fraud in public tenders and contracts. The law holds companies accountable for their employees’ actions. Violators face fines of up to 20% of the company’s revenues. (Addison 2016) Despite all the wrongdoing, which is still under investigation, Brazil seems to fight back, the legal way – and any change of presidency will simply end the political unrest at least until the next vote, which is in 2018.

 

Where should you look at, in today’s Brazil

Having explained and analyzed the above, one can of course wonder: how and why should an investor take the first step to Brazil, when nothing is certain and the market looks difficult? It is true that the entry into the Brazilian market is not straightforward and foreign investors need assistance so as to be able to cope with issues such as bureaucracy. It is a market that pays off though, in many ways, as it is too big to fail an investment, especially if the investment is the right one.

This is proven by the fact that foreign companies keep on investing in Brazil, especially in the areas of e-commerce and FinTech, which have seen massive growth, despite the financial and political crisis. Companies such as Payscout, Inc., which recently announced its expansion to Brazil to assist US e-merchants looking to expand in the Brazilian market did not hesitate to invest in the country. Another example is AliExpress, which was launched in 2010 to help Chinese merchants sell their products to overseas buyers, and according to Zheng Yaqian, a researcher at AliExpress, Brazil is now a major market for AliExpress. Finally, a very successful example is Adyen, the provider of global payment and e-commerce services. By the end of 2015, Adyen marked three years in Brazil with 300% growth and the Senior Vice President LatAm Jean Christian Mies admitted that there are endless opportunities in the country (Adyen 2015). All of these successful companies and many more knew very well that the path to the Brazilian market was not easy – but they also knew it would pay off!

Speaking with numbers, Brazil’s e-commerce industry is bound to increase, just as it did in 2015, when the country saw a vast growth of 15,3% in comparison to 2014. It is also important to mention here, that the market has grown so big, as the median household income has seen an increase of 87% from 2003 to 2013, and a lot of Brazilians entered the middle class (nearly double). E-commerce is said to continue growing, and it will do so between 2014 and 2019, to a total extent of 12,5%. Venture capitalist Anderson Thees, a founding partner of Redpoint eventures in São Paulo, says the “ecommerce and web sectors have grown over 20% year-over-year, while Brazil’s GDP has stayed flat, and tech is all but guaranteed to keep growing”.

Despite the recession the tech industry in Brazil is also thriving. In FinTech, Brazil is the largest Latin American market and according to a number of sources, it is going through a major positive transformation (Sofia 2016). It is also the leader of the South in infrastructure and technological development. It is also very important to note here, that private equity firms have raised funds in Brazil (Sreeharsha 2015), despite the economic challenges. Finally, with only half of the country online, Brazil remains the 5th largest internet and mobile economy in the world and one of the fastest smartphone markets globally.

 

Future opportunities

Looking it from a land perspective, from a population perspective, from a consumer’s perspective, from an events perspective – from any perspective you can look at it, it is a massive hub of opportunities. It is still the largest market in Latin America and it has managed to evolve into a truly “must” for the companies who have global ambitions. Moreover, the Brazilian real has depreciated significantly due to the economic fall-down, which makes the country very attractive for overseas investors and way easier to enter to its’ market.

Can a severe economic hit be enough to destroy the investor’s confidence?  It can surely affect it. And of course, no one denies that in the case of Brazil, it has taken a severe hit, at an economy, political, society level. It would be wrong to say that the country is dead though – or at there are no opportunities at all. With regards to the scandal, the fact that not even the President of Brazil is safe from anti-corruption drives clearly shows that the authorities are dealing with this problem seriously and they are absolutely committed towards change. On the other hand, with the recent Panama Papers worldwide scandal, a number of world leaders are involved in the lists, which means no country is immune to corruption. It would be wise to say, given all the above, that in a massive country of 200 million inhabitants spread over 27 states, with so many sectors growing, from e-commerce to education and tech, and a population that is responsive to all these sectors, there are still millions of opportunities to be explored and plenty of fertile ground. (De Ganay 2015)

 

Our tip

It is true that the restrictions on banks and currency controls would make it a somehow difficult mission to enter the market. It is important though to keep some things in mind, in order to understand the Brazilian culture and the key local preferences, so as to increase your success chances. For example, a large percentage of Brazilians is using credit cards for their purchases, as they feel that this is a safer choice. Brazilians are also big fans of the smartphone industry, as an estimated 45% of Brazilian Internet users used their mobile device to process payments. Preference is also given to payments with installments, which have reached the amount of 80% among Brazilians. If companies have a domestic entity, they are advised to proceed payments locally, instead of cross-border paying, due to the aforementioned bank restrictions and currency controls. Also, Boleto Bancário is a local payments method that accounts for around 15% of transactions. Although it is based on outdated technology, it is a must-have payment option for international merchants serious about reaching a mass audience in the market.

 

What do we offer?

What can we do for you here? Biassa can help you expand to Brazil, as we are already aware of the necessities and the prerequisites to enter the market of the country. Biassa is a fast growing Business Development Company, founded in Odense, Denmark in 2014, and our focus is to support, Develop and make Nordic and other European Companies tap and to thrive into the Brazilian Market. Through Biassa’s network we help clients in different branches and we provide resources to address their critical needs and provide solutions to develop their businesses in Brazil. We have helped companies such as VITA, Midtfyns Bryghus, DVS and provided them with the right consultancies so as to improve their strategies for the Brazilian market.

 

SOURCES

Addison, V. E&P. April 8, 2016. http://www.epmag.com/panel-opportunities-exist-brazil-despite-scandal-844896#p=5 (accessed May 8, 2016).

Adyen. Adyen Marks Three Years in Brazil with 300% Growth. April 16, 2015. https://www.adyen.com/home/about-adyen/press-releases/brazil-growth-three-years (accessed May 12, 2016).

De Ganay, G. AboutBrasil.com. October 2015. http://www.aboutbrasil.com/modules/brazil-brasil/business_brasil_business_brazil.php?hoofd=2&sub=9&art=1443 (accessed May 8, 2016).

Leahy, J. Financial Times. April 1, 2016. https://next.ft.com/content/6e8b0e28-f728-11e5-803c-d27c7117d132 (accessed May 8, 2016).

Smith, P. The Telegraph. June 5, 2014. http://www.telegraph.co.uk/sponsored/business/delivering-business/10878361/doing-business-brazil.html (accessed May 6, 2016).

Sofia. Let’s Talk Payments. February 18, 2016. https://letstalkpayments.com/brazils-fintech-is-a-carnival-of-innovation-in-latin-america/ (accessed May 5, 2016).

Sreeharsha, V. New York Times. July 27, 2015. http://www.nytimes.com/2015/07/28/business/dealbook/private-equity-firms-raise-funds-in-brazil-despite-challenges.html?_r=0&module=ArrowsNav&contentCollection=DealBook&action=keypress&region=FixedLeft&pgtype=article (accessed May 6, 2016).

Stratfor. A Chance for Change in Brazil’s Scandal. April 16, 2016. https://www.stratfor.com/analysis/chance-change-brazils-scandal (accessed May 5, 2016).

[1] A theory in economics which asserts that certain corporations, and particularly financial institutions are so large and interconnected that their failure would be disastrous for the larger economic system

[2] Lava Jato means “Operation Car Wash” and it refers to the current investigation of all the political elites (and not only) involved in the scandal

[3] There is oil that lies under a two-kilometre-thick layer of salt, which is itself under the ocean, and that is why it was named pre-salt oilfield


Written by Rafael Berti



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