Can Brazil provide the 'real' deal?

Brazil's upturn has intrigued investors, but enthusiasts should still exercise caution, warns Guilherme Brafman.

Emerging markets have been a hot topic in the profession for some time. Brazil, with its massive 45 per cent contribution to the Latin American Gross Domestic Product (GDP), is a particular case in point.

Brazil's corporate sector has been keen to access the world's capital markets, while the federal and state privatisation programme has also relied on Brazil being attractive to foreign capital.

After visiting the UK last year, President Fernando Henrique Cardoso said that, in his view, UK capital was under-represented in Brazil's privatisation programme.

To encourage more UK involvement, a roadshow was staged by Brazil in the City where privatisations in the water and transport sectors were detailed by, among others, the Federal Minister of Transport.

While there is an active public market in securities in Brazil, takeovers and mergers have been extremely rare. With the opening of the Brazilian domestic markets and the privatisation activity which has recently taken place, it is reasonable to suppose that this situation will change, and it would seem that an exposition of the British way of conducting takeovers and mergers would be timely.

Brazil has implemented a law to provide a framework for recognition of international arbitration, but it appears that the constitutionality of the law in question is awaiting various judicial processes.

Not so long ago, Brazil suffered from seemingly endemic inflation problems, in addition to protectionist policies which prevented the domestic economy from being exposed to international competition. Foreign investors demonstrated reluctance and were worried about repatriation of profits and capital.

The change in the past few years has been startling. Free-market economic policies and a great deal of discipline have lead to the introduction of the “real” as currency, pegged to the US dollar.

Inflation has come under control (in SAo Paulo state there has been negative inflation in the past 12 months) and an inflow of foreign capital has helped Brazil come to grips with servicing foreign debt. Rio de Janeiro has also improved its looks and toughened up on crime.

Little wonder then that Linklaters Limitada is now offering its consultancy services, that Clifford Chance is rumoured locally to be about to open its doors for business and that Richards Butler now has its own affiliated two-partner firm, Advocacia Rodrigues Do Amaral, in SAo Paulo.

But before UK firms climb onto the bandwagon, a pause for thought may be worthwhile. Recent events in global markets have not failed to affect Brazil. Like Mexico, Brazil has had to raise domestic interest rates to vertiginous levels (currently 49.75 per cent) to tempt foreign capital to remain. This has raised the cost of servicing foreign debt.

Recently, the so-called “circuit-breaker” which suspends trading if the market falls by 10 per cent or more in one session, came into operation not only in SAo Paulo, but also in Rio de Janeiro. Billions of dollars have fled the country at the behest of nervous investors and Moody's has downgraded Brazilian debt.

The real has lost some of its value against the dollar. Further, presidential elections are due to take place next month and a change of government could renew investors' doubts.

I am a Brazil enthusiast, but then, being Brazilian, I am biased. Those seeking to hang up their name plates in the country should research the market well. The potential rewards for capital markets/ privatisation lawyers are present, but Brazil is an emerging market, not a mature one. That is why it is interesting – but certainly not risk-free.