Brazil: A Macro-economic Outlook

Rollercoaster growth rates, worrisome inflationary pressures, near-perfect employment rates and uneven financial performance in different business sectors — these are some of the aspects characterizing Brazil's economy over recent years.

In the first panel session at the 2012 Brazil Conference hosted by Johnson's Emerging Markets Institute, Brazil: A Pathway into the Future, top Latin American analysts from four multinational financial-services powerhouses discussed the country's history and performance in terms of its economy, financial markets, and business environment against the backdrop of changing international conditions.

Brazil has a strong labor market, with unemployment holding steady for the past few years at just above 5 percent; GDP growth averaged 4.5 percent between 2003 and 2008, spiked to 7.5 percent in 2010, dropped to about 2.7 percent in 2011, and is forecast by the Brazil central bank at 1.6 percent for 2012 (9/27/12). Generally, tight monetary policy has helped curb inflation, which dropped from 14 percent in 2003 to 4 percent in 2007, and is forecast to level out around 5.2 percent for 2012. A major concern at present, said Joaquin Cottani, Citi's chief economist for Latin America, is the negative growth of the manufacturing sector over the last six quarters, vis-à-vis stronger growth in other sectors of the economy (due in part to strong agricultural production, trade improvements benefiting the commodities markets, and as Cottani put it, "a voracious appetite for Brazilian assets").

Some of the structural impediments to healthy growth in Brazil are a low investment rate (18 percent of GDP, versus 40 percent in China and 26 to 28 percent in Chile, Colombia and Peru) and low savings rates, underpowered human capital (low average education levels in the face of high tax burdens on the public as well as corporations), and infrastructure problems, said Alberto Ramos, who heads Goldman Sachs' Latin American research team. "Part of what we're observing now is structural, and part cyclical: Brazil is not condemned to underperform forever," said Ramos, who suggested that excessive efforts to help the underperforming industrial sector would be misguided. "The competitive factors of Brazil are labor, land, and the endowments of commodities (for example, crops and oil reserves) - not capital," he added, pointing out that Brazil would be better served to not try to compete with Asia in manufacturing, which is a very capital-intensive business. "Brazil's competitive advantage is in services and in agribusiness; and Brazil is doing quite well in these."

Access to capital is an ongoing challenge for Brazil, said Nuno da Silva, head of Latin America, depositary receipts, of BNY Mellon. Oil giant Petroleo Brasileiro (Petrobras) and infrastructure investments like electricity and highways have huge capital-expenditure requirements; but questions loom about where the capital will come from, said da Silva. There has been some growth in the debentures market, and more Brazilian companies have been listing on the equities markets, but the bulk of investment will have to come from overseas, he said. "Companies will have to really listen to what investors want; they can't just say, 'Invest in me because I'm big and I'm Brazilian' - those days are over." A steep tax rate on financial operations (2 percent on equities, 6 percent on fixed income, levied by the tax on credit operations, exchange and insurance, or IOF), unfortunately, may dampen foreign investors' hunger for Brazilian investments, Ramos and Cottani pointed out.

One of the bright spots in Brazilian business is impressive top managers. "These guys have gone through several economic plans, hyperinflation, and international and local crises," said PricewaterhouseCoopers partner Fabio Niccheri, who discussed the country's business transformation over the last two decades. He pointed to growing agribusiness, steel, telecomms, and educational companies that were fostered by the waves of privatization that occurred in the 1990s. On the consumer side, millions of Brazilians rose above the poverty line in the first decade of 2000, and can now afford a modicum of consumer goods. And, while capital markets have grown slowly, they have grown steadily. "In the 1990s, we had less than ten companies going into IPOs; between 2004 and 2011, there were about 150 IPOs," pointed out Niccheri. Mergers and acquisitions, which numbered about 300-400 annually in the 1990s, grew to 650 in the second half of 2000-2010. But perhaps more important, two-thirds of the deals were made by foreigners in the 1990s whereas, since the turn of the century, about two-thirds have been done by Brazilian companies.

Niccheri also pointed to the improvement of transparency and reporting issues by Brazilian companies that he, as an auditor on the international scene, has noticed in recent years. For example, the country has adopted the International Financial Reporting System accounting standards espoused by the bulk of the international community. In addition, "Twenty years ago, it was common to see mid-size companies having off-book sales; it was simply part of the culture," said Niccheri. "That's no longer a common practice."