Highlights From A Trip to Brazil

By: scutler

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From Scott Cutler: I have just returned from my first trip to Brazil. Brazil is the world’s fifth-most populous country and the world's 10th-largest economy in GDP terms. During this trip, I had the opportunity to meet with many of our listed companies, key private and public companies executives and government officials. We also hosted a successful conference in Sao Paulo entitled, "Capitalize on the Potential: The Value of a U.S. Listing for Brazilian Companies." The trip was covered by key financial newspapers and magazines.

Some key takeaways from my trip:

Strong Brazilian Franchise at the NYSE

NYSE's partnership with Brazil began in 1992 with the listing of Aracruz Celulose (NYSE: ARA), one of the largest pulp and paper companies in the world. Since then, many Brazilian companies from different sectors have joined our franchise. In fact, the number of Brazilian companies listed on the NYSE has increased six-fold, from five in 1997 to 32 today. Brazil is the third-largest country in terms of number of listed companies, after Canada and China. The combined market capitalization of all Brazilian companies on the NYSE is approximately $700 bn. These companies represent the diversity of the Brazilian economy.

Trading of Brazilian stocks on the NYSE has increased dramatically in the last few years at a compound annual growth rate of 80% during 2002-2008. In 2008, the average daily trading value reached $3.7bn, representing 25% of the total trading among all non-US companies listed on the NYSE. This is a reflection of the large interest by US institutional and retail investors in the Brazilian economy. The average daily trading value of the 32 Brazilian companies on the NYSE far exceeds the value of the 400+ Brazilian companies listed on the Brazilian exchange, BM&FBovespa.

Brazil's Strong Financial System

I was very impressed with the soundness of the Brazilian financial system. Brazilian banks have shown no signs of being contaminated by problematic assets and are showing healthy balance sheets. Interest rates remain relatively high at around 12%, with expectations that rates may dip below 10%, a rate that "had never been seen" by tenured executives at the largest banks. However, Brazil today is very different from its turbulent past. Before the economic stabilization plan was introduced in 1994, Brazilian banks had successfully adjusted to operating in an environment of hyperinflation where they overextended their branch network throughout the country in order to benefit from deposits. When the stabilization plan became effective, banks had to readjust to new market conditions to survive. The Brazilian government stepped in to stabilize the situation by (1) reducing the number of banks as it encouraged consolidation, (2) allowing foreign ownership; and (3) transferring control of troubled banks. These changes taken by the Brazil's Central Bank were key in preventing the failure of the Brazilian financial system. The rest of the world could learn from Brazil's experience in separating good assets from bad assets. In 2009, creditors are still realizing returns from bad assets.

Brazil's Economy is Massive and Will Continue to Grow

Brazil has become a powerhouse in the last decade. GDP has grown 5% consecutively in the last three years (2% on average in the last 10 years), and Brazil has done a phenomenal job by diversifying its exports and not relying on commodities alone. The strong domestic market, fueled by a growing middle class, is keeping the economy moving. However, the global crisis has not left Brazil untouched. GDP contracted 3.6% in the fourth quarter of last year when compared to previous quarter, and economists are predicting that Brazil's growth for 2009 could be less than 1%.

In meetings with key government finance officials, we heard that the Brazilian stimulus plan consists of nearly 300 shovel-ready projects and $90 bn of investments in the pipeline, the Petobras (NYSE: PBR) investment program of approximately $10 bn and a doubling in investment in credit and subsidies for housing and large investments in agribusiness.

The Brazilian Central Bank has been proactively monitoring the economy. Last week it cut rates100 basis points, lowering Brazil's interest rate to almost 11%, still one of the highest in the world. Inflation is low in comparison to previous years; it is currently around 5.5%. Brazil does have many challenges ahead: the real, Brazil's currency, has lost more than 30% against the US dollar since the summer of 2008; there is much poverty, high taxes and a strong need for improvement in the education and health-care system.

Nonetheless, Brazil is better prepared than ever to get through the global crisis, and is expected to emerge from it earlier than other countries, because of its solid financial system, and the government investment programs in key areas such as infrastructure, housing and agriculture.

This trip left me very bullish on the growth prospects of the Brazilian economy. We at the NYSE Euronext remain extremely committed to Brazil.