We believe that Brazil is at the start of a new phase of economic growth, driven by solid long-term foundations and an agenda of on-going structural reforms proposed by the government, in addition to showing signs of recovery after a period of serious recession. In recent months, the current government has submitted, and the National Congress has approved, meaningful reforms in which the highlight is the one that sets a limit on government expenditures, and the labor law reform, in addition to having announced an agenda of new reforms, including social security and the electricity sector itself. In addition, the government is rolling out new rounds of concessions and privatizations, increasing the focus on private investment in the country’s infrastructure, while making the long-term subsidized interest rates more predictable and adapted to the market.
The economic indicators show that Brazil is coming out of the recent recession, with a return to real growth in the first quarter of 2017, which has resulted in an expansion of 1.0% in Gross Domestic Product – GDP over the previous quarter. According to Central Bank of Brazil forecasts published in September 2017, real GDP growth should reach 2.3% in 2018 and 2.5% from 2019 onwards. The base rate (SELIC) is currently at 7.5%, following a sequence of reductions since reaching the peak of 14.25% in September 2015. According to the Focus Report published by the Central Bank of Brazil, the SELIC rate is still showing a downward trend, and may reach 7.0% by the end of 2017.
The 10-year Growth Plan prepared by the Energy Research Company (EPE) forecasts the consumption of electricity in Brazil to grow at a CAGR of 3.7% between 2016 and 2026. According to the EPE, the CAGR of electricity consumption in Brazil between 2006 and 2011 was 4%, with an average annual growth rate between 2011 and 2016 of 1%, largely due to the economic crisis. It should be noted too that per capita electricity consumption in Brasil is still only 2.4 MWh, which is low in comparison with the ten major global economies such as the United States (13.0 MWh), Germany (7.0 MWh), Canada (15.5 MWh), Switzerland (7.5 Mwh), Japan (7.8 Mwh) and England (5.1Mwh).
The key market for our distribution business consists of the States of Bahia, Pernambuco and Rio Grande do Norte and part of the States of Paraíba (one municipality), São Paulo (223 municipalities) and Mato Grosso do Sul (five municipalities).
The targets for universalization and quality of service in energy distribution defined by the Brazilian government have led to high levels of investment in the states of the Northeast, with the aim of complying with quality standards and total demand. We believe that the government’s agenda regarding the expansion in access to electricity to new locations (universalization) will enable us to grow our regulated asset base, recognized by the regulatory body for the purpose of defining tariffs, and to increase our customer base, with a positive impact in the long term. Furthermore, in the light of the recovery in industrial production, which began in the first quarter of 2017, and which we believe will continue to be a feature in years to come, we stand to gain from our exposure to industrial consumption, primarily in the state of São Paulo.