Article written by Linda Yueh

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Large-scale protests in Brazil have rocked one of the largest and most prominent emerging economies.

On the face of it the cause is a small rise in bus fares, which has mushroomed into a range of complaints - including corruption and a lack of investment in social services compared with spending on the World Cup and Olympics.

The real cause is likely to run much deeper.

Brazil's economy has slowed down considerably over the past year, expanding by less than 2%. It feels worse by comparison with a strong decade of growth - helped by the commodity boom of the 2000s - and relatively low inflation.

For years Brazil has been feted as one of the major emerging economies - one of the fabled Brics, alongside China, India and Russia.

To top it off, it was chosen to host both the football World Cup and the next Olympics.

Brazil became a destination for money seeking a better return.

Its key interest rate has averaged 8-10% in the past decade, which has offered the highest returns in the world (after taking into account inflation) for many of the years since the global crisis.

This inflow of foreign money and the country's success selling commodities led its currency to surge, which helped to keep a lid on inflation (although it did pose other problems).

But, now the picture has changed. With a few words, the Fed chairman, Ben Bernanke, has raised the prospect that the US central bank's cheap cash injections - which have fuelled billions of dollars of inflows into emerging economies - could begin to taper off in the next few meetings.

This has caused money to leave emerging economies (see my posts on the Great Reversal part I and part II). And Brazil has been hard hit.

The country's stock market has fallen by more than 20% and become a bear market. Its currency, the real, hit the weakest level in four years, at around 2.14 per US dollar.

This cheaper currency makes imports more expensive and tends to be inflationary. So much so that the central bank has just raised interest rates to combat price rises - despite the slowing of the economy.

It's a difficult economic position to be in.

Plus, when growth slows, the signs of fracture become more apparent.

One of the enduring difficulties for Brazil and other Latin American countries is that they have the most unequal societies in the world.

As measured by the Gini coefficient - where 0 is perfect equality and 1 means that one person has all of the money - Brazil's inequality has fallen during the past decade. But it remains above 0.5, which is the wrong side of the 0.4 level that is associated with instability.

Perhaps Brazil is now confronting the next challenge for these successful emerging economies that have grown well during the past decade or so.

There are now more than 130 million people in the middle class in Latin America (and I'll be writing more about that in my post tomorrow). This larger middle class tends to demand more from the government, particularly social services and re-distribution of income.

Brazil - and other countries - are likely to find that it is easier to satisfy those demands during a boom. It's much more challenging now.

But, with the worst protests on Brazilian streets in decades, it may be that this is the right time to grasp that potentially painful nettle.

Brazilian cement and concrete producer Votorantim Cimentos is plowing ahead with its multi-billion initial public offering this week. The offering will be the second-largest in the world this year, becoming a key test of investors’ perceptions of Brazil and the broader emerging markets.

“The (IPO) plan is on track. Of course, this time investors are more concerned, not so much about the company, but with the country’s economic conditions,” said a banker with knowledge of the deal, who declined to be named for this article. The person declined to discuss investor demand for the company’s shares so far.

Votorantim Cimentos, Brazil’s largest producer of heavy building materials such as cement and concrete, wants to raise up to 10.26 billion Brazilian reais ($4.8 billion), and the deal is expected to be priced on Wednesday. If it goes through, it will be the world’s second largest IPO this year, behind the 11.5 billion reais raised from another Brazilian deal, the spinoff of BB Seguridade SA , the pensions and insurance unit of Banco do Brasil SA , in April.

In its way is the rapid decline in enthusiasm for all things emerging markets, and Brazil in particular. The prospect of slightly slower growth in China, combined with the possibility that the U.S. Federal Reserve may begin “tapering” its easy-money policies, has led many money managers to pull back from their exposure in emerging markets, mostly because they have to pay down the cheap dollar loans before rates start to go up.

