bienville macro review
CONFIDENTIAL
BIENVILLE MACRO REVIEW Brazil: In Need of a New Growth Model October 31, 2013
Prepared by: Mark Bower
[email protected]
Cullen Thompson
[email protected]
Blake Bennett
[email protected]
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Summary From 2002-2011, Brazil experienced a remarkable economic expansion, averaging nearly 4.0% real GDP growth per year. Sentiment became near euphoric and growth rates were extrapolated forward. Foreign investors rushed in to own Brazilian debt, equities and currency (the Real). However, since late 2011, it has become clear that these high expectations were misplaced. Brazil’s growth model has been exhausted, and a difficult adjustment process is necessary. Disappointingly, the political will for reform remains conspicuously absent •
Previous strong growth in Brazil was driven by three powerful tailwinds: robust Chinese demand for the commodities that Brazil exports, a large expansion of private sector credit that drove domestic consumption, and slack in the economy from a cheap currency and spare labor (that allowed for a non-inflationary boom)
•
However, as these tailwinds have largely disappeared, economic growth has fallen sharply, averaging just 1.97% since late 2011. Brazil now needs to reorient its economy towards more productivity-enhancing investment, relying less on credit-driven consumption. However, the government is not only resisting these necessary adjustments, but also turning progressively more populist
•
Instead of focusing on longer-term structural reforms, and due to their declining popularity, the government is likely to pass ‘vote-buying programs’ as part of the re-election campaign of President Dilma Rousseff in October 2014
•
Although Brazil’s net debt level appears stable, the level of gross debt, which accounts for the rapid growth in stateowned bank lending, has been increasing. Gross debt levels in Brazil are reaching a point that is likely to trigger a downgrade of their credit rating by agencies such as S&P, possibly as early as 2014
•
Since 2011, Brazil’s growth has been partly financed by external capital, as evidenced by their current account deficit, which has deteriorated, implying that the currency should weaken in order to restore equilibrium. Although currency weakness would be welcomed, given Brazil’s external vulnerabilities, excessive volatility in the Real, as occurred over the summer of 2013, will continue to be met with intervention by the central bank
•
Inflation is also a persistent problem, which the Brazilian Central Bank is finally beginning to tackle using higher interest rates, although these efforts have been partly undermined by the government’s efforts to expand credit to consumers
•
High interest rates reflect high inflation, but do not yet represent a period of sustained slower growth and deleveraging. Overall, the potential for a combination of slow growth, a weaker currency, rising rates and inflationary pressure is an unfavorable backdrop for equity investors. Policy uncertainty is also constraining needed infrastructure investment. However, as the currency stabilizes and the rate hiking cycle concludes, bonds could prove interesting *This document is not a solicitation to invest in any investment product nor is it intended to provide investment advice. Please see the “Disclaimer” slide for information about Bienville Capital Management, LLC and for certain disclaimers relating to this presentation.
