Braziliant: boom time for South America's largest economy

Is it time to start taking Brazil seriously?

Famed for their scintillating wit, economists often joke that Brazil will forever be known as "the country of the future". Indeed, ever since its rapid phase of industrialisation and urbanisation in the 1950s and 1960s, great things have been expected of Latin America's largest economy, but, for whatever reason, it has never been able to capitalise on its strengths. Despite boasting ample natural resources, land and industrial might, for many it is destined to remain a global underachiever.

Bad political leadership and haphazard economic policies have been the country's major downfalls in recent decades. The end of a 20-year military dictatorship in the mid '80s was meant to herald a new dawn. Instead, a catastrophic period ensued: the economy stagnated and the mismanagement of an inexperienced government led to hyperinflation. Economic comparisons with Robert Mugabe's Zimbabwe are not entirely farfetched as inflation peaked at more than 30,000 per cent in 1990.

Luckily, investors have short memories. 19 years on, Brazil is very much back in vogue. The Economist, always keen to be at the forefront of financial trends, last week published a fourteen-page special report on business and finance in Brazil. Goldman Sachs, the US investment bank that first coined the acronym BRIC (Brazil, Russia, India, China), expects Brazil (currently ranked tenth in terms of global economic output) to become the world's fourth largest economy in 2050, overtaking countries such as the UK, Germany and Japan. On recent form, this forecast is looking increasingly conservative.

So what has changed in this time? Much of the progress has been attributed to the success of the country's president Luiz Inácio Lula da Silva - known as Lula for short - who was able to build on the economic and political reforms introduced by his predecessor, Fernando Henrique Cardoso. Back in 2002, when Barack Obama was still a relatively unknown name in US politics, his South American contemporary was staking his claim as the first non-white leader of South America's most populous country. The similarities between Lula and Obama are numerous. Just as Obama has been criticised by the American right for promoting socialist ideals such as universal healthcare and increased spending on welfare, Lula too suffered his fair share of abuse during the years leading up to his presidency. Such was his low standing amongst Brazil's business community that during his first presidential campaign in 1987 some 300,000 businessmen, wary of his socialist reputation, were reportedly ready to leave the country upon his election.

A former metal worker turned trade unionist, Lula helped form the Partito Trabalhadores (PT), or "workers party", in the 1970s - the first political party to truly represent the interests of Brazil's working class. The PT is currently in office, but is behind in the polls for the 2010 presidential election.

Lula differs from his predecessors in more ways than just his black and Amerindian ancestry. He also comes from a poor, rural background - a far cry from Brazil's political and military elite, the milieu of most of the country's 20th-century leaders. Many foreign investors, particularly in the US (which had supported the strongly capitalist military dictatorship of the 1960s and 1970s), thought Lula's left-wing ideology would deter private sector growth. They feared another Hugo Chávez, the outspoken anti-Western Venezuelan president, who has alienated foreign investors by centralising most of his country's industry.

These fears have not been realised. Instead, the opposite has happened. Huge areas of the economy have been opened up to foreign investors with industries such mining, aircraft construction and steelmaking becoming privatised. Drawn by promises of riches, 45 billion dollars of foreign direct investment (FDI) have flowed into the country this year alone, 44 billion dollars more than was invested 15 years ago. Inflows of capital have sent the country's stock market, the BOVESPA, soaring, while the Brazilian currency, the real, rose to a thirteen-month high against the dollar in October.

And there is more to come. With the 2014 football World Cup to host, followed by the 2016 Olympics - another endorsement of Brazil's rising global stature - huge investment in infrastructure, transportation and stadia will be needed. Much of this is expected to come from the private sector and foreign investors.

Private sector growth has helped the economy. Hyperinflation was stemmed in 1995 by Cardoso and the economy has been further steadied by the strong management of the Brazilian Central Bank's current president, Henrique Meirelles. Since the late 1990s, the economy has grown consistently (if not spectacularly) and has avoided the cycle of boom and bust suffered by neighbouring Argentina, which, having defaulted on its government debt in 2001, remains a pariah of the global investment community. While Argentina has only recently reopened talks with its international creditors over repayment of its foreign debt, the top three international credit agencies: Moody's, Standard and Poor's and Fitch, all raised Brazil's government bonds to investment grade in 2008 - a major milestone for a country once viewed in a similar light to its neighbour.

Steady leadership has taken Brazil through the global economic downturn relatively unscathed, with the International Monetary Fund expecting its economy to contract by about 0.3 per cent in 2009. Though the economy shrank slightly in the final quarter of 2008 and again in the first quarter of 2009, the country has avoided the severe recessions seen in other large emerging economies such as Russia and South Africa. This represents a key breakthrough for Brazil, whose fortunes for much of the post-war era had been closely tied to those of its main trade partner, the United States.

Economists used to say that when the US caught a cold, Brazil caught pneumonia, referring to the country's dependency on the US market for its exports. Decoupling - a buzz word used to describe the process of developing nations becoming less reliant on the West - is in full force in Brazil, arguably more so than in China, which is still heavily reliant on exports to Western markets and where domestic consumption represents just 35 per cent of GDP.

One of the major successes of Lula's administration has been to make the economy more self-sufficient by following through on his promise to improve both the living standards and the spending power of ordinary citizens. While exports remain important to economic growth - indeed, China recently overtook the US as the country's main trade partner - domestic consumption is becoming increasingly significant. Lula has done much to reduce the huge gap between the country's social elite and its poor by creating jobs and raising income levels. A key development has been the expansion of the Brazilian middle class, who, in a country with a population of 192 million, have created one of the world's most attractive consumer markets with huge growth in the sales of cars and new homes.

