Brazil’s equity market looks like it is in terminal decline.
Trading volume of $25.8 billion last year is one-fifth of the
volume in 1997. Delistings have outpaced IPOs for years. The market
has seen only five new listings in the last five years, with the
most recent taking place in February when CCR, an operator of
highway concessions, went public with a $126.6 million listing. The
equity market is the victim of an aversion to equity finance in
corporate Brazil, the decline in demand for emerging markets
equities by international investors and by a conscious decision of
the Brazilian government to tax the market within an inch of death.

In 1999, the government slapped a “provisional” tax on financial
transfers. It now stands at 0.38%, enough to force nearly all
Brazil’s blue chip companies to list their stocks on the New York
Stock Exchange in ADR form. In addition, New York offers tremendous
liquidity and access to institutional investors.

To his credit, José Luiz Osório, president of the Comissão de
Valores Mobiliários (CVM), the government’s securities regulator,
is doing his best to revive the market. He has convinced the
government to turn the CVM from a poodle into a watchdog with bite.
He is independent of the government and gets his funding not from
the federal budget as before, but from a levy on market operations.

And it was during his watch that Congress finally approved new
corporate legislation that strengthens the rights of minority
investors (see “Tenders Take Center Stage,” p. 24) and the São
Paulo Stock Exchange introduced a new market – literally called O
Novo Mercado – available only to companies meeting stricter rules
on corporate governance.

      

Osorio has modernized the CVM’s operations, hired more staff and
streamlined regulations, for instance by consolidating rules on
listings and delistings into a single, coherent body of law. His
next battle is to scrap the 0.38% tax on capital market operations.
He says, “This would put São Paulo and New York on the same
footing. There is a concern in the government with liquidity
leaving the country.” Maybe, but it is hard to believe that
Congress will approve the constitutional reform in an election
year. Ordinary Brazilians would have to continue paying the tax
every time they access their bank accounts.

Yet the market just does not seem to react. “The market is failing
in its most basic thing, as a market for primary issues. There were
almost none in two years and most of them were taken up by BNDES,”
says Osório. More companies are leaving than entering the market.
In 1998, there were 1,047 listed companies in Brazil, of which only
a fraction trade frequently. Today there are 980. Just as CCR was
listing, aluminum-can maker Latasa was quitting after its $550
million sale to Rexam of the UK.

It may be too soon to write the Brazilian equities market off
altogether. Private companies are realizing that they will soon
reach prudential debt levels. Although they are well-capitalized,
Brazilian companies need to invest heavily to keep up with
international competition. The day could soon come when they will
need to issue fresh equity on the public markets. Institutional
investors like private pension funds and mutual funds are growing
in size, and although they are invested mainly in government bonds,
they still buy shares when the price is right.

BNDES is encouraging companies to issue more hybrid, equity-linked
instruments. It is preparing to sell its remaining 31% share in
Cia. Vale do Rio Doce, the state-owned mining company, for an
expected $1.6 billion-$1.8 billion. As it did in 2000 with its
$4.34 billion sale of stock in Petrobras, the government-controlled
oil company, Brasília is planning a publicity campaign to convince
retail investors to buy stock and will likely allow them to use
some of their FGTS severance pay fund to buy shares. The day may
come when the government sells off a slice of shares in Banco do
Brasil, the state-owned commercial bank, to the public.