BraziLs rate of investment is failing to keep pace with demand sparked by President Luiz Inacio Lula da Silvas stimulus programmes, threatening to quicken inflation and force policy makers to increase interest rates.
As demand recovers after Brazils first recession since 2003helped by public spending, tax cuts and lower borrowing costsinvestment in new capacity rebounded too slowly to guarantee near-term supply, according to Morgan Stanley and Credit Agricole SA. Quickening inflation and rising interest rates may slow gains in the benchmark Bovespa index from 82% this year to less than 30% in 2010, Morgan Stanley said.
We have a lot of catching up to do, Vladimir Caramaschi, Brazil strategist at Credit Agricole, Frances biggest bank by branches, said in an interview from Sao Paulo. Investment is just not going to be enough to meet demand. Brazil, historically a laggard in investment in factories, machinery and other fixed capital, hasnt changed course even as it recovers faster than most from the global recession. The so-called Brazil cost of taxes, bureaucracy, labour laws and interest rates that remain the highest among G-20 economies discourages investment, Caramaschi said.
The Brazilian economy is doing well, Nobel Prize-winning economist Paul Krugman, 56, told journalists in SaoPaulo December 2. Its not the same as to say it will become the economic superpower next year. The markets are reacting as if it will.
Brazils real is up 34% against the dollar this year, the biggest advance among the worlds 16 major currencies, and the Bovespa index has outperformed benchmark measures in all of the 10 largest stock markets except China, according to data compiled by Bloomberg.
Krugman said he plans to sell some of his Brazilian assets because he is concerned that the gains arent sustainable.
Investment accounted for 19% of Brazils economy last year, the most since the national statistics agency began tracking the data in 2000. That compares with the 41.8% investment rate of developing economies in Asia, led by China, and the world average of 24%, according to the International Monetary Fund.
In the second quarter, Brazil, the worlds eighth-biggest economy, invested 15.7% of GDP. Caramaschi estimates the rate advanced to a still very low 16.5% in the third quarter.
The investment data will be released on December 10. The economy grew 2% in the third quarter from the previous quarter, when it expanded 1.9%, according to a Bloomberg survey of 30 analysts.
There isnt the slightest possibility Brazil can sustain its present pace of growth with this investment rate, said Luis Fernando Lopes, who helps manage $3.2 billion in assets as partner and chief economist at Patria Investimentos in Sao Paulo. To maintain 5% growth on average, Brazil would have to invest 22% to 24% of GDP, he said.
Brazil ranks 129th among 183 countries in the 2010 Ease of Doing Business index in the World Banks Doing Business report, trailing Swaziland and Bhutan. It fell two positions from last year, as indicators such as registering property, dealing with construction permits and getting credit, worsened.
I always borrow less money than I could use, said Andre Barbierato, chief executive officer of Buffalo Investimentos, a Sao Paulo-based private equity firm.
Jose Ricardo Roriz Coelho, the executive director of Vitopel do Brasil Ltda, Latin Americas largest maker of plastic films used for packaging, said he backed off buying $85 million worth of equipment to expand capacity. The average interest rate on a business loan was 26.5% in October, according to central bank data, and government borrowing constricts credit for businesses, Barbierato said.
Heavy taxes, expensive money, and the currency really make us think twice about investing, Coelho said. Its increasingly hard to export because of the exchange rate, and the domestic market is flooded by cheaper imports.
Policy makers may start increasing interest rates in the first quarter next year as economic growth accelerates, Marcelo Carvalho, Morgan Stanleys chief economist in Brazil, said in an interview from Sao Paulo.
The central bank will push up the so-called Selic rate as much as 1.5 percentage points to 10.25% by the end of 2010, according to the median estimate in a Bloomberg survey. Monetary policy is the biggest threat to gains in the Brazilian stock market, Morgan Stanley equity strategist Guilherme Paiva wrote in a report December 1.