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Brazilian Economy and Grendene

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1. Introduction

The purpose of this paper is to analyse the impact of an increase in world’s interest rates in the Brazilan economy.

Furthermore the macro exposure of Grendene, a Brazilian shoe manufacturer will be analysed. Grendene’s vulnerability and market exposure will also be accessed. Moreover the level of protection of the company will be approached.

2. Macro effects of an increase in world interest rate on the Brazilian economy

Brazil is one of the fastest growing countires in the world and is part of the so called BRIC economies (Brazil, Russia, India and China).

Currently the Brasilian Central Bank basis rate SELIC (Brazilian Central Bank’s rate for overnight lending) is at 8,50% p.a. (COPOM - Committee of Monetary Policy). Even if this rate is low compared to historical rates (Figure 1) it continues to be one of the highest interest rates in the world, atracting a high flow of international investments. Due to the large capital inflows, the Brazilian Real has appreciated in the last years diminishing the competitiveness of Brazilian products in the world market. Since 2009, Brazil has experienced high capital inflows mainly due to abundant global liquidity and high interest rates compared to developed countries (OECD, 2011).

[pic] Figure 1: Historical interest rates in Brazil (Source: Banco Central do Brasil)

In a general point of view, an increase in interest rates will cause a decrease in aggregate demand as it will lower consumption and investments (Begg & Ward, 2009). The cost of borrowing will increase, diminishing the demand for money. Furthermore, the propensity to save will increase and this represents a leakage from the circular flow of income. Hence the consequence will be a reduction in GDP. The aggregate demand curve will shift to the left (figure 2).

[pic] Figure 2: The increase in world interest rates will result in a decrease in consumption and consequently a decrease in GDP and in inflation shifting the demand curve to the left (from AD1 to AD2).

In the case of Brazil, an increase in the world interest rate would mean an outflow of external capital which will instead flow to countires where interest rates are higher and investment return greater. As Brazil has high interest rates this effect may be limited. Even taking to account the high inflation, Brazil still is the third country with higher real interest rates in the world (Figure 3).

[pic] Figure 3: Real interest rates on selected economies as of XX (Source: Vieira J. and Davino T. cited in XXX)

The figure 4 below shows the difference between the SELIC interest rate and the real interest rate, taking to account inflation.
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|[pic] |

Figure 4: Comparison between SELIC and real interest rates in Brazil. (source: acionista.com.br)

The increase in world interest rates will have also an impact on Brazilian’s trade balance. As world consumption will decrease, the demand for Brazilian products will be reduced and hence Brazilian exports will decrease. When comparing the interest rates evolution in the United States (figure 5) and the evolution of Brazilian exports (figure 6) one can see that Brazilian exports are higher when US interest rates are down.

[pic]

Figure 5: United States interest rates. (Source: tradingeconomics.com - Federal Reserve).

[pic]Figure 6: Brazilian exports by month. (Source: tradingeconomics.com - Ministério do desenvolvimento, indústria e Comércio Exterior).

On the other hand, an increase, for example, in th US interest rates will encourage repatriation of funds from Brazil to the US and hence the US dollar will appreciate and will push down the Brazilian Real - this will be profitable for Brazilian exports to the US as the competitivity of Brazilian products will be higher (Evenett, 2011).

ADD MORE Around 150 words

3. Grendene: macroeconomic exposure on performance

3.1 The company

Grendene was founded in 1971 and is one of the biggest producer of synthetic shoes, made from PVC (poly vinyl chloride) and EVA (ethylene vinyl acetate), worldwide. The company started as a factory of wine plastic bottles covers and gradually was transformed into the largest footwear manufacturer of Brazil present in the feminine, masculine and kids consumption segments. The company owns diverse brands, has 24,000 employees and a production capability of 200 million pairs of shoes / year (average production of 500,000 pairs / day). It has 12 factories, one PVC (Policloreto de Vinila) plant and 1 molding unit. Grendene products are oriented to the domestc market but also to export (presence in 90 countries) (Grendene, 2012). The company sells it products via sale agents, distributors, direct exports and two subsidiaries - Grendene USA, INC (USA) and Grendene Argentina S.A. (Argentina).

In 2004 the company went public and has its commun shares negotiated at the BOVESPA (Sao Paulo Stock Exchange) New Market.

|[pic] |

Figure 7: Grendene’s share performance since 2005 in comparison to the index BOVESPA.

3.2 Performance and macroeconomic exposure

Grendene has been experiencing 40 years of positive results. In 2011, the return on equity achieved was 18.2% with a cash flow of operating activities of R$ 68.1 million (Grendene, 2011).