Bienville Macro Review – October 31, 2013 | 2
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL With a population of almost 200 million people, Brazil is the fifth largest country in the world. The population and wealth is concentrated in the Southeast, home to the country’s two largest cities, including Rio and São Paulo… Brazil’s Economic & Population Map
Rio de Janeiro São Paulo
Source; World Bank
Bienville Macro Review – October 31, 2013 | 3
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Popular sentiment on Brazil has swung from euphoric to decidedly more pessimistic after three years of slowing growth, indecisive policy, and recently, mass protests in the largest cities. Two Economist issues perfectly show the changing mood…
With the introduction of the BRICs theme, Goldman Sachs’ acronym for Brazil, Russia, India and China, Brazil became a favorite among investors hoping to participate in not only the commodity boom, but also for its expanding middle class that was expected to lead to ‘decoupling’… This optimism has dimmed after poor growth figures and social unrest
November 2009
September 2013 Source; The Economist
Bienville Macro Review – October 31, 2013 | 4
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL The Brazilian Real and the main stock market index, the Bovespa, had a phenomenal run in the 2000s. Since 2011, however, both have sold off in lock step as Brazil’s growth model exhausted itself… Brazilian Real and the Bovespa Index (Since 2002) Brazil boomed in the 2000s, recovered quickly in 2009 and 2010, but has stalled out since then…
Brazilian Real FX Rate (lhs)
Protests Erupt/ Emerging Market selloff
Global Financial Crisis Bovespa Index (rhs)
Source: Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 5
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Brazilian GDP statistics reflect this exhaustion of the growth model. Growth has declined from 4 - 6% to the 1 - 3% range in most recent quarters. Absent a shift in the growth model, which appears unlikely, this stagnation should continue for several more quarters… Brazil’s GDP Growth (% YoY) Quick China-led recovery
The Boom
Stagnation
Global Financial Crisis
Source: OECD, Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 6
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL During the past decade’s boom, the government’s net debt to GDP fell substantially as GDP grew and the government held the line on deficits. This resulted in an improvement in Brazil’s credit quality and a decline in interest rates, perpetuating a boom in private sector credit, which rose from 25% of GDP to over 65% in the past ten years… Brazilian Net Government and Private Debt (% of GDP) Early in the 2000s, Brazil had a largely unlevered private sector…
Private Sector Credit (% of GDP)
However, over the past 10 years, private sector borrowing has boomed… The current high level of outstanding indebtedness suggests the pace of credit growth is not sustainable and the private sector will be forced to deleverage, reducing overall domestic demand
Government Debt (net % of GDP)
Source: IMF, Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 7
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Although net debt levels have fallen in the past five years, gross debt levels have begun to creep higher again. The 60% gross debt level has been a focus of many market participants, as well as credit rating agencies such as S&P, who have warned of a potential downgrade if it is breached… Brazilian Government Gross and Net Debt (% of GDP) The government’s net debt levels are low, but its high gross debt levels may trigger an S&P downgrade... The difference in these two figures is the transfers it gives to the state-owned banks, particularly the BNDES. This nontransparent accounting obscures the increasing overall debt levels in the country… The high levels of gross debt leave the government with little room to further promote growth through infrastructure investment or other government-led spending
Gross Debt, % of GDP
Net Debt, % of GDP
Source: Macrobond, Bloomberg Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 8
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL One of the drivers of Brazil’s economic boom was an improving terms of trade (prices of exports minus price of imports). This was led by commodities such as soy and iron ore. In the past two years, however, this trend has reversed substantially, putting pressure on both economic growth and the currency… Brazil’s Terms of Trade Index An improving terms of trade had supported the Brazilian Real for the past decade… But the recent reversal in Brazil’s terms of trade will keep pressure on the country’s current account and currency…
Source: Funcex, Macrobond,,Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 9
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL The Real’s strength combined with higher inflation has further increased Brazil’s ‘real effective exchange rate.’ This has resulted in several consequences, but primarily a substantial loss of global competitiveness… Brazilian Real versus Real Effective Exchange Rate Index Real Effective Exchange Rate Index
As the currency strengthened and inflation remained higher than Brazil’s trading partners’, the country lost most of the competitiveness it enjoyed at the beginning of last decade… 1/2002= 100 Brazilian Real Rate vs U.S. Dollar
Source: Macrobond, Bloomberg Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 10
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL All of these economic shifts have made the everyday cost of living quite high for Brazilians. This is captured in an accurate real world indicator: The Economist’s Big Mac Index… Brazil’s Big Mac Index (% Over / Under Valued) Brazil expensive globally
As a consequence of the boom over the last ten years, Brazil’s cost of living has risen substantially, making it among the world’s most overvalued countries…
