Brazil tightens its belt ahead of tougher years

Brazil faces new challenges in the near future

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In the past few weeks the markets of the world and at different levels have been rattled by a single word: “tapering”. The term which has become a synonym for the Federal Reserve System of the United States’ decision to cut the purchases of American bonds has impacted emerging countries like a tornado. As a result, making stocks plunge and halting a couple of projects here and there. So what are the real effects it can have on the Brazilian economy and the opportunities for investment it has been offering for years?

In just a few sentences, the reason why it has done such damage in so little time begins in the response to the 2007 recession as the Central Bank of the United States decided to start purchasing bonds at a rate of more than 80 billion USD a month. The idea behind it was to spur spending which accounts for more than 70% of the American economy. Pouring that much money into the market and keeping interest rates at almost zero meant cheap money was cascading from the government down to banks and down to other countries seeking returns in countries with higher central bank rates, like Brazil for example. For emerging countries like Turkey, Indonesia and South Africa it was like money falling down from the North in all kinds of investments as they were giving much higher returns.

Particularly in Brazil, it changed the landscape of Foreign Direct Investment but it also hurt prices as more money flowing in the street means higher inflation. With consumer spending in the country at an all-high and big projects like the World Cup and the Olympics on the way, it still seemed like there would be little trouble. On the other hand, the FED decided a few months ago to” hint” that it would soon begin cutting its purchases and it finally did in December 2013. As the economy of its country was gaining steam and jobs were slowly being created the FED made substantial cuts. The entity reduced its program by 10 billion USD and then in January did so again by another 10 billion thus bringing down the program set for March to 65 billion a month and therefore halting inflation hikes.

 

What are some of these new challenges?

As expected, Brazil, one of the largest economies in the world but still dependent on the demand of its products more than its internal markets suffered great losses with just the announcement. Tapering wasn’t the only reason of course. As data from its biggest partner, China, which buys Brazilian products across all sectors, was also disappointed. This did not bother China because it wants to move away from an export-driven economy to one that grows from within, but on the other hand, this change will hurt Brazil.

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Politically speaking, this is not the moment for the country and its president, Dilma Rousseff, to be on the spot-light. This is an election year in which she will launch her campaign for reelection with voting scheduled for October 5th. Moreover, with so many big events and so much news on the way, the government has already ramped up spending in socially-critical areas like transportation and education. Rousseff knows there isn’t that much money to spend without hurting the country’s inflation target. In addition, in a conference at the World Economic Forum in Davos last month, while the stock market and value of currency dipped, Rousseff declared that she was truly committed to being strait-laced.

 

Are there still opportunities for investors in Brazil?

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For investors who are uncertain about the way events will unfold in the upcoming months, we should first say YES. Brazil is still a country in which investing is critical and profitable. Although the country has grown exponentially in the past decade, there is plenty of room for projects in every major industry. After all, the country holds the largest economy south of the United States and it has the largest of its markets with more than 200 million people. Investments in productivity are the ones that will be the most important in the years to come. By the same token, transportation, education, health care services, agriculture, technology, oil and gas will all be hot-spots of its economy for years to come, but it will face more challenges than previously expected.

Brazil is facing several fronts to battle this year: The first is growth, which since 2011 has averaged just 1.8% a year; the second one, inflation, is currently at 6% (the FED wants US inflation to stand at a healthy 2% for comparison purposes); and third, its fiscal issues which includes a ballooned current-account deficit that now stands at 4% of the GDP. But some things are still positive, for example: a strong real indeed makes exports more expensive, but with good deals with other countries in Latin America, it means for money per unit of export for whoever sells the product – and the real has lost 17% of its value since tapering begun.

The country’s foreign exchange reserves are the fifth largest in the world.  A weaker currency, which Brazil might be seeing soon, will balance its external accounts and manufacturing will again be cheaper in the country. Keep in mind that this covers 47% of the South American continent and its borders except for two countries. The only real issue is how Rousseff will manage her spending promises for the inside with the tightening she promised outsiders, and it is in the middle path that she will likely stand.

For businesses, there is a great deal of good news to come. The country’s middle class still holds purchasing power and that will be very hard to disappear. In addition, wages are still on the rise, which means spending will continue to increase. And for those wanting to invest in Brazil, the only caution to take is deciding who to sell to. Brazil has always been a country trying to lure and at the same time stand away from American policies (political and economic). Because of this reason it has sometimes befriended countries such as Venezuela, Argentina, Turkey, Russia, China and to a lesser economical extent, Iran, Angola and Nigeria.

If Rousseff has proven something in all of this, is that she is no Lula and the country has slowly embraced the fact that more capitalist emerging economies are the true creators of future growth. So investing in Brazilian’s partnerships with Chile, Peru, Colombia, Mexico and even the European Union or India will reap big benefits.  As it has always been with Brazil, it is not a matter of ‘if’ to invest, more than ‘how to’. The profits will still be plenty for whoever takes the leap.

 

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Jorge Mastrapa

Managing Director at Inloso LLC
Dr. Jorge Mastrapa is an international author, speaker, executive coach, and entrepreneur. His areas of expertise include cultural diversity, global leadership, organizational culture, and human capital management.

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CC BY-NC 4.0 Brazil tightens its belt ahead of tougher years by Inloso is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

About Jorge Mastrapa

Dr. Jorge Mastrapa is an international author, speaker, executive coach, and entrepreneur. His areas of expertise include cultural diversity, global leadership, organizational culture, and human capital management.

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