A roadmap to Brazil s infrastructure build-out:

Transcription

1 Christopher Garman Director, Latin America and Emerging Market Strategy A roadmap to Brazil s infrastructure build-out: Pragmatism or economic nationalism? August 2012

2 Two policy drivers guide Dilma Rousseff s administration The learning curve on the left Low inflation is a precondition to political and economic success Microeconomic lessons are also being learned Rousseff is more pragmatic and fiscally conservative than appreciated The challenge of abundance : industrial policy is back Politics fundamentally changes when the risk of insolvency goes away; Complacency on structural economic reforms Policy that strengthens SOEs and to foment local industry is here to stay 1

3 Statist predispositions have always been present in the electorate 2

4 Why the recent bout of investor pessimism? Greater signs of a slowdown Two conflicting policy objectives Drive to lower interest rates Desire to help local industry through depreciated FX, incremental protectionism and local content Proclivity for interventionism Strong arming banks to lower lending rates Growth model based on consumption could be reaching its limit 3

5 Structural impediments of growth: big state Government has taken great strides to reduce debt burden Net debt/gdp ratio will continue to decline Tax burden, however, has continued to rise Government expenditures are rigid Higher revenue has gone to cover more expenses 4

6 But the pessimism is overstated Commitment to fiscal austerity is underappreciated Reduction of fiscal target unlikely, and Rousseff will hold spending in order to help lower interest rates Rousseff approved structural reforms Pension reform for public sector approved March Harmonization of ICMS import taxes approved in April This is an administration willing to work with the private sector Rousseff privatized three airports, and new concessions are coming. Port overhaul to be announced 2H 2012 Government improving quality of public sector House-cleaning in the ministries and less room for political appointments 5

7 And Rousseff remains politically strong 6

8 Sector Outlook: who will drive investments? 7

9 Oil and Gas Outlook: local content, local content Repercussions of new E&P framework for the pre-salt Decision to make Petrobras lead operator will slow pace of production New framework will reduce number of bid rounds Policy of developing oil service supply industry runs deep Oil and gas seen as escape valve to declining competiveness of industry Focus rests local supply to meet requisites of production post 2015 No flexibility on local content requirements Little urgency on conducting new bid rounds 11 th bid round will probably wait to 1H 2013 First pre-salt bid round likely only in 2014 Signposts to that could change current equilibrium Petrobras s production curve 8

10 Signs that Petrobras is under strain Petrobras Capex Plans ($ billions) E&P RTC Gas & Energy Petroquimica Distribution Biofuels Corporativo Total Source: Petrobras 9

11 Transport Infrastructure Outlook: good story Investment has suffered delays Anti-corruption purge in Transport Ministry, state rail company Valec and regulatory agencies in 2011 and surprise rejection of ANTT head Overburdened state institutions and bureaucratic hurdles But government moving to address bottlenecks Greater role for private sector, even in areas such as rail where concessions have been limited Continued efforts to ease public procurement and environmental licensing requirements Restructuring contracts to reduce delays caused by TCU (Federal Accounting Tribunal) and other agencies 10

12 Privatization agenda will pick up steam Civil aviation Second round of airport privatizations will be brought forward (Confins, Galeao) Government will help state governments privatize airports, and legislation to increase foreign capital in airlines should be approved Ports Rail Regulatory overhaul coming in next few months, and focus will be on concessions for new port construction Tougher investment requirements and long-term planning to improve linkages to rail and highway New framework makes operator a traffic flow manager, not sole service provider; less restrictive right-of-passage rules and minimum usage targets on existing rail concessions Concessions to private sector for Ferroanel project in Sao Paulo and FICO line (R$ 6 billion) to agricultural interior Federal highways New concessions in 2H 2012 and 2013 (BR-101, BR-153, BR-163, BR-262) PPP maintenance contracts for less profitable highways 11

13 Power Sector Outlook: mixed bag Taxes and levies can reach 50% of a power bill: ICMS rates average 21%, but can go as high as 30% Federal PIS/Cofins are 8.5% RGR and other levies account for the remainder 12

14 Big push for lower tariffs coming Reduction in federal taxes and contributions Reduction of federal contributions and potentially PIS/Cofins Scope will be limited by fiscal target Bundling negotiations of state debt with ICMS reduction State governments pushing to negotiate terms of payment owed to federal government Federal government will give concession in exchange for ICMS reduction in power and telecommunications Renewal of concessions 1/3 of concessions in generation, transmission and distribution expire from Government will seek rule that allows for renewal, but conditioned on lower tariffs. Decision will come before year end 13