The net profit for the year decreased 2,2% in comparison to 2010 (Figure X). This decrease is mainly due to the fall in sales volume in 2011 (Figure 8) and an increase in taxes due to a new dividend distribution policy. (Grendene, 2011).

|Mn of pairs |2005 |2006 |2007 |
| | | | |
|Return on assets |15,63 % |12,34 % |5,70 % |
|Return on Investment |18,19 % |17,03 % |8,90 % |
|Return on Equity |18,37 % |20,63 % |13,16 % |
|Operating margin |13,21 % |11,47 % |8,14 % |
|Gross margin |44,23 % |44,30 % |24,78 % |
|EBIT Margin - 5 years average |17,14 |15,81 |10,95 |

Figure XX: Comparison of performance ratios between Grendene, Alpergatas (main competitor) and their sector of activity. (source: Reuters)

| | |MATURITY |PRICE / YIELD | | |
|3-Month | |10/01/2012 |977.74 / 8.08 | | |
|6-Month | |01/01/2013 |960.62 / 7.79 | | |
|1-Year | |07/01/2013 |925.98 / 7.80 | | |
|2-Year | |04/01/2014 |866.66 / 8.36 | | |
|3-Year | |01/01/2015 |1,071.33 / 8.76 | | |
|5-Year | |01/01/2017 |1,054.84 / 9.73 | | |
|9-Year | |01/01/2021 |1,031.61 / 10.28 | |

Figure XX: Brazilian government bonds yields as of 18.06.2012 (Source: Bloomberg)

6. Level of protection

7. Conclusion

8. References

http://www.reuters.com/finance/stocks/financialHighlights?symbol=ALPA4.SA http://www.reuters.com/finance/stocks/financialHighlights?symbol=GRND3.SA

http://www.bloomberg.com/markets/rates-bonds/government-bonds/brazil/

http://socialalterations.com/2009/02/06/vivienne-westwood-pvc-debate/

World Interest Rate http://www.economywatch.com/interest-rates/world-interest-rates.html

http://en.mercopress.com/2011/12/01/brazil-has-the-highest-real-interest-rate-Gamong-40-leading-economies

http://epocanegocios.globo.com/Revista/Common/0,,ERT23733-16642,00.html

Grendene 2008 http://www.bmfbovespa.com.br/empresas/consbov/ArquivosExibe.asp?site=B&protocolo=192336

http://www.webtranspo.com.br/comex/22152-exportacoes-de-calcados-ainda-tropecam

http://siteempresas.bovespa.com.br/DWL/FormDetalheDownload.asp?site=C&prot=324881

Grendene 2009 http://www.bmfbovespa.com.br/empresas/consbov/ArquivosExibe.asp?site=B&protocolo=232676

http://g1.globo.com/economia/negocios/noticia/2012/03/lucro-liquido-da-grendene-recua-22-em-2011.html

http://online.wsj.com/article/SB10001424052702303459004577361810251344468.html

http://www.bcb.gov.br/?COPOMJUROS

http://epocanegocios.globo.com/Revista/Common/0,,EMI223316-16642,00-ALPARGATAS+GRENDENE+BRASKEM+E+MARCOPOLO+VENCERAM+O+CAMBIO+MESMO+COM+O+VENTO.html

http://economia.uol.com.br/ultimas-noticias/redacao/2012/05/30/brasil-cai-para-3-com-maior-taxa-de-juros-reais-do-mundo-atras-de-russia-e-china.jhtm

Nolan, M. (2007), Higher interest rates – stronger currency? (online). Available at: http://tvhe.wordpress.com/2007/11/22/higher-interest-rates-stronger-currency/ (accessed on 06 June 2012)

(2011) OECD Economic Survey Brazil - October 2011 http://www.oecd.org/dataoecd/12/37/48930900.pdf

EMIS, ISI Emerging Markets (2012), (online) Available at: http://www.securities.com/Public/company-profile/BR/Grendene_pt_2027137.html (accessed on )

Grendene Fact Sheet http://ri.grendene.com.br/eng/download/fact_sheet/Fact_Sheet_1Q12.pdf

BOVESPA http://www.bmfbovespa.com.br/Cias-Listadas/Empresas-Listadas/ResumoEmpresaPrincipal.aspx?codigoCvm=19615&idioma=pt-BR

Rodrigues, A.C. , Guidolin, S.M. (2011), Setor precisa investir en inovacao para ter competitividade no mercado global, Folha de Sao Paulo http://www.bndes.gov.br/SiteBNDES/export/sites/default/bndes_pt/Institucional/Sala_de_Imprensa/Galeria_Arquivos/Setor_Calxados.pdf

Portugal, M. (2010), Grendene assiste a euforia do consumo no Brasil enquanto ações despencam na bolsa, Revista Exame http://exame.abril.com.br/mercados/noticias/grendene-assiste-euforia-consumo-brasil-enquanto-acoes-despencam-bolsa-572142

Ferreira, G. (2012), Grendene altera perfil das exportacoes e vende menos, Brasil Economico http://www.brasileconomico.ig.com.br/noticias/grendene-altera-perfil-das-exportacoes-e-vende-menos_114339.html

Factiva http://www.buysellsignals.com/001041051060612323

http://stgallenmba.ch/evenett/2011/01/14/what-happens-if-us-interest-rates-continue-to-rise/

9. Bibliography

http://www.scielo.br/pdf/rbe/v65n3/a06v65n3.pdf

http://www.istoedinheiro.com.br/entrevistas/21472_O+BRASIL+FEZ+MUITO+BEM+EM+SOBRETAXAR+A+CHINA
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