Brazil cheap globally
Source: Macrobond, Economist,Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 11
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL One consequence of an overvalued currency and credit boom is a large current account deficit. Brazil’s has grown to the levels of 2001-2002, a time when it last had trouble rolling over external debt. This reliance on external funding means that Brazil will get hit hard in periods of global risk aversion, similar to the past summer… Brazil’s Current Account Deficit (% of GDP)
Rapid widening despite slowing growth
Source : BCB, Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 12
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL One area which was overlooked during the boom years and continues to be neglected is infrastructure. Relative to Latin America and global peers, Brazil has a poor stock of infrastructure, and underinvests in new infrastructure… Fixed Asset Investment (2012)
High interest rates and the government’s promotion of consumption have favored other sectors in the past, resulting in low government investment... Recent poor policy decisions on privatization and concessions have deterred private capital from picking up the slack 100
Country
% of GDP
Brazil
18%
Chile
24%
Colombia
24%
Mexico
25%
Peru
27%
Russia
26%
India
36%
China
48%
Stock of Infrastructure (% of GDP)
80 60 40 20 0
Source :World Bank, McKinsey, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 13
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Slower growth, high inflation, and government mismanagement has resulted in a poor approval rating for the government. President Rousseff’s government’s popularity plummeted after the protests this summer. This will keep the government focused on state directed lending and consumption for the foreseeable future, preventing the needed transition towards investment…
President Rousseff’s popularity plummeted with her response to the wave of protests over the summer… Recent poor policy decisions on privatization and concessions have deterred private capital from picking up the slack
Opinion of the Government 70 60 50 40 30 20 10 0
positive
negative
Source : DataFolha, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 14
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Another consequence of the credit boom and economic growth has been persistent inflation. The central bank claims to have a 4.5% inflation target with a 2% band. However, since the global financial crisis, they have essentially let the top end of the range become their new target… Brazil’s Inflation Rate (% YoY) Continued domestic credit expansion and the presence of infrastructure bottlenecks have kept inflation high despite slowing growth in Brazil…
Brazil inflation repeatedly testing top end of target range
The government will have to run a very tight monetary policy, or address supply side issues in order to permanently bring inflation back to the middle of the range… High inflation and the higher interest rates needed to stop it are not good for Brazilian equity investors
Source: Macrobond, Bloomberg Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 15
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL To quell inflation, the central bank has been raising interest rates towards 10%. The bond market, as seen here by the three-year swap rate, is pricing in future real interest rates that are more representative of a normal historical range… Brazilian Interest Rates
Market interest rates have returned to the 11-12% range, while real interest rates are again back towards 6%, creating a better entry point to buy bonds…
Three-year swap rate
Interest rate hiking cycle this year as currency weakened
Policy Rate (SELIC)
Real interest rate returning to 6% range
Source: Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 16
CONFIDENTIAL
DISCLAIMER Disclaimer The Bienville Macro Review (the “Presentation”) is a distribution which highlights the research of Bienville Capital Management, LLC (“Bienville”) in different areas of interest across the macro landscape. Bienville believes that understanding the global macroeconomic backdrop is a prerequisite to efficiently allocating capital. The Presentation is not intended to be an all-encompassing review of the financial markets. Rather, it should serve as a concise summary, which provides clients with an update of Bienville’s areas of focus within its research process. We hope that the Presentation will create an ongoing dialogue with our investors on the global dynamics that drive the financial markets. The topics covered in the Presentation may or may not be related to Bienville’s active positions or investment strategies. The content of the Presentation includes forward-looking statements, estimates, projections, assumptions, beliefs and opinions (collectively, “Projections”), which may prove to be substantially inaccurate or based upon flawed reasoning and assumptions. Moreover, Projections are inherently subject to significant risks and uncertainties beyond the control of Bienville and its affiliates, including Bienville Capital Partners, LP, Bienville Capital Partners Offshore, Ltd. and Gulf Coast Opportunities Fund, LP (and collectively with other private investment funds that Bienville or its affiliates may form and manage in the future, the “Funds”). The information contained in the Presentation regarding Bienville and the Funds has been prepared solely for illustration and discussion purposes. Except where otherwise indicated, the Presentation speaks as of the date hereof, and Bienville undertakes no obligation to correct, update, or revise the Presentation, or to otherwise provide any additional materials. Although Bienville believes the Presentation is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, Bienville makes no