“Brazil is the country of the future; and will always remain so…”
Charles de Gaulle, President of France
“Wow! Brazil is big…”
George W. Bush, President of the USA
As the country beds down at the start of Dilma Rousseff’s second term as President, which Brazil will dominate for the rest of this decade, and possibly beyond?
There are two Brazils; the first comprises the world’s fifth largest both by size and population and its seventh largest economy, both nominally and by purchasing power parity. The country can only be described using a number of superlatives, underpinned by a wide range of improving and expanding indicators, and a generous and increasingly important resource base. Set to host the summer Olympics in 2016, this Brazil is set to take on a more visible global role as the century progresses. With a large (200 million plus), young and upwardly mobile population, it will become a key global market for a range of manufactured and consumer items.
The other Brazil is economically and politically highly insular, with an economy driven by volatile commodity exports and increasingly hard-pressed domestic consumers, infamous for its bureaucracy, restrictive labor practices and high levels of government intervention. The Real remains vulnerable due to continuing positive US$ momentum and weak domestic data, while a scandal at oil major Petrobras has already cost the company its investment grade rating and threatens to broaden out and fragment the ruling coalition.
Both Brazil’s are exerting fluctuating influence on the country’s current dynamic. 2015 has started badly; the country is at odds with virtually every other country around the world by continuing to raise interest rates in response to high levels of inflation[1]. This continues to inflict punishment on a hard-pressed consumer. President Rousseff pleased many investors by appointing a sensible and credible private sector financier, Joaquim Levy, as her Finance Minister. He recognizes the threats to the economy and is prepared to act to rectify them, but the scale of the Brazilian economy and existing headwinds (a weak oil price, a slowing China and domestically low levels of investments, the possibility of a drought in the south impacting on energy production and a population weaned on state largesse) mean that steady application over a period of time will be required.
The early indications are positive, though stated intentions need to be followed swiftly, by actions. Levy’s widely publicized aim to generate a primary surplus (government income minus expenditure, stripping out interest payments) of 1.2 percent and 2 percent respectively of GDP in 2015 and 2016, follows a deficit of 0.6 percent in 2014. It won’t be easy but investors will be looking for positive results resulting from the types of tough decisions that will be needed to achieve this goal, including tax hikes, cutting some welfare benefits and cutting back on expenditure.
It was interesting noting comments by emerging markets investment expert Mark Mobius of Templeton reported on March 11 that he was now ‘actively looking’ to increase his exposure to the country after the recent market sell-down. We expect more of this bargain-hunt mentality to surface; it is after all a tried and tested way to outperform and maximize returns. While Brazil will face a testing 2015, and the country is performing well below its potential, few Brazil watchers are in any doubt that the measures set out will improve the inflationary outlook, and boost confidence, the latter issue which is at the root of so much of the country’s current distress.
[1]In mid-March 2015, the Bank of Brazil policy rate was 12.75 percent, while inflation was 7.70 percent.