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Mauricio Endo October 2016 kpmg UKTI Webinar Investing in Brazil in a time of change

Webinar ITI Brazil - Investing in Brazil in a time of change

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Page 1: Webinar ITI Brazil - Investing in Brazil in a time of change

1© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Mauricio Endo

October 2016

kpmg

UKTI WebinarInvesting in Brazil in a time of change

Page 2: Webinar ITI Brazil - Investing in Brazil in a time of change

2© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

■Largest country in South America (7th largest country in the world): 8.5 million km2

■Population (2015): 206 million people (87.3% urban area / 12.7% rural area)

■GDP (2015): USD 1.8 trillion

■Currency: Real (BRL/USD = 3.30 in Sept 15th,2016)

■26 States, 1 Federal District and 5,565 Municipalities

■Brazilian economy experienced accelerated growth untill 2013 largely driven by increased demand from China, coupled with a boom in commodities prices, and internal consumer market growth

■ In the last couple of years, Brazilian economy stagnated due to the fall in global commodities prices, driven by a slowdown in Chinese demand, political turmoil and the rise of the national debt

■The general consensus anticipates a return to growth from 2017 on

Source: (1) Demografic sensus for 2016, IBGE (2) Oxford Economics, July, 2016. (3) Central Bank of Brazil.

Brazil is the largest economy in South America with a GDP of USD 1.8 trillion and a population of 206 million people

Brazil overview

SOUTH EAST86 million55% of GDP

NORTH EAST57 million14¨of GDP.

NORTH18 million

6% of GDP

MIDWEST16 million

9% of GDP

SOUTH29 million

16% of GDP

GDP and population by region (2015)

Page 3: Webinar ITI Brazil - Investing in Brazil in a time of change

3© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Brazil is the seventh largest economy in the world

17.929 16.549

7.328

4.457 3.541 3.426 2.946 2.622 2.462 2.455

China UnitedStates

India Japan Germany Russia Brazil Indonesia UnitedKingdom

France World

0.9CAGR(2015 – 2020)

Top 10 countries GDP (US$ bn at PPP, 2015)

Source: Oxford Economics, July, 2016.

GDP by country region

10.6GDP per capita (USD ‘000)

2.2

52.1

6.0

6.7

7.0

1.7

0.3

45.0

1.5

45.3

1.0

11.9

1.6

41.5

1.6

42.2

3.5

10.3

5.4

3.9

103,820

% of GDPCAGR

(2010 – 2013)

North 6% 4.3%

Northeast 14% 3.3%

Central-west 9% 4.3%

Southeast 55% 2.4%

South 16% 3.3%

Brazil overview

Page 4: Webinar ITI Brazil - Investing in Brazil in a time of change

4© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Brazil has a strong consumer market and is expected to be the 8th largest in the world by 2020

Forecast

4,7

3,4

2,21,7 1,7 1,7 1,5 1,3 1,1

12,8

Note: (a) Almacenes Exito acquired 18.8% stake in Companhia Brasileira de Distribuicao. (b) The Hershey Company, the listed US-based manufacturer of confectionery, chocolates and snack products has agreed to acquire the remaining 49% stake Hershey do Brasil Ltda.

Source: Oxford Economics, database 2016

Country’s consumer market (USD trillion), 2020Brazilian personal disposable income (USD’000) and unemployment rate (%)

1,2041,133

1,214

1,6411,701 14%

7%8%

20132011 20162015

12%

9%

2018

12%1,346

2020

Disposable incomeUnemployment rate

1Brazil overview – Consumer context

Page 5: Webinar ITI Brazil - Investing in Brazil in a time of change

5© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Further supporting the economic recovery is the healthy demographics of Brazil

10.4%

63.6%

23.8%

2.2%

Lending Interest Rate, Average, % Average household personal disposable income (US$’000)

Average Wages per hour (US$)

Total Household Income from all Sources (US$/month)