At the same time, investors have become frustrated with Brazil. Economic growth has been muted over the last two years, and looks set to disappoint again this year, with latest forecasts pointing to sub-2.5% GDP expansion. Government policy has been roundly criticized, for too much intervention, either directly or indirectly, as well as mixed signals on interest rates, inflation, public spending and the currency. Last week, Standard Poor’s changed its outlook on Brazil’s sovereign rating to negative, raising the possibility of a downgrade, after years of upward momentum.

Votorantim will be hoping that investors can distinguish between the immediate problems facing the broad economy, and the longer-term growth prospects for companies that manage to navigate these difficult times successfully.

“I think that they [companies] are doing a good job operating in a difficult environment, and there are very good opportunities for continued economic growth in Brazil,” said Geoffrey Pazzanese, a portfolio manager at Federated Investors, who oversees $636 million in equities with 9% of its assets in Brazilian stocks. Pazzanese bought shares in BB Seguridade, but said he won’t buy Votorantim’s shares, as he’s not interested in the cement industry. “I believe much of the investor pessimism for Brazil has to do with the government’s policies, which have attempted to engineer certain solutions rather than letting the free market work.”

Votorantim Cimentos — controlled by local billionaire family Ermirio de Moraes – plans to offer a total of 540 million units, including an overallotment, with each unit expected to price between BRL16 and BRL19.00. Each unit consists of one common share and two preferred shares. Investors can reserve shares in Votorantim until Tuesday. Trading is expected to begin on Thursday.

Of the total offer, around 70% will be new shares and 30% will be sold by the Moraes family through a secondary offering. The company did not reveal what the offering will represent as a percentage of the company’s total ownership.

Votorantim plans to use the proceeds to expand and add more products in Brazil, as well as for potential acquisitions of heavy building materials companies or assets outside Brazil. It already has operations in the U.S., Canada and elsewhere in Latin America.

Itau BBA Morgan Stanley JPMorgan Chase Credit Suisse BTG Pactual HSBC Goldman Sachs Deutsche Bank Bradesco BBI Bank of America Merrill Lynch, Banco do Brasil and Banco Votorantim are coordinating the offering.

President Dilma Rousseff has said people have engaged in "information terrorism" through the media. But it is evident that the country needs some structural reforms to help revive growth.

We walk you through five key talking points on Brazil's economy:

Inflation - Brazil's inflation reached 6.5% in 12 months through May. Strong private consumption, supply shocks, "17% average exchange rate depreciation in 2012," easy fiscal and monetary policy, and a rise in import duties, all drove inflation higher.

The concern is that rising inflation will hurt real wages and consumption.

BBVA Research

Wage inflation and competitiveness - "As a consequence of both the sharp increase in domestic wages (due to a tightening of the labor market) and the appreciation of the exchange rate, labor costs in dollars increased sharply (more than 300% since the end of 2002), matching productivity gains and then eroding Brazil’s competitiveness," according to BBVA Research.

BBVA Research

Credit growth hits a wall - Credit-fueled consumption growth has hit a wall in Brazil. The government needs to address the issue but it's unclear if they will considering elections are coming up in 2014.

Societe Generale

GDP growth is slowing  - Brazil's economy grew a mere 0.9% in 2012. Rising wages hurt the Brazilian economy as the country lost competitiveness. The credit-fueled consumption growth maxed out also hurting economic growth. Along with other issues like poor infrastructure and high taxes.

BBVA Research

The current account deficit is deteriorating - "The current account is deteriorating as real exports of goods and services declined sharply in Q1 against a big jump in imports." But the decline in balance of payments (BOP) is nearly done, according to Societe Generale.

Morgan Stanley analysts see no reason to panic about the decline in BOP, and attribute most of the rapid decline to "accounting errors from the customs authority."

Societe Generale

SEE ALSO:  The Chinese Credit Bubble In Four Charts

By Rogerio Jelmayer

SAO PAULO--Brazil's economic activity posted a relatively healthy expansion in April, pointing toward a recovery in the activity of Latin America's largest economy.

The Brazilian central bank's economic activity index, or IBC-Br, was up 0.84% from the previous month on a seasonally adjusted basis, while it was up 1.66% in the 12-month period.

