Brazil’s Wealthy Lament Political Dysfunction as Fortunes Tumble
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Brazil’s Wealthy Lament Political Dysfunction as Fortunes Tumble
Daniel Cancel, Cristiane Lucchesi and Rachel Gamarski
5 min read
(Bloomberg) -- A more than $12 billion wipeout in the fortunes of Brazil’s wealthiest people deepened this week, as a market selloff knocked the currency down to a record low and dragged down some company valuations by more than 60% for the year.
From Rubens Ometto to Andre Esteves, some of the country’s billionaires had already seen their wealth decrease this year as President Luiz Inacio Lula da Silva continually refused to slash spending and the country’s fiscal deficit swelled to nearly 10% of gross domestic product.
Net worths further shrank this week after Congress watered down proposed cuts to spending and the central bank made several failed attempts to stem a currency collapse. The country’s benchmark stock exchange has lost some $230 billion this year — $60 billion in the past week alone.
Policymakers stepped in again Friday with a spot sale and credit line auction totaling $7 billion. That led markets to bounce, with the real gaining as much as 1.4%, briefly erasing the week’s losses.
The spiraling crisis is worsening fears across Faria Lima — Brazil’s Wall Street — that despite relatively robust economic growth, Lula will paralyze long-term investment decisions when he’s been trying to attract foreign companies to revitalize industry.
Interest rates are expected to surge to 15% next year, with little to no expectations that the leftist government will cave in to the market’s demands for austerity. That, along with market volatility, leaves investors without any reason to be optimistic about near-term prospects.
“What we see is a generalized and unprecedented value destruction,” said Ricardo Lacerda, founder and CEO of investment bank boutique BR Advisory Partners Participacoes SA. With surging interest rates, “no one can finance themselves. We already see projects being postponed, mergers and acquisitions being aborted, investment projects being shelved.”
Ometto, the billionaire behind ethanol and logistics giant Cosan SA, told the Folha de S. Paulo newspaper in an interview this week that the problem is mostly political, with members of Lula’s party refusing to budge and that companies are halting investments.
The sheer wealth destruction that’s been unleashed is shocking, and the mood in the financial district grim. Hedge funds — which boomed just a few years ago — are failing to beat market benchmarks and grappling from net redemptions of 411 billion reais over the past year. Many are opting to shut down. Those that remain are shorting Brazilian stocks and the currency, adding gasoline to the fire.
Some of Brazil’s most storied business executives are taking it on the chin. Ometto has seen 66% of value wiped off Cosan in dollar terms. Luiza Trajano, of retailer Magazine Luiza SA, has seen her stake, once worth well north of $1 billion, shrivel further this year with shares down 75% in dollar terms, according to the Bloomberg Billionaires Index.
Billionaire Rubens Menin’s flagship homebuilder MRV Engenharia e Participacoes SA has also cratered along with wholesale retailer Atacadao SA, which is majority owned by France’s Carrefour SA alongside the late Abilio Diniz’s family office.
However, many exporters have been shielded. The billionaire families behind meat producers including JBS SA, BRF SA and industrial machinery manufacturer WEG SA are among the few to buck the trend with their publicly traded companies gaining for the year.
Representatives for the billionaires and their companies did not respond or declined requests for comment.
Senior bankers in the country who agreed to speak on the condition they aren’t named said the latest spending cut plans were insufficient, lawmakers were dragging their feet and the government has failed to show enough urgency to address the deteriorating fiscal situation.
One lamented that Argentina, the perennial economic basket case neighbor to the south that is now undergoing a drastic austerity campaign, will have higher growth and lower inflation by the time Lula’s term ends.
Others criticized Lula’s finance chief Fernando Haddad for suggesting the currency was under a “speculative attack.”
Business leaders from the infrastructure and retail industries who also requested anonymity to speak about the situation said they see a wasted four-year presidential term and expect more brain drain as young Brazilians look to move abroad.
While the wild currency fluctuations are mostly affecting businesses, valuations and wealthier Brazilians who are planning New Year trips abroad, economists warn the devaluation will show up in consumer prices and through higher rates for all in 2025.
The vast majority of regular Brazilians will only start to feel the impact of the fiscal crisis once the currency hits the prices of items like food, apparel and home appliances, which are all very sensitive to the US dollar, according to Bloomberg economist Adriana Dupita.
Brazil’s central bank estimates that — all else being equal — inflation will rise by 1% for every 10% depreciation of the real. A median income earner in Brazil will be far more vulnerable to the depreciation.
Carpa, a multifamily office that advises 140 families with about 7 billion reais under management, now recommends clients allocate up to 50% of their portfolios to hard currency — up from 20% to 30% in the past, according to partner and director of wealth planning Pedro Romeiro.
Among clients keen on establishing tax residency outside Brazil, there’s growing interest for destinations like Uruguay, Portugal and Italy, he said. Others are thinking of selling assets like real estate in the US that have become expensive to maintain and are seldom used.
“Brazilians in general are sending more money abroad and migration is on the rise,” Romeiro said. “As the government tries to raise taxes those trends accelerate.”
The wealthy always have ways around increased taxation, which will only make the fiscal situation harder to resolve, according to Romeiro.
The chaos is proving a boon for some fintech firms specializing in offering Brazilians money transfer and offshore investment channels.
“We’re noticing an all-time high in the volume of financial investments from Brazilian clients,” said Roberto Lee, founder and CEO of Avenue, a brokerage that targets Brazilians looking to diversify and protect their savings.
Lacerda, the banker, sees Lula “arm wrestling” with the market, capital flight increasing and growing uncertainty for investors.
“Investors are throwing in the towel,” he said. “Those who bet against Brazil are making money. Those who bet in favor are losing.”
--With assistance from Walter Brandimarte.
(Adds details of central bank’s latest intervention in fourth paragraph.)
