Brazil must free ‘national treasures’
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Just before the New Year, Britain’s pride took a dent when it was relegated to seventh position in the world economic table as Brazil officially overtook it to become the world’s sixth largest economy, according to the Centre for Economics and Business Research.
But my simple mind, and even simpler calculations, would argue that we still have the upper hand. Britain has a population of around 60m, while Brazil’s population is about 190m. This would mean that, as Brazil only recently matched Britain, one British person is about as productive as 3.16 Brazilians. Of course, I understand it is not as easy as that.
It is clear to see how fantastically well the country is doing. Millions are being lifted out of poverty, buying better quality food, clothing, medical care, electrical goods, cars, and homes. Growth was fostered by a government determined to reform its entire financial system, and an abundance of commodities.
According to Lula da Silva, Brazil’s former president, systems were improved to supply credit to those who need it and boost employment. The domestic market is ripe for the picking, and both local and international business are clambering to capture a piece of the action. But even with reforms, the system is still overly bureaucratic. Outsiders, in particular, find it a complicated exercise to operate in Brazil.
There are signs that it is becoming less complicated to invest in both Brazil’s equity and debt markets. Indeed, Brian Coulton, emerging market strategist at Legal & General Investment Management, says Brazil is considered the “most investable” of the Bric (Brazil, Russia, India, China) countries. (blog continues below)
Recently, a delegation of industry and government officials visitied London as part of the BEST Brazil worldwide roadshow to promote investing in Brazil. Of course, the conference itself was, in essence, a sales pitch, but after the event I was lucky enough to meet some of the delegates.
Aldo Mendes, deputy governor of monetary policy of the central bank of Brazil, was perhaps the most interesting of the bunch. Brazil’s central bank has had a tough job to do over the past couple of decades. In October, it decided to cut interest rates from 12% to 11.5%, after five consecutive rate rises, citing a slowdown in the global economy. Inflation was still running at 7.3% in September.
He said stability will be key to the country’s economic future.
“We have to remember that Brazil came from an era of severe hyper inflation (in the 1980s). It is a priority to make sure the economic environment is stable,” he said.
The Brazilian government, it seems, likes to meddle. As an example of this, it took everyone by surprise in September by slapping a 30% import tax on foreign-built cars. While Mendes and his team can use currency control as a viable option to protect local manufacturers, the government’s move towards protectionism, he said, was a mistake in the longer term.
“[Protectionism] might be helping in the short-term, but it does not do any good in the long-term. We have to be careful with this, it is not a solution,” he added.
State control of the largest Brazilian companies such as Petrobras and Vale is now also a concern for precisely the same reason. The government’s recent interventions have infuriated outside stakeholders. These firms used to be among the top names in general emerging markets fund manager portfolios, but they are not as widely found as they once were.
The situation seems remarkably similar to the 1970s, when Pele, the famous Brazilian footballer, was deemed a ‘national treasure’ and the government banned him from joining any team from outside the country.
Luciana Dias, the commissioner of the securities and exchange commission of Brazil, aded: “With companies like Petrobras and Vale, it is clear that the government is the majority. Investors just need to be aware of that.”
Dias points to the fact that Maria das Graças Foster, Petrobras’s newly-appointed chief executive, is a long-time friend of Dilma Rousseff, Brazil’s president.
Nevertheless, the BEST Brazil event did a good job of convincing attendees.
While the delegates might be keen to push Brazil’s case to foreign investors, as Rodrigo Amaral argued in his latest cover feature, issues such as protectionism risk scoring own goals. The country also needs to remove bureaucratic obstacles.
Shaun Cumming is staff writer for Fund Strategy.
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