From Our Briefings Newsletter

Published on14 JAN 2019

The article below is from our BRIEFINGS newsletter of 14 January 2019:

Briefly . . . on Brazil's Economy, Markets and Investment Opportunities

With a new administration in power in Brazil, what's the outlook for the economy and markets in 2019? We sat down with Maria Silvia Bastos Marques, president and CEO of Goldman Sachs Brazil, to discuss opportunities in the region, issues on the minds of clients and her experiences as a pioneering executive in Brazil.

Last year's presidential campaign was a divisive and polarizing one, with the election of right-wing former army captain and lawmaker Jair Bolsonaro. How concerned should investors be?

Maria Silvia Bastos Marques: To be sure, the election was a contentious one with a controversial candidate, and there are a number of policy questions that exist moving forward. But first, I would note a few reasons why investors shouldn't be overly concerned about the future of the country's democracy. For one, institutions in Brazil are strong. The country went through a painful presidential impeachment and a sweeping corruption and kickback scheme, known as Operation Car Wash, in recent years and we saw elements of a functioning and vibrant democracy – the general public, Congress, the Supreme Court, press and social media all functioned properly. Finally, it's worth noting that today's younger military generation – including the four-star general who was just appointed Brazil's Minister of Defense – weren't part of the country's military dictatorship that ended in 1985 and may even act as a moderating power inside the government.

What's been the sentiment in the corporate sector in recent months?

MSBM: During the campaign, financial markets supported Bolsonaro's candidacy early on given expectations that Bolsonaro, if elected, would appoint Paulo Guedes, a pro-markets economist from the University of Chicago, as the country's finance minister. After the election, Guedes took on a larger and more comprehensive role, assuming responsibility for a newly created Ministry of Economy that was formed through the merger of the former Ministries of Finance, Planning and Industry and Commerce.

The corporate sector in Brazil had some concerns about then-candidate Bolsonaro during the campaign, but many are hopeful today that the new administration will push concessions and privatizations, approve the mandatory social security reform and improve the Brazilian business environment by opening the economy, implementing tax reform and pursuing other microeconomic measures necessary to resume sustainable growth.

What will be some of the key priorities for the administration this year?

MSBM: With interest rates and inflation anchored at relatively low levels, we expect the government will focus on reining in the country's high fiscal deficit levels and embarking on social security reform. I recently returned from a roadshow in the US and – while foreign investors are excited and wanted to learn more about the new government – there is still some cautious skepticism. One of the key issues to watch for is whether the new government is successful in building enough political support in Congress to approve the necessary laws and constitutional amendments, especially related to the social security reform.

Our colleagues in Goldman Sachs Research expect Brazil's real GDP growth to exceed 2% in 2019 for the first time since 2013. President Bolsonaro, however, faces complex legacy macroeconomic issues and will need to carefully navigate and manage old and new political and social challenges. The administration now has to deliver on growing the economy and implementing the necessary changes to improve the business environment and make Brazil's economy more open and competitive with other emerging market countries.

Are there any particular areas of opportunities that investors are focused on?

MSBM: From my conversations with clients in Brazil, local investors are particularly excited about a range of investment opportunities from oil, gas and natural resources projects, to infrastructure investments, including energy and sanitation. Brazil also has a vibrant financial technology sector. In fact, a number of fintech companies in Brazil went public in 2018. More broadly, 2018 was our best-ever year in the region given our involvement in some of the largest IPOs of Brazilian companies on Brazil's Stock Exchange or on the NYSE and Nasdaq. We expect more companies to go public or issue ADRs on foreign exchanges in 2019. Meanwhile, we see key M&A opportunities in the infrastructure sector and expect the oil and gas sectors to boom this year.

As one of the few female bank CEOs in the region, what have you learned from your experience that could help promote more diversity in corporations?

MSBM: I guess you could say that I'm used to being the first woman in a CEO role as I was previously the first woman CEO of the other companies I worked at. My advice to other women is to take advantage of the fact that you are a woman to add a diverse perspective to the mix. When I was the CEO of a Brazilian steel company – which had fewer than 1% female employees – I saw that the employees' uniforms were dirty, old and poorly designed. So we held a contest with fashion designers to design a new uniform. We actually held a "fashion show" inside the steel mill where employees voted on their favorite design. Our employees were proud of their new uniforms and it was a great boost for morale and productivity. It even became a case study for human resource professionals in general and a benchmark for the industry. It is just a small example that having a different perspective can be a very positive thing for the business.