Breakdown of Income Groups in Brazil (Percentage of total households)

Class “A”

Class “B”

Class “C”

Class “D”Class “E”

3.670

2.202

4402940

Note: (a) All historical data and projections are in real terms and aligned to the overall Global macroeconomic trend scenario described by both the IMF and Oxford Economics Database; Source: (1) EIU; (2) IMF; (3) Central Bank; (4) Oxford Economics Global Database (September 2015); (5) The Economist Intelligence Database Unit; (6) KPMG interview program; (7) IBGE; (8) Valor Econômico

2015

Forecast Forecast Forecast

Evolution of social classes, in millions and percentage of population:

Brazil overview – Social context

Class “A”

Class “B”

Class “C”

Class “D”Class “E”

Page 6: Webinar ITI Brazil - Investing in Brazil in a time of change

6© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Despite the challenging macroeconomic context, the strong FDI numbers show a bullish standpoint from international investors in Brazil

Source: Institute of Applied Economic Research (Ipea), accessed July 2016.

18,817,1

9,3

18,615,0 15,4

26,130,1

19,9

75,0

84,7

64,1

30,8

57,9 56,4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

FDI (USD billion 2001 – 2015)

Brazil overview – Foreign investments

Page 7: Webinar ITI Brazil - Investing in Brazil in a time of change

7© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

M&A volumes have remained high despite the economy turmoil, historically, cross-border transactions represent larger share than domestic deals

161 168130

101123

146 143116 100

150183

351379

219

333

410

342365

331

269

167

204221

208

230 194

84 114

199

213

290

348284

235

393

407 474431

487

504

328

372351

309

353 340

227 230

299

363

473

699663

454

726

817 816796

818

773

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic Cross Border

Number of M&A transactions 1996 - 2015)

Crisis in Argentina and elections

Financial Crisis

Russian Crisis

Source: Merger & Acquisitions Research 2016 – 1st Semester: Mirror of transactions undertaken in Brazil, KPMG.

Brazil overview - Transctions

Page 8: Webinar ITI Brazil - Investing in Brazil in a time of change

© 2016 KPMG Consultoria Ltda., a Brazilian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Brazil. The KPMG name andlogo are registered trademarks or trademarks of KPMG International.

8

New government (President Michel Temer), its new team, reforms and focus on infrastructure

Source: Eurasia Group

Reforms Description

Pension A priority within the team. They will at a minimum introduce a retirement age, but also talking about delinking minimum wage from inflation.

Ceiling on Spending

Will establish a ceiling on spending that will tackle earmarked provisions of health and education, but not tackle social security.

Tax Proposals to unify state based value added tax ICMS, and federal taxes, but that will come only at the end of the year.

Labor More flexibility of labor code, but not constitutional reforms; government will piggy back on a bill in congress.

Microeconomicreforms

Oil reform highly likely to get approved and also telecommunications reform. Logistics infrastructure will have an upside potential.

New government understands he has a very narrow window of opportunity for reforms

Political survival strategy predicated on boosting confidence in private sector

A very credible economic team

Ceiling will come quicker than pension

Microeconomic reforms will move in parallel

A market friendly economic team

A sequential strategy on reforms

Energy, logistics to benefit

Pre-salt reform (2H2016)

SOE reform (2H2016)

State pension reform (2H 2016)

Doubling infrastructure investment (2017 onwards)

Commercial opening under Minister Serra

Telecom overhaul (2017)

Mining code (2017)

Microeconomic agenda will move faster

Brazil overview – New Government

Page 9: Webinar ITI Brazil - Investing in Brazil in a time of change

9© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Brazil economy is anticipated to return to growth from 2017

-4%

-2%

0%

2%

4%

6%

8%

00 01 03 0402 05 1312111009080706 18

EIU

16 1714

BACEN

2015 19

Oxford

Sources: Economist Intelligence Unit (EIU); Oxford 2015; Banco Central do Brasil, 2015

Brazil GDP year over year growth (real)

EIU, Oxford Econimics and BACEN (Brazilian Central Bank) forecasts anticipate a return to growth from 2017 on

Real GDP has been declining since 2014 due to a recession that triggered by the decline in commodity prices and political turmoil.

