There has been a lot of negative commentary about Brazil recently, not least some of which has been in the articles I write for Euromoney Magazine, for example this month’s look at the precarious state of Petrobras which should be of real concern. But it does feel that everyone now is ‘piling on’. Everyone, it seems, is disillusioned with the ‘Brazil Play’ and fund flow analysts such as EPFR report long and lengthening streaks of equity and fixed income money leaving the country.
Bankers in São Paulo have long said that there was too much hype three or so years ago. And that now there is too much pessimism. International investors are certainly bearish on Brazil. Mexico, Colombia and Peru seem better bets in the region. Chile probably always has in many respects and growth rates in other places – Paraguay for example – are eye-catching. Brazil has been sluggish in comparison and low investment, high inflation and deteriorating fiscal position are points of concern. Productivity is hampered by poor infrastructure, over-regulation and high taxes and a public education system that needs radical improvement. Next year could be tricky too – the world cup and an election year are a potentially explosive mix socially and politically and will almost certainly postpone the economic reforms that are needed to re-invigorate the economy until 2015. The rating agencies may heighten the sense of a downward spiral drama with negative rating actions.
But investors shouldn’t forget the long-term trends and the fundamental strengths of the Brazilian economy that got the country so over-hyped in the first place. Brazil is resource rich – with oil, gas, minerals and other commodities, as well as the water, land and technology to grow an already mighty and successful agribusiness sector. Brazil is huge, with a large domestic market with an attractive demographic profile. It is still growing. Its long-term GDP growth rate could and should be higher but it is still firmly in positive territory. Yes, its fiscal surplus is eroding at an alarming rate but it is still a fiscal surplus. Its banks are well capitalised and well run.
Brazil has a strong entrepreneurial class and protects the rights of business and intellectual property – the political intervention of the government is harmful to some industries and probably to the economy as a whole but it is at the margin and it is a sound, if over-regulated place to do business – especially when contrasted with its neighbour Argentina or fellow Brics like Russia and China. Latin America’s intra-regional growth looks set to be a driver of growth and Brazil will benefit. Brazil will benefit from the long-term development of the emerging markets story, the convergence of which with the developed markets still seems sound. Brazil has a hugely ambitious infrastructure growth pipeline, driven by BNDES but partnering with the private sector, which should drive growth GDP and also lead to productivity gains. And even if there is a ratings downgrade it will retain its hard-won investment grade status.
2014 will be a big year for Brazil and it faces many short-term challenges, many of which are significant. But as necessity is the mother of invention, then next year could be the mother of serious reform. It’s going to be rocky but it’s just as likely that what comes next is the beginning of a new phase for Brazil, rather than the beginning of the end. The country has come too far, is too ambitious and has too many gifts to give it all up now. Those who want a short term return probably should leave now (if they haven’t already). But those that stay for the medium should remain confident about Brazil.