Brazil?s is the best illustration of how, when the going gets tough?the tough get going. That surprised many who had been convinced that only size had made it impossible to overlook Brazil as a Bric economy, and that little else explained its inclusion in the group. But the current US economic slowdown demonstrates that there is more to Brazil than just markets.
Like, last year Brazil?s main stock market index rose 71%?which was even faster than India?s. And the focus was on the economy?s biggest stocks Vale (the world?s largest iron-ore exporter) and Petrobras, which in January made the second biggest global discovery of oil and gas under the Atlantic.
Clearly, things are very different from when Brazil?s weak performance owed largely to structural hurdles that resulted in high rates of interest and taxes?both of which retard growth. Also present were a gargantuan public sector, antediluvian labour institutions and over-regulation.
Those forced Brazil to remain a straggler even when times were good?its annual real GDP growth averaged 2.6% over 2000-06, compared to China?s 9.6%. But now is the time for high-fliers to lose altitude while Brazil comes into its own?it might get company from Russia on the way up, but that is another story. Firstly, Brazil has the green signal even from the risk averse ever since the October 29, 2006 comeback of president Lula da Silva. Hyper-inflation has been haltered; an annual trade surplus of $40 billion seems to have become routine; the country is on schedule in the repayment of its international debts and its credit rating has hardened.
Brazil?s trade performance is, in fact, outstanding despite currency appreciation triggered by farm and energy-sector exports. Such a development even serves to place a question mark against the universality of the debilitating effects of the Dutch Disease. Yet, that is not to forget that the currency had also sharply depreciated in 2001 and 2002, leading to a dramatic current account adjustment. Brazil?s record 2003 to 2006 trade surpluses owed to that. Currently, though, the surpluses have lowered the cost of finance.
The second positive is the acceleration of GDP in 2007 over 2006?a track record of accelerated growth that is visible even in Brazil?s stock market. As for returns on investment, Brazil has 20 million plus middle class households?43% up from 14 million at the turn of the century. That means a middle class that is five times of India?s or China?s.
Indeed, the biggest change has been President Lula?s strong popularity rating?including during his earlier stint in power, he has created over 5 million jobs since 2000. He is dismantling over-regulation as well, and more economic progress can be expected from the supportive coalition he heads.
But the third positive is perhaps the biggest one: it is Brazil?s firewalls against a few of the most intractable international economic problems. For instance, there is no scare of losing market access since exports are a mix of manufactures and commodities. There are finished agricultural products, intermediates like hydrocarbons, timber and even aircraft?Embraer is the world?s third largest aircraft manufacturer. Accordingly, Brazil?s export growth accelerates in step with rises in consumption spending and per capita incomes elsewhere. The worldwide shift towards meat eating has, for instance, increased animal feed off-take, and ensured higher grain export prices for Brazil.
Even energy independence is up since the latest (January 2008) discoveries of natural gas. That has further insulated the economy from international oil prices?plus set aside huge reserves of foreign exchange. The only major worry is the government?s inability to carry through structural economic reforms. That has been the root cause of slow growth; it has also burdened the private sector by high taxes, interest rates and haltered investment as well as consumption.
Even investor interest seems to be veering towards Brazil, which got $71 billion of FDI in 2007. That is natural since investors suddenly find that they gain more since Brazil exports to the OECD and the rest of Bric. So, they too stand to gain by adding Brazil?s to their basket of shares of EU and US multinationals.
As for how they would gain from Brazil alone, that would be from the fact that Brazilian shares would be quoting at prices that are far lower than ruling elsewhere?thus lifting price/earning (P/E) ratios. The investor would gain by simply getting in on the ground floor in OECD bourses and letting the Bric impart dynamism to OECD export sectors.
Besides, about the fear that the Bric will ?decouple? from the North and adopt South-South interdependence, they cannot do while (almost) their entire flow of trade and investment derive from?and is targeted at?the OECD.