representation or warranty, express or implied, as to the accuracy or completeness of the Presentation or any other written or oral communication it makes with respect to the tactical positions or investment strategies described herein. Bienville expressly disclaims any liability relating to the Presentation or such communications (or any inaccuracies or omissions herein). The Presentation merely constitutes an opinion or belief based upon the information set forth herein, which opinion or beliefs may prove to be wrong. The information and opinions contained in the Presentation are based on public information. Neither Bienville nor the Funds makes any commitment or undertaking to take or refrain from taking any investment decision or other action with respect to the tactical positions or investment strategies described herein. Bienville may change its views about the tactical positions and investment strategies described in the Presentation at any time, for any reason. Bienville and the Funds may buy, sell, or otherwise change the form or substance of any of their investments at any time. Bienville disclaims any obligation to notify any recipient of this Presentation of any such changes. The Presentation is not investment advice, or a recommendation or solicitation to buy or sell any securities mentioned herein or otherwise. If any offer of interests in any Fund is made, it shall be pursuant to one or more definitive private placement memoranda for such Fund which would contain material information not contained herein and which shall supersede this information in its entirety. Any decision to invest in a Fund should be made after reviewing the definitive private placement memoranda for the Fund, conducting such investigations as the investor deems necessary and consulting the investor’s own investment, legal, accounting, and tax advisors in order to make an independent determination of the suitability and consequences of an investment in the Fund. This Presentation and its contents are confidential, and proprietary information of Bienville, and any reproduction of this information, in whole or in part, without the prior written consent of Bienville is prohibited. For additional information about Bienville, including fees and services, please see our disclosure statement as set forth on Form ADV. Additional information is available from Bienville upon request.
Bienville Macro Review – October 31, 2013 | 17
BIENVILLE MACRO REVIEW Brazil: In Need of a New Growth Model October 31, 2013
Prepared by: Mark Bower
[email protected]
Cullen Thompson
[email protected]
Blake Bennett
[email protected]
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Summary From 2002-2011, Brazil experienced a remarkable economic expansion, averaging nearly 4.0% real GDP growth per year. Sentiment became near euphoric and growth rates were extrapolated forward. Foreign investors rushed in to own Brazilian debt, equities and currency (the Real). However, since late 2011, it has become clear that these high expectations were misplaced. Brazil’s growth model has been exhausted, and a difficult adjustment process is necessary. Disappointingly, the political will for reform remains conspicuously absent •
Previous strong growth in Brazil was driven by three powerful tailwinds: robust Chinese demand for the commodities that Brazil exports, a large expansion of private sector credit that drove domestic consumption, and slack in the economy from a cheap currency and spare labor (that allowed for a non-inflationary boom)
•
However, as these tailwinds have largely disappeared, economic growth has fallen sharply, averaging just 1.97% since late 2011. Brazil now needs to reorient its economy towards more productivity-enhancing investment, relying less on credit-driven consumption. However, the government is not only resisting these necessary adjustments, but also turning progressively more populist
•
Instead of focusing on longer-term structural reforms, and due to their declining popularity, the government is likely to pass ‘vote-buying programs’ as part of the re-election campaign of President Dilma Rousseff in October 2014
•
Although Brazil’s net debt level appears stable, the level of gross debt, which accounts for the rapid growth in stateowned bank lending, has been increasing. Gross debt levels in Brazil are reaching a point that is likely to trigger a downgrade of their credit rating by agencies such as S&P, possibly as early as 2014
•
Since 2011, Brazil’s growth has been partly financed by external capital, as evidenced by their current account deficit, which has deteriorated, implying that the currency should weaken in order to restore equilibrium. Although currency weakness would be welcomed, given Brazil’s external vulnerabilities, excessive volatility in the Real, as occurred over the summer of 2013, will continue to be met with intervention by the central bank
•
Inflation is also a persistent problem, which the Brazilian Central Bank is finally beginning to tackle using higher interest rates, although these efforts have been partly undermined by the government’s efforts to expand credit to consumers
•
High interest rates reflect high inflation, but do not yet represent a period of sustained slower growth and deleveraging. Overall, the potential for a combination of slow growth, a weaker currency, rising rates and inflationary pressure is an unfavorable backdrop for equity investors. Policy uncertainty is also constraining needed infrastructure investment. However, as the currency stabilizes and the rate hiking cycle concludes, bonds could prove interesting *This document is not a solicitation to invest in any investment product nor is it intended to provide investment advice. Please see the “Disclaimer” slide for information about Bienville Capital Management, LLC and for certain disclaimers relating to this presentation.