The index is widely considered a leading indicator for gross domestic product growth, but was criticized recently for not capturing the tepid activity of the third quarter of 2012 when a slowdown in financial services hurt overall economic performance.

In the first quarter, Brazil posted more tepid activity, prompted by timid performance in retail-sales volume and industrial production. Brazil's economy grew by a paltry 0.9% in 2012, and economists, who were expecting growth of about 3.0% for 2013 at the start of this year, now expect growth of around 2.5%.

After efforts to jump-start the economy last year failed to gain much traction, the Brazilian government is taking more measures to fuel investment, mainly in infrastructure areas, and has also moved to cut taxes.

Write to Rogerio Jelmayer at rogerio.jelmayer@dowjones.com

  (END) Dow Jones Newswires
  06-14-130804ET
  Copyright (c) 2013 Dow Jones  Company, Inc.

RIO DE JANEIRO | Fri Jun 14, 2013 7:56pm BST

With Brazil on track for the third straight year of disappointing growth and inflation running at the ceiling of the official target range, Rousseff's still-high popularity has edged lower and her stewardship of the economy has come under increased scrutiny in both the local and international press.

Many economists also have become more pessimistic about Brazil's economic outlook, citing worries about government spending and the country's struggle to increase investment rates. Those concerns prompted U.S. rating agency Standard Poor's to warn last week that it could downgrade Brazil's debt.

In a speech on Friday in a sprawling shantytown in Rio de Janeiro, a stern Rousseff said the criticism was misguided and ticked off a list of Brazil's economic strengths - a robust job market, a low debt-to-GDP ratio, and a firm government commitment to keep public spending and inflation under control.

"They say that Brazil is a country in trouble.... Not only is Brazil not going through a rough patch, we are extremely solid," she said. "Everybody has to be humble and accept criticism, but not terrorism."

"We have enough resources to maintain investments and social spending, in a serious, responsible way that ensures solid public finances and keeps inflation under control," she added.

The speech was the second time this week that Rousseff forcefully addressed her critics and sought to reassure investors that Brazil remains committed to fiscal discipline and low inflation - two pillars of the country's hard-won economic stability over the past decade.

Other Rousseff administration officials have been sounding a similar note in their own media offensives over the past week, publicly backing the central bank's recent interest rate hike as a necessary step to slow consumer price increases.

Some economists caution that the government may find it hard to cut spending amid growing demands for cash ahead of next year's presidential election and the upcoming sporting events that Brazil will host, the 2014 World Cup and the 2016 Olympics.

Rousseff, a left-leaning economist who is widely expected to run for re-election in 2014, saw her approval rating slip slightly in two opinion polls over the past week, in part because of the sluggish economy and high inflation. Still, the polls showed she remains the clear favourite in next year's race.

(Reporting by Pedro Fonseca; Writing by Alonso Soto and Todd Benson; Editing by Diane Craft)

By Peter Murphy and Carl Patchen

BRASILIA | Tue Jun 11, 2013 2:53pm EDT

About 54 percent of 2,000 Brazilians surveyed this month rated Rousseff's government as either "great" or "good," slipping from 57 percent in July 2012, according to the survey whose margin of error was 2.2 percent.

The poll was conducted by research company MDA Pesquisa on behalf of the National Confederation of Transport (CNT).

Brazilians are less optimistic that employment, income and public security levels will improve in the next six months and most expected health and education not to improve or worsen as the economy sputters after years of rapid growth, the survey said.

Two-thirds of respondents said inflation was having a moderate to high impact on their income as the government struggles to rein in price increases which recently hit the upper limit of its inflation target.

"It's inflation that is weighing most," Clesio Andrade, head of the CNT, said in a news conference in Brasilia on Tuesday. "People perceive rising prices and the impact on their income," he said.

Rousseff's personal approval rating slipped to 74 percent from 76 last year, with her still-high marks attributed to a tough stance on corruption and a close relationship with popular predecessor Luiz Inacio Lula da Silva, also from the PT or Workers' Party.

