The Brazil Economy in 2009 for the Real Estate / Land Investor: Quarter 1
From a global economic perspective, 2009 was almost unprecedented and also saw changes in the ways real estate and land investors strategised and developed their businesses. Brazil was in the fortunate position of being able to hold a relatively strong position and move out of recession by the second quarter of the year. Indeed, the country’s recovery began much before many industrialised and developed nations – several of which continued to witness stifled growth as 2010 began. In turn, a number of risk averse real estate / land investors, who had previously overlooked South America’s largest country, started to see the huge potential that Brazil had to offer (backed up by solid long-term fundamentals and a growing economy). Please see a review of the Brazilian economy of the last 12 months and how it relates to real estate / land investors (note we have split the months into four blog posts):
The Brazil Economy in 2009 for the Real Estate Investor: Quarter 1
With the global financial crisis in full swing, Latin America’s biggest economy stalled in the last quarter of 2008, shedding 654,946 jobs (the most in ten years previously) as industry output, consumer demand and commodity prices declined (the economy expanded 1.3 per cent compared to 6.8 per cent in the third quarter). Consumer, construction and wholesale prices all fell for the second month in a row, according to the Getulio Vargas Foundation. Despite negative sentiment prevailing, Presidential Chief of Staff Dilma Rousseff stated that the economy will bounce back throughout 2009. Brazil policy makers also commented (according to the minutes of their monthly meeting): “inflation expectations for 2009 show a substantial retreat yet monetary policy can be eased without risking the convergence of inflation to target.” Andre Loes, Chief Economist at HSBC Brazil, commented at the World Federation of Investor Corporations’ congress in São Paulo: “At the start of the 1990s, we had a very closed economy. We had a very weak balance of payments and hyperinflation. The state owned industries that it shouldn’t have. In the late 1990s and early 2000s, we established an inflation-targeting regime. We approved a fiscal expenditure law. The state could only raise spending if it raised taxes.”
The central bank also cut the overnight SELIC interest rate for the first time in the 16 months previous (to 12.75 per cent) and it was widely predicted that Henrique Meirelles (the bank President) would continue to do so throughout 2009 (which did occur). The government also promised to ‘act firmly to generate jobs’ to avert a further slowdown such as the use of resources from income taxes to helping businesses and industries in need.
Statistics by the Index of Economic Freedom (jointly published by the ‘Heritage Foundation’ and the Wall Street Journal) gave Brazil a score of 56.7 placing its economy 105th in the world whilst indicating the following:
- The overall freedom to start, operate and close a business is limited by a strict regulatory environment. To start a business takes four times the world average of 38 days;
- Monetary freedom was above the world average with positive comments made towards inflation control over the last decade;
- Investment freedom was above the world average with the findings reporting that foreign investors are given the same treatment as nationals although there are a few restrictions on foreign exchange transactions;
- Property rights were well above the global average with contracts considered to be secure. It was noted, however, that the Judiciary can be inefficient as well as being subject to too much political and economic influence;
- Government expenditure was below the world average (government spending formed 40.7 percent of GDP in 2008);
- Fiscal Freedom was below the world average with Brazil’s with higher comparable income and corporation tax structures;
- Financial Freedom was above the world average and it was commented that, despite lingering state involvement, banking and capital environments are increasingly diversified, dynamic and competitive. Approximately 200 public and private commercial banks operate to international best practices;
- Brazil’s trade freedom was close to the world average yet the findings reported that import bans and restrictions; market access barriers in services; prohibitive tariffs; border taxes and fees; restrictive regulatory and licensing rules; export support programs; non-transparent government procurement and problematic protection of intellectual property rights persist;
- Although stating that corruption was decreasing, the statistic was slightly below the global average with businesses bidding on government procurement contracts being the main guilty parties;
- Brazil’s labour freedom was above the world average although inflexible regulations hinder employment and productivity. The non-salary cost of employing a worker is high and dismissing a redundant employee can be costly.
Ongoing difficulties in the global financial markets failed to prevent Brazil’s Bovespa from rising withnews that the real was strengthening against the dollar. Government data pointed to a slight increase of 9,179 formal jobs after three straight months of cuts. However, analysts and economic pundits predicted a Brazilian growth rate of zero with Morgan Stanley forecasting a contraction of 4.5 percent. In response, President Luiz Inacio Lula da Silva voiced confidence stating to the press at the time “even if it’s close to zero, Brazil certainly will be one of the few nations in the world – among the emerging and the big ones that won’t have a recession like the rich nations are having.” Despite these words and actions, the President’s approval ratings fell 5% on the back of concerns with the economy.
Petrobras (Brazil’s state owned oil company) signed a long-term landmark agreement to supply China with between 100,000 to 160,000 in return for loans of up to $10 billion US which will assist with the development of the large-sale reserves of oil and gas found on its southern coast. Celso Amorim, Brazil’s foreign minister, said at the time “This is the most important South-South relationship.”
The completion of the Doha trade round seemed a far reality with Brazil’s Foreign Minister, Celso Amorim, openly criticising Howard Dean’s (former chairman of the US Democratic National Committee) comments on progressing environmental standards by stating: “if the US wanted to do something positive for the environment, eliminate tariffs on ethanol,” (Brazil has long campaigned against US restrictions on imports of its ethanol).
The Brazil government announced that it will spend 34 billion reais in building over one million homes under a programme entitled Minha Casa, Minha Vida. Finance Minister Guido Mantega pointed to the related benefits of the house-building programme including the injection of 60 billion reais into the economy, economic growth of over 2% and the creation of over 1.5 million construction related jobs. President Lula commented in a speech: “This is an emergency response, on the one hand to the global economic crisis, and on the other to the housing shortage Brazil faces.” Indeed, by the end of the month, central bank data showed bank lending surged by 26.1 per cent in the month.
The G-20 summit; aimed at paving the way to tackle the downturn; saw President Lula’s comments made international news. Accusing ‘blue-eyed bankers’ of being entirely to blame, the president stating that: “this crisis was caused by no black man or woman or by no indigenous person or by no poor person; but fostered and boosted by the irrational behaviour of some people who looked like they knew everything about economics – but knew nothing.” He also urged for tougher regulation on the financial markets: “We do not have the right to allow this crisis to continue for long. We are determined to make sure the world financial system is vigorously regulated. You go to a shopping mall and you are filmed. You go to the airport and you are watched. I can’t imagine that only the financial system has no surveillance at all.” The president finally turned on the media for demonising immigrants: “The great majority of the poor are still not getting their share of the development that was caused by globalisation. They are the first victims. I follow the press and I see that prejudice is a factor against immigrants in the most developed countries.”
On a national level, the central bank freed banks from more than 100 billion Brazilian reais to encourage local lending in the face of international credit restrictions. The bank also pointed to the fact savings deposits (which, by law must be used by banks to finance house lending) would soon compete with government securities – a measure aimed at encouraging further investment. Brazil Bovespa stock market looked comparatively strong than compared to its US and European counterparts with unexpected surges as a result of US orders of big-ticket manufactured goods.