Bienville Macro Review – October 31, 2013 | 2
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL With a population of almost 200 million people, Brazil is the fifth largest country in the world. The population and wealth is concentrated in the Southeast, home to the country’s two largest cities, including Rio and São Paulo… Brazil’s Economic & Population Map
Rio de Janeiro São Paulo
Source; World Bank
Bienville Macro Review – October 31, 2013 | 3
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Popular sentiment on Brazil has swung from euphoric to decidedly more pessimistic after three years of slowing growth, indecisive policy, and recently, mass protests in the largest cities. Two Economist issues perfectly show the changing mood…
With the introduction of the BRICs theme, Goldman Sachs’ acronym for Brazil, Russia, India and China, Brazil became a favorite among investors hoping to participate in not only the commodity boom, but also for its expanding middle class that was expected to lead to ‘decoupling’… This optimism has dimmed after poor growth figures and social unrest
November 2009
September 2013 Source; The Economist
Bienville Macro Review – October 31, 2013 | 4
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL The Brazilian Real and the main stock market index, the Bovespa, had a phenomenal run in the 2000s. Since 2011, however, both have sold off in lock step as Brazil’s growth model exhausted itself… Brazilian Real and the Bovespa Index (Since 2002) Brazil boomed in the 2000s, recovered quickly in 2009 and 2010, but has stalled out since then…
Brazilian Real FX Rate (lhs)
Protests Erupt/ Emerging Market selloff
Global Financial Crisis Bovespa Index (rhs)
Source: Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 5
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Brazilian GDP statistics reflect this exhaustion of the growth model. Growth has declined from 4 - 6% to the 1 - 3% range in most recent quarters. Absent a shift in the growth model, which appears unlikely, this stagnation should continue for several more quarters… Brazil’s GDP Growth (% YoY) Quick China-led recovery
The Boom
Stagnation
Global Financial Crisis
Source: OECD, Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 6
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL During the past decade’s boom, the government’s net debt to GDP fell substantially as GDP grew and the government held the line on deficits. This resulted in an improvement in Brazil’s credit quality and a decline in interest rates, perpetuating a boom in private sector credit, which rose from 25% of GDP to over 65% in the past ten years… Brazilian Net Government and Private Debt (% of GDP) Early in the 2000s, Brazil had a largely unlevered private sector…
Private Sector Credit (% of GDP)
However, over the past 10 years, private sector borrowing has boomed… The current high level of outstanding indebtedness suggests the pace of credit growth is not sustainable and the private sector will be forced to deleverage, reducing overall domestic demand
Government Debt (net % of GDP)
Source: IMF, Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 7
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Although net debt levels have fallen in the past five years, gross debt levels have begun to creep higher again. The 60% gross debt level has been a focus of many market participants, as well as credit rating agencies such as S&P, who have warned of a potential downgrade if it is breached… Brazilian Government Gross and Net Debt (% of GDP) The government’s net debt levels are low, but its high gross debt levels may trigger an S&P downgrade... The difference in these two figures is the transfers it gives to the state-owned banks, particularly the BNDES. This nontransparent accounting obscures the increasing overall debt levels in the country… The high levels of gross debt leave the government with little room to further promote growth through infrastructure investment or other government-led spending
Gross Debt, % of GDP
Net Debt, % of GDP
Source: Macrobond, Bloomberg Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 8
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL One of the drivers of Brazil’s economic boom was an improving terms of trade (prices of exports minus price of imports). This was led by commodities such as soy and iron ore. In the past two years, however, this trend has reversed substantially, putting pressure on both economic growth and the currency… Brazil’s Terms of Trade Index An improving terms of trade had supported the Brazilian Real for the past decade… But the recent reversal in Brazil’s terms of trade will keep pressure on the country’s current account and currency…
