Brazil’s improving fortunes underpin capital markets outlook

Bnamericas Published: Monday, January 06, 2020
Brazil’s improving fortunes underpin capital markets outlook

Brazil was Latin America’s IPO champion last year – and capital markets activity in the country could accelerate thanks to an improving economic environment

In 2019 the region saw seven IPOs, all domestic, which raised US$3.5bn, down around 30% in value and volume, reflecting the impact of political and economic uncertainties

Brazil and Chile bucked the negative trend, with the former accounting for five IPOs, up from three in 2018.

The country, which is shaking off fallout from years of political uncertainty, the commodity plunge and corruption scandals, is regaining some economic strength, with approval of a major pension reform bill last year a key driver. Two offerings were listed the same day the reform passed.

After expanding by an estimated 1% in 2019, Latin America's biggest economy is forecast to grow almost 2.5% this year.

Pablo Berckholtz, managing partner for global law firm Baker McKenzie in Peru, told BNamericas it was difficult to make forecasts, or identify trends, on account of changing political and economic climates in the region, but Brazil – along with Peru and Colombia – should see an uptick in activity.

“Particularly in Brazil, which has been held up for a while now; and the pension reform does give them more growth potential,” Berckholtz said.

“You visit Brazil, you talk to the bankers, and they do expect the market to pick up. They do still have high expectations for the capital markets, in particular equity, picking up in the next 12-18 months.”

Brazilian infrastructure firms, among others, are increasingly turning to the local capital markets instead of banks when seeking financing for their long-term projects. Capital markets have become a more attractive source of financing compared to traditional lenders. 

The benchmark interest rate is at a historic low of 4.5%, but banks continue to charge companies double-digit interest rates.

Among those tapping the market last year was logistics firm Rumo, which raised 1.13bn reais (US$279mn) from a bond issue. The bonds are paying around 7%. 

In the first nine months of 2019, companies raised 335bn reais from debt and share issues, up from 238bn reais in the same period of 2018, according to the country's finance and capital markets association, Anbima.


In terms of sectors in the region with particularly strong potential, retail, fintech and education stand out.

“Those industries will become hotter in the next couple of years,” Berckholtz said. “I don’t think we can say we’re going to see IPOs in the next 12 months necessarily, but there will be investment in those industries that I think will at least open doors for growth in the equity capital markets.” 

Activity in sectors including construction – largely due to the Lava Jato corruption scandal – is expected to remain dampened.

“The construction industry I think is going to be held back for a long time. We’ll probably see newcomers. They will take some time to actually tap the capital markets for fundraising,” he said.


The fall in Latin American IPO activity last year mirrored global trends.

In 2019, a lack of policy clarity, among other factors, dampened investor appetite in the region’s second and third largest economies, Mexico and Argentina, respectively. 

“As it happened in Latin America, geopolitical uncertainties, particularly in major financial markets around the world in markets like the US, UK and Hong Kong, dampened IPO activity and left investors waiting on the sidelines, hoping for resolution to trade disputes and political uncertainty,” Baker McKenzie said in a release.

In Latin America, activity was also down in 2018. 


While IPO activity has slowed, local companies in Latin America are sharpening their focus on compliance. They are starting to enforce policies instead of drawing them up simply to comply with, for example, US stock exchange requirements and then filing them away, Berckholtz said.  

And Lava Jato remains a key driver. Launched in 2014, the investigation thrust the issue of corruption into the spotlight not only in Brazil but across the region.  

US anti-corruption rules that govern US firms operating overseas are also playing a role.  

“What is changing in Latin America, and does affect a company’s ability to tap in particular equity capital markets, is corporate governance and compliance,” Berckholtz said.

“Some people are going to jail. Regulators are starting to look at the level of enforcement. Board members are starting to get concerned about their participation and their roles and responsibilities and potential liabilities within the companies. That wasn’t a concern until not too long ago," he said.

"So I think, as a region, it’s very positive that people are starting to look at this and it should have a long lasting effect on the way business is conducted in the region.”

Berckholtz added that Latin American countries have realized the economic benefits of compliance. 

“I think countries do realize that if they want to keep growing, there has to be much better enforcement and cleaner business practices,” he said.

Picture credit: Cris Faga/NurPhoto

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