Rousseff, a trained economist and former left-wing guerrilla tortured and imprisoned during military rule, is widely expected to run in elections in late 2014. She would still be re-elected in the first round with 52.8 percent of votes if elections were held now, the poll showed.

While maintaining policies that have pulled millions out of poverty in the world's seventh-largest economy, Rousseff's government has struggled to tackle the underlying structural problems that are dogging economic growth and feeding inflation.

GDP grew just 0.9 percent in 2012 and a 0.6 percent in the first quarter of 2013, Brazil's statistics agency showed, while the export-led economy's trade surplus flipped to a $6.2 billion deficit in the first four months of 2013.

Last week, Standard Poor's downgraded its outlook for Brazil's foreign currency debt rating to "negative" from "stable", citing deteriorating budget fundamentals and slow growth that could weaken the country's ability to pay its debt.

Rousseff's administration says the economy is beginning to pick up however, with private investment on the rise and falling debt to GDP levels. The government expects growth of around 3 percent this year while financial markets see a lower rate around 2.53 percent.

The CNT poll was similar to another by the Datafolha polling agency published on Saturday which showed 57 percent of Brazilians rated Rousseff's presidency "good" or "excellent," down from 65 percent in its prior poll.

The government's own private polls have also shown its popularity is slipping, chiefly due to concerns inflation is hitting people's spending power, local daily newspaper Folha de Sao Paulo reported last week.

(Editing by Cynthia Osterman)

BRASILIA, June 14 | Fri Jun 14, 2013 7:35am EDT

The median estimate in a Reuters survey of 17 analysts was for a rise of 0.80 percent.

The index, a gauge of activity in the farming, industry and services sectors, rose a non-seasonally adjusted 7.30 percent over the same month a year ago.

Fri Jun 14, 2013 8:26am EDT

* Results slightly above market forecast of 0.80 pct

BRASILIA, June 14 (Reuters) - Economic activity in Brazil rose slightly more than expected in April, central bank data showed on Friday, signaling a better start for the second quarter after lackluster growth at the start the year.

The Brazilian central bank's IBC-Br economic activity index rose 0.84 percent in April from March in seasonally adjusted terms. The index for March was revised up to 1.07 percent growth from a previously reported 0.72 percent.

The median estimate in a Reuters survey of 17 analysts was for a rise of 0.80 percent in April for the index gauging activity in the farming, industrial and service sectors.

After two years of subpar growth, the Brazilian economy is still struggling as consumer spending slows and industrial output remains sluggish.

The country's gross domestic product grew only 0.6 percent in the first quarter from the previous one, surprising both private economists and government officials who were expecting a stronger rebound after a slew of stimulus measures.

Since then private economists have cut their average 2013 growth forecasts to 2.5 percent from 3.2 percent at the beginning of the year, according to a central bank weekly poll.

The IBC-Br index has in recent quarters been out of sync with quartelry gross domestic product figures published by the national statistics institute. The index showed economic expansion of 1.22 percent in the first quarter versus the prior one.

The central bank's index rose a seasonally unadjusted 7.30 percent in April over the same month a year ago.

Telefonica SA (TEF), Latin America’s second-largest phone company, is counting on smartphone demand from Brazilian consumers to offset the effect of slower economic growth in its biggest market, said the region’s top executive.

“The market is only moderately dependent upon the economy,” Santiago Fernandez Valbuena, chief executive officer of Telefonica Latin America, said in an interview at Bloomberg’s Sao Paulo office. “Data migration is happening very fast in a very large way, and we think that’s the future.”

Competition is increasing in Brazil for the most profitable mobile users as consumers cut off landlines, forcing companies to invest in services like high-speed Internet to attract customers. In its home country of Spain, which has an unemployment rate of 27 percent, Telefonica is losing mobile subscribers and customer bills are decreasing, putting pressure on the Brazilian unit to supply growth.

