BRAZIL: An Introduction
Pinheiro Neto Advogados
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Brazil: An IntroductionIt is always difficult to predict the future in emerging markets like Brazil, especially when we are facing a sequence of uncertainties, disruptive events, and volatility— not only domestically, but on a global basis.
The potentially harsh and unpredictable consequences of the war in Ukraine, especially for the Brazilian agricultural sector, which is heavily dependent on the import of fertilizers; the escalating inflationary pressures resulting from lockdowns and other events associated with the Covid-19 pandemic that have disrupted and continue to disrupt supply chains on a global basis; the greater protectionism resulting from the increasing complex geopolitical agenda involving the United States and China; and the expected turmoil of polarised general elections in Brazil to occur in October are among the exemples that illustrate the existing challenges and risks for those trying to anticipate scenarios amidst important long-term business and economic decisions.When one looks back to where things were at this point in time last year, the general prevailing sentiment was of a somehow cautious optimism in relation to the year’s outlook. At that time, Brazil was still struggling with the immediate impacts of the second wave of the Covid-19 pandemic, the need to speed up vaccination of the population and the threats represented by the omicron variant. Even so, many industries were eventually very fortunate and 2021 surprisingly ended up being one of the best years ever for them. Gradually, investors regained confidence, the injection of funds from emergency aid and stimulus programs enacted by the government boosted consumption, risks were mitigated, fears have receded, and economic activity generally resumed to pre-pandemic levels (and in some areas has even increased). This positive business and investment environment fuelled capital markets, M&A and other transactional practices.
The Brazilian Central Bank was one of the first monetary authorities to start to increase domestic interest rates still in 2021 with the aim of reducing inflation. It is reasonable to expect, therefore, that Brazil will be one of the first countries to start to see a structural reduction on inflation in the coming months, allowing equity capital markets to regain traction - although, until June, inflation remained high. Certain sectors continued to post very meaningful results, like mining, oil & gas and agribusiness, benefiting from the current commodities boom and a devaluated local currency.
Considering what we have seen so far, although general elections are usually believed to put a damper on business activity, we do not expect any major shift or setbacks in terms of macroeconomic policies or reforms in the future, independently of who wins the presidential election. This results from a genuine belief that whoever wins the election will be encouraged to continue to pursue fiscal responsibility, a tax simplification and an administrative reform aimed at lowering bureaucracy and increasing productivity. Brazil is heavily dependent on receiving foreign investment and whoever becomes the incumbent president will need to act diligently towards this goal and continue to adopt pro-market initiatives, otherwise the risks of a downturn or a continuing very low growth period will materialize, dangerously reducing popularity and political support. There is a mature consensus that only by adopting this set of measures will Brazil be able to attract investments, increase tax revenues, generate jobs and better distribute wealth. Despite natural difficulties, we really hope the Brazilian society and Congress are ready and willing to timely take these measures.
In our view, there are basically three big windows of opportunity for Brazil to attract long-term investments and boost domestic economic activity in the years to come. One continues to be the infrastructure sector, primarily via several transport and water treatment concessions, new projects and privatisations. The privatisation of electric company Eletrobrás closed in June is a major example. Another major opportunity is through incentives and the favourable and unique conditions for Brazil to play an even more important role in the context of the climate-environmental global agenda; and, finally, Brazil is also in a good position to attract new investments as part of the expected reshaping of global supply chains.
All in all, there are sound reasons to remain optimistic with the country’s outlook. In this context, despite all the challenges described above and those yet to surface, 2022 is expected to be another year full of opportunities in the Brazilian market.
Doing Business in Brazil
The Brazilian domestic market continues to offer great potential and attract interest from global companies targeting large markets and other segments with unexplored expansion potential, as well as smaller companies seeking investment and expansion. For short-term financial investors, the current macroeconomic conditions are very attractive, with high interest rates, low insolvency risks and very favourable exchange rates for foreign investors. At the same time, for long-term investors, Brazilian assets continue to be valued at appealing prices and many sectors still offer very good entry opportunities with little or no barriers, investment and consolidation opportunities, including healthcare, technology, financial services, agribusiness, infrastructure and commodities.
For sure, Brazil still needs to pursue a more solid and consistent agenda to polish and enhance its image abroad - including by creating less political noise and taking concrete measures to show its firm commitment to the environmental, social and corporate governance (ESG) agenda. This, together with responsible government decisions and the long overdue reforms, will certainly provide the necessary conditions for a more predictable, reliable and stable business environment.
We are very optimistic with the rapid evolution experienced by many Brazilian companies, especially when it comes to adoption of very robust ESG principles, policies and practices. More and more, they develop and implement serious and transforming initiatives that will certainly have a significant impact on how businesses are conducted, improving the development of our country and society.
Key Legal topics on the agenda
Streamlining the country’s tax system – which is very complex, bureaucratic, inefficient and often unclear – is more than ever long overdue, but unfortunately we do not envision any major change approved this year due to the natural difficulties of building the necessary support at Congress in a general elections year.
Many legal improvements and disruptive measures (such as open banking) continue to be consistently approved and announced by the Central Bank, all aimed at increasing competition, efficiency and reducing costs, not only in connection with lending activities, but also foreign exchange, asset management and financial investments.
We also expect to see some actions toward regulation of cryptocurrency and asset-backed tokens. This is a thriving area worldwide and should only increase from now on.
In terms of ESG initiatives, we have seen a consistent move related to carbon credits and issuance of green bonds that are poised to pick up in the current year.
We must also not overlook the agribusiness sector which—considering Brazil’s stand as a global leading producer of several agricultural commodities and also the Russia-Ukraine turmoil—should continue to be a magnet for local and international investments and, hence, potentially prompt changes to more relaxed rules (such as a revision of foreign restrictions on ownership of rural property).
After so many changes over the last two years, the recent challenges have shown that adaptability is essential at all levels of the legal profession, from law firms to legal departments. A successful outcome has relied on an already irreversible trend: the pro-active and responsive lawyers who understand the client’s industries and needs are the ones that deliver the best results. That is why flexibility, technical knowledge and business acumen are crucial when doing business in a sizable and complex market such as Brazil.
Editor’s note: The overview above is co-authored by Pinheiro Neto Advogados' managing partners Alexandre Bertoldi and Fernando Meira.
Alexandre Bertoldi has featured at the top of Chambers and Partners’ rankings for the last 20 years. He is among the very best of a generation of high achievers in the legal profession and has maintained an enviable 35-year career leading some of Brazil’s most prominent M&A transactions, including the landmark deals that resulted in the creation of airliner LATAM and retailer Via Varejo. He is also highly respected for leading Pinheiro Neto over the last 16 years, helping the firm to establish and develop its quintessential culture. Managing partner since 2009, Bertoldi also serves as chair of Pinheiro Neto’s executive committee.
Fernando Meira co-manages the firm and is a top-class M&A lawyer. His career spans almost 30 years and he has featured in Band 1 since 2008. Meira’s portfolio is marked by landmark acquisitions. Boeing’s acquisition of Embraer and Raízen’s acquisition of Biosev are examples. He also assisted Odebrecht with the formation of Braskem.
Pinheiro Neto is a leading firm topping key rankings in Chambers Brazil in contentious and transactional areas as well as in important and innovative sectors and industries.