Source: Funcex, Macrobond,,Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 9
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL The Real’s strength combined with higher inflation has further increased Brazil’s ‘real effective exchange rate.’ This has resulted in several consequences, but primarily a substantial loss of global competitiveness… Brazilian Real versus Real Effective Exchange Rate Index Real Effective Exchange Rate Index
As the currency strengthened and inflation remained higher than Brazil’s trading partners’, the country lost most of the competitiveness it enjoyed at the beginning of last decade… 1/2002= 100 Brazilian Real Rate vs U.S. Dollar
Source: Macrobond, Bloomberg Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 10
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL All of these economic shifts have made the everyday cost of living quite high for Brazilians. This is captured in an accurate real world indicator: The Economist’s Big Mac Index… Brazil’s Big Mac Index (% Over / Under Valued) Brazil expensive globally
As a consequence of the boom over the last ten years, Brazil’s cost of living has risen substantially, making it among the world’s most overvalued countries…
Brazil cheap globally
Source: Macrobond, Economist,Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 11
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL One consequence of an overvalued currency and credit boom is a large current account deficit. Brazil’s has grown to the levels of 2001-2002, a time when it last had trouble rolling over external debt. This reliance on external funding means that Brazil will get hit hard in periods of global risk aversion, similar to the past summer… Brazil’s Current Account Deficit (% of GDP)
Rapid widening despite slowing growth
Source : BCB, Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 12
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL One area which was overlooked during the boom years and continues to be neglected is infrastructure. Relative to Latin America and global peers, Brazil has a poor stock of infrastructure, and underinvests in new infrastructure… Fixed Asset Investment (2012)
High interest rates and the government’s promotion of consumption have favored other sectors in the past, resulting in low government investment... Recent poor policy decisions on privatization and concessions have deterred private capital from picking up the slack 100
Country
% of GDP
Brazil
18%
Chile
24%
Colombia
24%
Mexico
25%
Peru
27%
Russia
26%
India
36%
China
48%
Stock of Infrastructure (% of GDP)
80 60 40 20 0
Source :World Bank, McKinsey, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 13
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Slower growth, high inflation, and government mismanagement has resulted in a poor approval rating for the government. President Rousseff’s government’s popularity plummeted after the protests this summer. This will keep the government focused on state directed lending and consumption for the foreseeable future, preventing the needed transition towards investment…
President Rousseff’s popularity plummeted with her response to the wave of protests over the summer… Recent poor policy decisions on privatization and concessions have deterred private capital from picking up the slack
Opinion of the Government 70 60 50 40 30 20 10 0
positive
negative
Source : DataFolha, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 14
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL Another consequence of the credit boom and economic growth has been persistent inflation. The central bank claims to have a 4.5% inflation target with a 2% band. However, since the global financial crisis, they have essentially let the top end of the range become their new target… Brazil’s Inflation Rate (% YoY) Continued domestic credit expansion and the presence of infrastructure bottlenecks have kept inflation high despite slowing growth in Brazil…
Brazil inflation repeatedly testing top end of target range
The government will have to run a very tight monetary policy, or address supply side issues in order to permanently bring inflation back to the middle of the range… High inflation and the higher interest rates needed to stop it are not good for Brazilian equity investors
Source: Macrobond, Bloomberg Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 15
CONFIDENTIAL
BRAZIL: IN NEED OF A NEW GROWTH MODEL To quell inflation, the central bank has been raising interest rates towards 10%. The bond market, as seen here by the three-year swap rate, is pricing in future real interest rates that are more representative of a normal historical range… Brazilian Interest Rates
