Strategic intelligence in Latin America

Brazil

The year ahead for Latin America's largest economy.

The Brazilian government seems to lack a long-term vision and has been pursuing a short-term agenda. The Coronavirus pandemic has not helped and with general elections scheduled for October 2022, next year will be crucial for Bolsonaro’s re-election hopes.

The President must make progress on his privatisation plans, international relations and infrastructure investment. Outside of this, there are significant changes expected in the energy, agriculture, telecommunications and sanitation sectors that are worth keeping an eye on.

“2021 will be decisive for Bolsonaro’s chances of re-election in 2022; the government continues to talk about privatisations and new infrastructure projects but there is no detail or action.”

Former Minister of Justice, Brazil

Privatisations

In the third year of his term, Bolsonaro hopes to raise USD 70.3 billion through public-private investment partnerships and the privatisation of 115 state-owned entities.

The state power company Eletrobras is the lead asset in the privatisation plan but others include the Correios postal service, 24 airport concessions, 16 port terminals, 6 highways, 3 railway lines and others.

One of Bolsonaro’s main electoral pledges was to privatise some of Brazil’s largest state-owned companies but this has been hindered by political resistance in Congress, a shift in economic priorities due to the COVID-19 pandemic and resignations of key secretaries in the Ministry of Economy.

International relations

The EU and Mercosur countries (Brazil, Argentina, Uruguay and Paraguay) reached an agreement in principle in 2019 to create a free-trade zone affecting almost 780 million people with a combined GDP of USD 19 trillion. However, the agreement has yet to be finalised, signed and ratified.

The agreement should be beneficial for both parties. EU countries will see most export tariffs to Mercosur countries eliminated while Mercosur, with a commodities surplus, will see an exemption from import taxes on 80% of its products. In particular, Brazil’s commodities and agricultural sectors would obtain preferential access to the European consumer market, currently restricted by quotas.

The deal is facing some challenges. One hurdle is that European politicians, investors and protectionist agribusinesses have environmental concerns over the deforestation of the Amazon and the lack of effective solutions implemented by the Brazilian government.

A former senior politician in Brazil highlights the other challenges facing Brazil in the international arena, “Brazil needs to realign its interests with the international community. The government has distanced the country from important alliances such as Mercosur and the BRICS, has alienated China, offended the Middle East and backed the wrong horse in the US.”

Energy

There are two major changes expected in the Brazilian energy sector: the liberalisation of the gas market and renewables investments.

Brazil started liberalising its gas market in 2019, opening it up to competition through market reforms that ended Petrobras’ monopoly over the onshore market. On 10 December 2020, the Senate passed another law to open up the natural gas distribution market – also traditionally monopolised by Petrobras. The new regulation aims to prevent producers from being distributors and vice-versa.

Furthermore, the government wants to continue de-regulation through the ‘Gas para Crescer’ (Gas to Grow) programme to encourage new participants in the transportation, import/export, distribution and commercialisation of gas. It is hoped that full liberalisation would grant Brazil lower fuel prices while attracting investment at the same time.

In terms of renewables, the Brazilian Electricity Agency (ANEEL) is planning to tender eight new concession contracts to construct, develop and maintain a number of transmission lines and substations.

Brazil is seeking USD 60 billion of foreign investment over the next 10 years to invest in clean energy, according to the Ministry of Environment, which also predicts a 2.5% growth in energy demand until 2024.

Companies from Spain, France, China, India, Italy and Switzerland were involved in a recent auction for electric power transmission. It is expected that two ANEEL auctions in 2021 will generate similar interest.

Infrastructure

Following the economic crisis, caused by the COVID-19 pandemic, Bolsonaro is aiming for a quick recovery to boost his re-election chances in 2022. Consequently, the federal government will try to tender several major infrastructure concessions to boost growth.

Among these concessions, three are expected to attract foreign interest:

  1. Dutra motorway: 626 kilometres of motorway to connect Sao Paulo and Rio with concessions expected to attract USD 2.7 billion and extend for 30 years;
  2. Ferrogrão Railway: 933 kilometres of railway spanning from Mato Grosso to Pará, which includes a 69-year concession and USD 1.7 billion investment; and
  3. 22 airport concessions in three blocks (combining more profitable with less profitable airports). Investments and concession terms depend on the blocks.

Agriculture

Middle Eastern and Asian investors are looking at Brazil as a ‘food guarantor’ with stronger agricultural infrastructure than many other countries in the region. Sovereign funds from Saudi Arabia have invested in Brazil, while Brazilian companies are opening plants in the Middle East and Northern Africa to consolidate export infrastructure.

Brazil is expected to produce 301.8 million metric tons of grain by 2027-2028 in contrast with the 248 million metric tons registered in 2018-2019. In 2021 exports of arabica coffee, soybean, sugar – of which Brazil aims to be responsible for 45% of global exports by the end of the decade –, cotton and maize are expected to grow significantly.

During the Covid-19 pandemic, the exchange and export capacity of Brazilian agribusiness companies, was one of the few economic activities with continued growth.

Telecommunications

Anatel, the Brazilian telecoms regulator is preparing the auction of 5G equipment which will likely take place in the first half of 2021 and has the potential to be the world’s biggest single tender of its kind. It has been estimated that 5G could generate a USD 1 trillion economic impact for Brazil.

President Bolsonaro has admitted that tender participation requirements will not be solely technical as geopolitical considerations will be also taken into consideration. Brazil is currently facing pressure from the US to restrict the participation of Chinese state-owned Huawei in the tender. This would upset China, Brazil’s largest trade partner, which could retaliate with restrictions in other sectors.

The Brazilian government is currently divided into a pragmatic business-like bloc, which opposes any restriction on Huawei’s participation and an ideological bloc aligned with the US position.

Sanitation

Last June, the Brazilian Senate passed a Basic Sanitation Law to guarantee basic sanitation services throughout the country. Rogério Marinho, minister of Regional Development said that 83.7% of the Brazilian population had access to potable water while only 54.1% had access to adequate sewage services.

The new sanitation framework seeks to make the regulatory framework more attractive for investment in sanitation services including waste, wastewater and drainage. The proposed new regulations will make the granting of new concessions easier which will have a significant impact in attracting new investments.

The estimated cost to universalise access to all sanitation services in Brazil is estimated at USD 94.3 billion. One of the main 2021 sanitation concession tenders is expected to take place in Rio de Janeiro, which is estimated to be valued at USD 8.9 billion alone.

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Volume 1 - Issue 15

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Brazil

The year ahead for Latin America's largest economy.