Brazil this year became the biggest single market for Madrid-based Telefonica, the parent company of Sao Paulo-based Telefonica Brasil SA. (VIV) Latin America represented 51 percent of Telefonica’s 14.1 billion euros ($18.8 billion) in revenue in the first quarter, according to data compiled by Bloomberg.

Only 16 percent of wireless users in Brazil have smartphones, Fernandez Valbuena said. The rate is 50 percent in Europe, showing Brazil still has ample room to grow, he said.

“It’s not a stagnant market like in Europe where you are going to go up and down with the ebb and the flow of macro,” he said. “Here, you still have a lot of penetration.”

Data Growth

Telefonica Brasil’s revenue from data and other non-voice services rose 19 percent in the first quarter of 2013 from a year earlier. Total sales climbed 2.9 percent in the first quarter in Brazil, compared with an 8.8 percent drop in its parent company’s revenue, according to data compiled by Bloomberg.

Telefonica Brasil had a 26 percent market share of mobile broadband accesses in April, compared to first-place America Movil SAB (AMX)’s Claro brand with 40 percent, according to consulting firm Teleco. While Claro and Tim Participacoes SA (TIMP3) offer lower prices, Telefonica provides better coverage, with a network that extends to more municipalities than all of its rivals combined, Fernandez Valbuena said.

“Telefonica is winning because of the quality and coverage of its network,” said Andre Baggio, a Porto Alegre, Brazil-based analyst at JPMorgan Chase Co., in a telephone interview. “The company is ahead and others are trying to catch up.”

Brazil Performance

Telefonica (TEF) is down less than 1 percent in Madrid trading this year, compared with a 7.1 percent increase for Telefonica Brasil (VIVT4) in Sao Paulo and a 17 percent drop for the Ibovespa index. Telefonica Brasil is trading at 13 times estimated 2013 earnings, compared with nine times for the parent company, according to data compiled by Bloomberg.

Telefonica Brasil rose 1.5 percent to 52.50 reais at the close in Sao Paulo, while its parent company fell less than 1 percent to 10.11 euros in Madrid.

Brazil’s economy expanded 0.6 percent in the first quarter of 2013, below economist estimates of a 0.9 percent expansion. Household consumption has also slowed to 0.1 percent from 1.2 percent in the previous three-month period, the national statistics agency said. Economists expect Brazil’s gross domestic product to expand 2.5 percent this year, down from 3.2 percent in January, according to a central bank weekly survey published this week. In addition, inflation has quickened to 6.5 percent, matching the upper limit of the central bank’s target range.

Middle Class

“The weaker the economy gets, certainly it will hit the Brazilian middle class, the less money they will have to spend on everything, certainly including data,” said Christopher King, an analyst at Stifel Nicolaus Co. in Baltimore, one of four who rate Telefonica Brasil’s American depositary receipts hold. Eight analysts say buy and none say sell.

Growth in data “is disassociated from the economy,” said Baggio, who rates Telefonica Brasil overweight. The Brazilian equity has 12 buy ratings, seven holds and one sell.

While he declined to provide a forecast for the second quarter of 2013, Fernandez Valbuena said the trend of customers shifting to data services and contract plans is similar to the first quarter. Contract customers rose 17 percent last quarter from a year earlier, and 81 percent of them bought smartphones.

About 20 percent of Brazilians have contract, or postpaid, plans for mobile-phone service, with the rest on prepaid accounts, according to the telecommunications regulatory agency, Anatel. Fernandez Valbuena said his goal is to shift more of those users to contracts, where they offer more-dependable, steady sales.

The economy is “not what we depend on, because we actually depend on something people want to do, have the means to do,” Fernandez Valbuena said.

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net; Nick Turner at nturner7@bloomberg.net

June 13 (Bloomberg) -- Chief Executive Officer and Chairman of Telefonica Latin America Santiago Fernandez Valbuena talks about the outlook for the Mexican and Brazilian markets and the possibility of initial public offerings. Fernandez Valbuena spoke to Bloomberg's Christiana Sciaudone on June 11 at Bloomberg's office in Sao Paulo. (Source: Bloomberg)