Welcome to a new era of recovery, growth and outperformance in Brazil. Responding well to the challenging macroeconomic landscape experienced throughout much of this year, President Michel Temer continues to implement a series of game-changing policies that are injecting life into Latin America’s largest and most prosperous economy.
In a press conference last week, Temer announced several measures aimed at catalyzing an economy that, alongside many emerging nations around the world, has been under some pressure in recent memory. With a clear mission to restore fiscal balance, increase commercial appeal and reduce bureaucracy across government and business, the new administration in Brazil has become a source of excitement for investors around the world and will undoubtedly pave the way for a very prosperous 2017.
Priority number one for the new government is to establish a more open and inclusive economic system that offers better commercial conditions and further incentivize investors. The National Bank for Economic and Social Development (BNDES) has launched a support package for small-medium sized businesses that will facilitate, expand and streamline credit access to the tune of an extra $1.6 billion in 2017. The Temer Administration will also ease strict employment regulation and reduce the time it takes to authorize imports and exports for natural resources such as food and fuel, as well as consumer products ranging from electronics to personal care. We will continue to see the implementation of policies in the new year with the government reducing the cost borne by lenders in credit operations and the implementation of new home purchasing initiatives for the country’s vast middle class. This focus on establishing an attractive private sector comes from an understanding that business is the engine of any economy. After all successful businesses increase trade, create jobs and pay the taxes that finance social services.
Source: Fundação Getúlio Vargas, Confederação Nacional de Indústria and the Central Bank of Brazil (2016)
These announcements came days after Brazilian Congress approved spending limits that will reform the country’s excessive and now unsustainable social security system. Public expenditure has been outgrowing GDP for years and public debt as a result has increased. A new fiscal rule is being implemented and, in combination with planned reform on social benefits, will be vital in restoring the country’s high credit rating. With public spending growth now pegged to the previous year’s inflation rate, the Brazilian government will reduce public debt and restore fiscal balance. Moving forward, analysts expect additional measures relating to pension-reform. Such initiatives will further motivate investor confidence and revive economic growth.
Source: Central Bank of Brazil and IBGE (2016)
What is most promising about this new constitutional amendment, apart from the immediate benefit that it will have on the Brazilian economy, was the ease in which it was accepted by congress. In an unusually rapid session, with very little discussion, lawmakers voted in a clear majority for what is commonly referred to in Brazil as unpopular austerity measures. This is a clear sign that the new pro-business and center-right government is not only taking the necessary and difficult steps to catalyze growth and recovery, but also inspiring widespread support among the lawmakers of the nation. The reason is simple, these measures have already had a positive impact as the country receives increasing levels of foreign direct investment (reaching $8.75 billion in November alone). Brazilian equities are up 80% from the beginning of the year and the Ibovespa has outperformed other emerging market indices by an average 46%. The Brazilian Real, while still significantly undervalued, still remains one of the top currency performers this year having strengthened by 18% against the US$. Savvy investors know that profit is in the purchase price and are beginning to realize that now is the right time to focus on Brazil.
It’s also important to the note that while the Brazilian economy embarks on the road to recovery, the country’s agricultural sector continues to outperform. By all accounts 2017 will see a blockbuster harvest and booming exports amid forecasts of favorable weather patterns. Agriculture has seen continuous growth with total output more than doubling in volume since 1990 and livestock production almost trebling. Brazil is also a major producer of fertilizer and fertilizer-intensive crops, with institutional investors ranging from Vanguard, Franklin Advisers and Blackrock all holding major positions in the sector.
Brazil has reached a profound turning point and demand for the country’s resources and services are on the increase. Political uncertainty has diminished, consumer and business confidence are rising and investment is strengthening. This new fiscal adjustment will allow monetary policy to loosen further and catalyze recovery and growth in the New Year.