Brazil’s economy overall grew at a relatively stable rate until 2013 (except 2009) following growth in global commodity markets.

Forecast

Brazil overview – Economic context

Page 10: Webinar ITI Brazil - Investing in Brazil in a time of change

10© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Macroeconomic indicators support economic analysts estimate of an imminent recovery in 2017 – 2018

Interest Rate Evolution, SELIC, % Inflation, CPI, %

Note: (a) All historical data and projections are in real terms and aligned to the overall Global macroeconomic trend scenario described by both the IMF and Oxford Economics Database; Source: (1) EIU; (2) IMF; (3) Central Bank; (4) Oxford Economics Global Database (September 2015); (5) The Economist Intelligence Database Unit; (6) KPMG interview program; (7) IBGE; (8) Valor Econômico

ForecastForecast

Brazil overview – Economic context

Page 11: Webinar ITI Brazil - Investing in Brazil in a time of change

11© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Brazil has been investing around 2% to 2.5% of its GDP in infrastructure, however the minimum necessary for sustainable growth is 5%

*Estimate

3,1%

2,0%1,4%

1,8% 2,0% 2,0% 1,9%2,5% 2,5% 2,4% 2,1% 2,3% 2,4% 2,4%

Investment in Infrastructure in Brazil (% GDP)

13,4%

10,3%

7,3%5,1% 4,8% 4,2%

2,2%

China (2010) Vietnam (2009) China (2003) Chile (2008-11) India (2009-10) Peru (2008-11) Brazil (2008-13)

Investment in Infrastructure (% GDP)

Minimum necessary for sustainable growth is 5%

Source: IBGE; Frischtak, 2012 “Brasil e China: Perspectivas”

Brazil overview - Infrastructure

Page 12: Webinar ITI Brazil - Investing in Brazil in a time of change

12© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

One of the first actions of President Michel Temer as interim government was the announcement of the Provisional Measure 727/16, establishing the Investment Partnership Program (PPI –Programa de Parcerias de Investimento), with the objective to incentivize and increase private investment through Privatization, Concessions and PPPs (Public-Private Partnerships).

New government’s Investment Partnership Program (PPI)

Brazil overview – PPI

PPI key benefits:

Governance

Executive Board of PPI: led by the President and composed by the Secretary of PPI, Ministry of CivilHouse, Ministry of Finance, Ministry of Planning, Ministry of Transportation, Ministry of Energy andMining, Ministry of Environment and President of The Brazilian Development Bank (BNDES)

Secretary of PPI subordinated directly to the President

One Stop Shop for investors - the Secretary of PPI will have a dedicated team of 30 specialists that willaccumulate technical information of all projects in the program and be a single interface with the private sectorinvestors

Technical support - Company Planning and Logistics (EPL – Empesa de Planejamento e Logistica), with 120engineers, will be the technical supporting body to the Secretary of PPI.

Funding - BNDES will create FAEP (Fundo de Apoio à Estruturação de Parcerias), a fund with an initial term of10 yeras, renewable for similar periods, with the objective to contract services to structure projects for thepartnerships (privatizations, concessions and PPP) within PPI.

Page 13: Webinar ITI Brazil - Investing in Brazil in a time of change

13© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

The information contained herein is of a general nature and is not intended to address the circumstances of any particularindividual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that suchinformation is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on suchinformation without appropriate professional advice after a thorough examination of the particular situation.

© 2016 KPMG Assessores Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados. Impresso no Brasil.

Mauricio EndoPartner, Head of Government & Infrastructure in Brazil and Latin AmericaKPMG in Brazil+55 11 3940 [email protected]