All this sounds too good to be true. Indeed, Brazil still has its fair share of problems and for many potential investors crime remains the country's Achilles heel. For all the talk of rising income levels and falling unemployment, incidents of violent crime are still four times higher than in the United States. Carjackings, muggings and murder are major problems in the big cities. Despite huge investment in policing, ordinary citizens still don't feel safe. In 2005, a national referendum was held to decide whether the public right to own a firearm should be continued. The result was a resounding "yes".

Meanwhile, health and education standards still lag far behind those found in the developing world. Infant mortality rates are higher than in Vietnam, Sri Lanka and Albania. The standard of primary education is even poorer - Brazil is ranked 119th out of 133 nations surveyed by the World Economic Forum, 89 places behind China. Opportunities for further education are limited and typically reserved for the rich, leading to a "brain drain" of high achieving students to universities in the US or Europe.

Lastly, foreign investors often complain of the difficulty of doing business in a Brazil which, language barriers aside, is restricted by high levels of bureaucracy and corruption, as well as an outdated legal system.

For Brazil to bridge the gap, not only between itself and the developed nations, but also with major emerging economies such as China and Russia, massive investment is still needed in these areas. Lula has done much to improve standards but the worry is that in 2010 the next administration - likely to be current frontrunner the Brazilian Social Democratic Party (PSDB) - will bow to pressure to reduce investment in public services from their current highs. There is also the more immediate concern of currency appreciation, with a strong real hurting exports, particularly to the US. Last week the government introduced a tax on foreign capital inflows. Whoever wins the next election must strike the right balance between attracting investment and protecting exports.

Despite its ongoing problems, however, Brazil's future looks bright. Hosting the World Cup and the Olympics in 2014 and 2016 should do much to change the minds of those who still doubt the country's ability to reach its potential. Paradoxically, the weakness of the West should also help Brazil over the next few years. With the US and Western Europe expected to experience a slow and sluggish economic recovery, investors are likely to be wooed by Brazil's strong but steady growth. The IMF are forecasting that Brazil's GDP will, on average, increase by around 3.5 per cent each year between 2010 and 2013.

Much will depend on the strength of Lula's successor - widely tipped to be the current governor of São Paolo, Jose Serra. Yet, unless the economy manages to implode over the next two decades (which, given its past record, is not beyond the realms of possibility), it is likely to overtake those of the UK and Germany sooner than first thought.

The economists of this world may continue to joke, but expect Brazil to have the last laugh.

5 Brazilian companies to remember

Petrobras

The largest company in Latin America by sales revenue and market capitalisation, with income of 128 billion dollars in 2008, Petrobras is one of the world's leading oil firms, managing much of Brazil's energy needs. The company is state-managed but listed on the São Paulo and New York stock exchanges.

Excitement surrounding the company escalated in 2007 when it announced the discovery of a new underwater oil field in the Santos basin off the coast of Rio de Janeiro, estimated to contain between five and eight billion barrels of oil. The discovery - the world's largest for more than seven years - boosted Brazil's total oil reserves by 60 per cent in a single flash, giving it the opportunity to become a net exporter of crude oil in the next few years.

Vale

Founded in 1942, Vale is the world's second largest mining company and the world's largest single exporter of iron ore - the raw material used to make steel. The company was privatised in 1997 under the Cardoso government and has since become one of Brazil's most successful companies.

In recent years, the company has profited from the economic and industrial growth of China, which has sucked up much of the world's iron ore to produce steel for housing and infrastructure. Vale, along with Australian rivals Rio Tinto and BHP Billiton, has become one of China's largest suppliers and has recently branched out into other areas such as copper and coal mining.

Besides Brazil, the company has major operations in Canada, Australia and Mozambique.

Banco do Brasil

Latin America's largest financial services firm with revenues of 36 billion dollars last year, Banco do Brasil is Brazil's oldest and most respected bank. Like Petrobras, the company is owned by the Brazilian government but is also publicly listed. Having started life as the country's National Treasury, given the role of printing money and managing currency transactions, the company has operated solely as a commercial bank since 1992.

The company's operations span retail banking, investment banking and capital markets.

Embraer

Brazil's aeronautical engineering industry is the envy of the world and has grown considerably since the sector was privatised in the 1990s. Embraer is one of the largest companies in its field with revenues of more than six billion dollars in 2008. The company produces aircraft for the commercial and passenger sectors as well as the military. Having originally built planes for the domestic market, over the last decade the company has become a major exporter to markets in Europe and North America.

The company stands to benefit from the growth of Brazil's tourism sector, which is expected to thrive over the coming decades.

Odebrecht

An engineering and construction firm, Odebrecht is benefiting from Lula's administration's investment of billions of dollars into its Growth Acceleration Programme (PAC), aimed at bringing the country's roads, railways and housing up to first world standards. With the 2014 World Cup and 2016 Olympics in Rio requiring new stadia and accommodation to be built, the next few years are set to be lucrative for the construction sector.

With revenues of 28 billion dollars last year, Odebrecht is a multinational organisation and has operations across North and Latin America and Africa, Europe and the Middle East. The company is also an emerging player in the energy and chemicals sectors.

Comments