Brazil builds recovery plan on new infrastructure concessions
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Emerging Markets

Brazil builds recovery plan on new infrastructure concessions

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The weakened Brazilian government has pledged to offer higher returns to investors in infrastructure concessions in the face of its most severe recession for several years.

Nelson Barbosa, the planning and budget minister, is facing the difficult task of relaunching the government concession programme amid flagging investor confidence and the latest twists and turns of the Petrobras corruption scandal.

In an interview with Emerging Markets, Barbosa defended the current “policy realignment” after years of what investors perceived as economic mismanagement. He made it clear that the government was determined to ensure investors were offered higher rates of return. He also indicated that state intervention would be curbed.

Meanwhile, the strong currency depreciation against the dollar would boost the competitiveness of Brazilian industry, he said. “We have been working towards creating an environment that is conducive to provide investment with attractive return rates and that is relevant to each project,” said Barbosa, who recently announced the resumption of the airport privatisation programme, including those of Porto Alegre, Florianopolis and Salvador. Dredging, railways and road concessions were already on the agenda, he said.

Nevertheless, his attempts to reassure investors have been met with scepticism. “The concessions are pretty important, but you have to get rid of the protectionist components, such as the 60% local content rule,” said John Welch, emerging market macrostrategist at CIBC, who said the level of local content should be brought down to 30% at most. “They have to bring down the cost of investment in Brazil,” he said.

Fiscal adjustment

Barbosa insisted the economic policy realignment would pave the way for a resumption of economic growth towards the end of the year. “The economy will take stock of these measures and will start accelerating towards the end of this year in order to have a stronger growth in 2016.” Around 70% of the fiscal adjustment was related to the “improvement in public expenditures”, with the remaining 30% coming from government revenues, he said.

Nevertheless, the government programme has met fierce resistance in Congress, including from some members of the ruling coalition. President Dilma Rousseff lacks political capital and her government is suffering badly in opinion polls amid a devastating corruption scandal in the state-run oil company Petrobras.

The new economic policy has, however, received a boost when Standard & Poor’s, the credit rating agency, upheld the sovereign credit at BBB- with a stable outlook this week. “This means that there are conditions that are supportive in terms of investment,” Barbosa said. “We need to have a business atmosphere that is more competitive and profitable.”

As the Brazilian real was one of the emerging market currencies that has suffered the most in recent weeks ahead of the looming US rate hikes, Barbosa downplays the impact of risk aversion on the Brazilian capital markets. “We have adopted a floating exchange rate and we believe that the current appreciation of the dollar can help the national industry to be more competitive while preserving the country’s attractiveness for domestic and foreign investments.”

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