Market interest rates have returned to the 11-12% range, while real interest rates are again back towards 6%, creating a better entry point to buy bonds…
Three-year swap rate
Interest rate hiking cycle this year as currency weakened
Policy Rate (SELIC)
Real interest rate returning to 6% range
Source: Macrobond, Bienville Capital Management, LLC
Bienville Macro Review – October 31, 2013 | 16
CONFIDENTIAL
DISCLAIMER Disclaimer The Bienville Macro Review (the “Presentation”) is a distribution which highlights the research of Bienville Capital Management, LLC (“Bienville”) in different areas of interest across the macro landscape. Bienville believes that understanding the global macroeconomic backdrop is a prerequisite to efficiently allocating capital. The Presentation is not intended to be an all-encompassing review of the financial markets. Rather, it should serve as a concise summary, which provides clients with an update of Bienville’s areas of focus within its research process. We hope that the Presentation will create an ongoing dialogue with our investors on the global dynamics that drive the financial markets. The topics covered in the Presentation may or may not be related to Bienville’s active positions or investment strategies. The content of the Presentation includes forward-looking statements, estimates, projections, assumptions, beliefs and opinions (collectively, “Projections”), which may prove to be substantially inaccurate or based upon flawed reasoning and assumptions. Moreover, Projections are inherently subject to significant risks and uncertainties beyond the control of Bienville and its affiliates, including Bienville Capital Partners, LP, Bienville Capital Partners Offshore, Ltd. and Gulf Coast Opportunities Fund, LP (and collectively with other private investment funds that Bienville or its affiliates may form and manage in the future, the “Funds”). The information contained in the Presentation regarding Bienville and the Funds has been prepared solely for illustration and discussion purposes. Except where otherwise indicated, the Presentation speaks as of the date hereof, and Bienville undertakes no obligation to correct, update, or revise the Presentation, or to otherwise provide any additional materials. Although Bienville believes the Presentation is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, Bienville makes no representation or warranty, express or implied, as to the accuracy or completeness of the Presentation or any other written or oral communication it makes with respect to the tactical positions or investment strategies described herein. Bienville expressly disclaims any liability relating to the Presentation or such communications (or any inaccuracies or omissions herein). The Presentation merely constitutes an opinion or belief based upon the information set forth herein, which opinion or beliefs may prove to be wrong. The information and opinions contained in the Presentation are based on public information. Neither Bienville nor the Funds makes any commitment or undertaking to take or refrain from taking any investment decision or other action with respect to the tactical positions or investment strategies described herein. Bienville may change its views about the tactical positions and investment strategies described in the Presentation at any time, for any reason. Bienville and the Funds may buy, sell, or otherwise change the form or substance of any of their investments at any time. Bienville disclaims any obligation to notify any recipient of this Presentation of any such changes. The Presentation is not investment advice, or a recommendation or solicitation to buy or sell any securities mentioned herein or otherwise. If any offer of interests in any Fund is made, it shall be pursuant to one or more definitive private placement memoranda for such Fund which would contain material information not contained herein and which shall supersede this information in its entirety. Any decision to invest in a Fund should be made after reviewing the definitive private placement memoranda for the Fund, conducting such investigations as the investor deems necessary and consulting the investor’s own investment, legal, accounting, and tax advisors in order to make an independent determination of the suitability and consequences of an investment in the Fund. This Presentation and its contents are confidential, and proprietary information of Bienville, and any reproduction of this information, in whole or in part, without the prior written consent of Bienville is prohibited. For additional information about Bienville, including fees and services, please see our disclosure statement as set forth on Form ADV. Additional information is available from Bienville upon request.
Bienville Macro Review – October 31, 2013 | 17
