Strengths
- The 2019 macro- economic outlook for Brazil is positive following the election of Jair Bolsonaro. The market is rebounding as a result of the pro-business agenda of the new administration
- The market is picking up in equity and bond activity which increases appetite from international investors in Brazilian credit. This will open up the market to further bond issuances in 2019
- The loan market is increasing both on the new money deals and refinancing sides following a slow performance in 2018
- Private market for debentures has taken off and will continue to do so into 2019
- International banks return to the Brazilian market following Lava Jato, which provides a much-needed boost to the infrastructure sector
Weaknesses
- Long term funding remains challenging for infrastructure projects in Brazil
- FX risk lingers on, despite election uncertainty fading; hedging remains a challenge with foreign lending versus local currency
- Reduction in public subsidies for agribusiness pits private investment as the sole avenue for new funding sources.
- Lack of long-term debt in Brazil limits potential pipeline of project finance investments. This a hurdle that investors want to overcome for 2019
Opportunities
- Foreign investment is returning to the Brazilian project finance market with substantial focus on the agriculture, infrastructure and oil & gas sectors. This will lead to increased IPO activity and reissuances in Q1 2019
- Corporates are experiencing high levels of credit risk and will be on the lookout for more structured finance deals. This will provide an opening for international investors to come back to the Brazilian market
- Privatization of state companies is a key focus for 2019, in particular, the power and electricity sectors, which will open up the Brazilian market and increase foreign investor appetite
- The changing role of BDNES not only increases the debentures market but also increases competition between local and international investors in filling the funding gap for project finance in Brazil.
- The rise of fintechs, in particular, payment companies is an important focus for the Brazilian financial market going into 2019. Institutional investors are also increasingly exploring the cryptocurrency space.
Threats
- The continued positive economic outlook hinges on Bolsonaro’s ability to approve the pension fund reform. This will impact the capital market’s response and the long-term outlook on interest rates
- The trade war between the US and China impact on Brazilian investment will largely depend on how Brazil choses to position itself. Whilst China is an important partner to keep, Brazil’s long-established and growing relationship with the US is paramount going into 2019
- Challenger banks such as Neobank and Nubank are more advanced than traditional banks, and as a result, both parties are fighting for the market in the digital product offering space.
