Panel: Economic Prospects and Opportunities in Brazil and Latin America

Introduction

1. First, please allow me to thank you for inviting me to speak here today. In uncertain times such as these, forums like this one are powerful opportunities to share with and learn from peers. As relative newcomers to Brazil, this is particularly useful for us. So, again, thank you.

Background on Temasek

2. Before speaking directly on the topic, perhaps it would be useful to provide some background on Temasek – not everyone here may be as familiar with us as you are with my fellow panelists from Carlyle and Banco Itau.
3. Temasek Holdings, while owned by the Singapore government, is an independent and autonomous investment firm. Thirty-five years ago, almost to the day, we were started with an initial portfolio of S$350 million made up an eclectic mix of Singapore start-ups - a shoe manufacturer, a bottled chicken essence producer, and a budding airline with a domestic island market that is 40km wide and 24 km deep.
4. Economic challenges, albeit perhaps in retrospect not as significant as those faced today, are nothing new to Temasek. Over the years, Asia faced many, some originating within Asia, others driven by the US recessions of the 1970s and 1980s, or oil shocks related to OPEC decisions.
5. Temasek managed through the Asian financial crisis of the late 1990s and today our investment exposure has grown into a globally balanced portfolio of about US$80 billion, covering a range of industries, including financial services, transport and logistics, telecommunications and other infrastructure and engineering services.
6. Much of this growth can be attributed to the transformation of Asia through better governance and dramatic growth, which has turned billions into consumers. With all of this as our backdrop, Temasek has been given the sole mission of serving as a professional investment firm to create and maximise long-term shareholder value as an active investor and shareholder of successful enterprises.

Our Start in Brazil

7. As a Singaporean company, not surprisingly, Singapore and Asia currently account for nearly 80% of Temasek’s investments. While we are a relative newcomer to Brazil and the Latin America region, we are very pleased to be here as we believe it holds tremendous investment opportunities.
8. This belief has been reinforced for us by the positive experiences our portfolio companies have had in Brazil. Olam is engaged in agro trading and processing in Brazil, in cashew, cotton, coffee and sugar. In the area of Oil and Gas, both Keppel Offshore & Marine and Jurong Shipyard have enjoyed a strong relationship with Brazil. Jurong Shipyard announced last year their partnership agreement with Mac Laren Shipyard for the engineering, procurement and construction of offshore platforms and equipments. Keppel Offshore & Marine has about a quarter of its 29,000-strong global workforce in Brazil. Their positive experiences reaffirm our confidence in the investment opportunities available in Brazil.
9. Over the last two years, acknowledging the changing economic world order, we have been re-assessing our long term portfolio balance. Our target geographic exposure is what we refer to as a 10:20:30:40 portfolio mix – which here in Brazil, may sound a bit like a football team formation.
10. In this case, it means maintaining our investments in the rest of Asia at 40% of our portfolio, keeping Singapore at about 30%, reducing OECD exposure to 20% and adding investments in other geographies such as Latin America, Russia and Africa of up to 10%.
11. This is not a rigid target, but a re-weighing of the growth trends and the changing risks over the next decade or two, particularly for Asia. It also framed our decision to open new offices in Mexico and Brazil last year, after a couple years of due diligence. Since then we have made several investments in private equity funds, the oil & gas sector and in commercial real estate.
12. We recognise that Brazil is not just important as the most economically powerful nation in the region, but we also see it as an important part of our strategy to invest in large transforming economies.

What we like about Brazil

13. The realities of Brazil’s strengths are very clear to us. Brazil has an economy with long-term growth potential and stability, which fits nicely into Temasek’s investment philosophies. Consider the factors:
    1. Inflation is less than 4% as a result of well developed institutions guiding monetary policy. We expect stable monetary policy to keep inflation within the 5-6% range
    2. Stable fiscal policy has driven external debt to zero net of foreign exchange reserves, which are almost US$200 billion
    3. Mature regulators are allowing for rational business development across sectors from oil and gas to forestry to telecommunications and beyond
    4. There is good governance of the capital market by the Brazilian CVM as well as sophisticated stock market practices such as BMF-Bovespa’s Novo Mercado regime, which seeks to ensure a certain high level of quality investment information
       1. This is complemented by a deep base of local investors (pension funds, BNDES, local asset managers and hedge funds) and international investors who are driving foreign direct investment (FDI)
    5. The Brazilian financial system is strong; banks are healthy and have largely and thankfully avoided the global financial crisis
    6. All of this no doubt has contributed to Brazil’s stable democracy - 6 presidential elections over the last 24 years
14. Of course, all of this has been recognized by global financial community:
    1. S&P upgraded Brazil to investment grade in 2008
    2. Foreign direct investment (FDI) reached US$45 billion in 2008 and we are pleased to see it has already started to come back post this crisis
    3. As evidenced by today’s turnout, Temasek is not the only investment company to see this… The top global investment banks, investment companies and private equity firms maintain an active presence in Brazil
15. And, that’s just today. There is terrific long term growth potential. With a current GDP/capita (PPP) of around US$10K, a young population of almost 200 million with a significant and growing middle class. So broadly, based on this, you may ask what are Temasek’s investment themes?
    1. It’s clear that GDP growth is sustainable long term primarily driven by the growing middle class and their increasing appetite for consumption, thus pointing to opportunities in financial services, education and health care
    2. Exports will continue to play a key role as well, although smaller than domestic consumption – it’s currently at 13% of economy
    3. Another factor we are looking at . . . consumer credit penetration is low and has room to grow. With long term credit now becoming available as economic stability is sustained
    4. Perhaps above all, Brazil is blessed to have clear competitive advantages in agribusiness, natural resources such as oil and gas, forestry and mining, consumer businesses, as well as aircraft and automobile manufacturing
       1. Driven by domestic consumption, these competitive advantages are rapidly creating emerging champions
    5. Certainly, relative weakness in infrastructure is a bottleneck to development, but there are signs that long term investments will unlock economic potential through key infrastructure developments, which will in turn help support the development of emerging champions

A Look at the Overall Global Economy

16. So, as you can see, we are quite bullish on our future in Brazil and broadly in Latin America. Perhaps to close, I’ll say a few words about our perspectives on the global economy. Clearly, there are significant challenges, many of which are directly tied to the US and its ability to bring back its remarkable appetite to consume and create.
17. That doesn’t of course mean that there won’t be great opportunities for investment. While developed economies may begin posting positive growth as early as the end of this year, that growth is likely to be sluggish at best. And, for quite some time, we are likely to see a new world economic order where the concept of “normal” GDP growth is more muted than the spectacular growth patterns of the years leading up to the recent downturn.
18. That being said, it is no secret that emerging markets have the greatest opportunity for long-term sustainable growth. And, within those markets, natural resources, manufacturing, real estate, agriculture, particularly here in Brazil hold great promise for the future.
19. We are actively looking for such opportunities around the world and, of course, here in Brazil and I personally am glad to be here at such an exciting time.

Conclusion

20. It is occasions like these which give us the opportunity to share experiences and learn from each other. As new members of the Brazilian business community, we are looking forward to building invaluable relationships, deeper engagement and, perhaps even, business collaborations in future.
21. Thank you for having me.