The Brazil Economy in 2009 for the Real Estate / Land Investor: Quarter 4
The Brazil Economy in 2009 for the Real Estate Investor: Quarter 4
Brazil continued to increase its presence on the world stage via being awarded Latin America’s first Olympic Games. Rio de Janeiro will host the games in 2016 and will invest $11.1 billion (the city received 66 votes in contrast to Madrid’s 32 in balloting by the International Olympic Committee). After campaigning heavily in the build up to the vote, President Lula in a television interview with Globo News stated: “The people who voted saw that we were the ones who really wanted to do it, who had our soul and heart in it.” A study by the São Paulo Business School for the Ministry of Sport stated that the games would help sustain Brazil’s economic growth via the injection of $51.1 billion through to 2027 as well as add 120,000 jobs annually through to 2016. Rio previously failed in attempts to host the games in 2004 and 2012 due to the fact that both federal and state governments were not convincingly committed. According to the International Olympic Committee: “there is now a full alignment of all levels of government and the bid enjoys the strong leadership and involvement of the national Olympic committee, as well as athletes.” It was also predicted that Rio’s attraction as a tourist destination will increase significantly with Ruy Cezar Miranda Reis stating: “we believe that, in the worst-case scenario, about 1.2 million people will visit Rio for the games, which is the same we usually have for Carnival and New Year’s Eve.” The IOC, did play down issues about security but highlighted their concern over the city’s use of cruise ships for housing due to the lack of hotel space. With the news came more interest from global investors and a blip in the stock market – particularly with the country’s flight companies – GOL and TAM. Ed Kuczma, an equity analyst at Van Eck Global Advisors in New York stated: “It’s more wind in the sails of Brazil’s investment case for anyone on the fence.”
Guido Mantega (Finance Minster) confirmed Brazil’s bounce back from recession with 8 to 10% growth in the third quarter. The Minister also suggested that the country could look forward to a “4 to 5%” growth rate in 2010. Brazil stocks dropped for the most in four months as the government imposed a taxation regime of equities and bonds to stem the real’s significant appreciation (foreign investor inflows totalled the equivalent of 542 million US dollars into Bovespa in the month). Finance Minister, Guido Mantega, explained the government’s logic to curb a currency bubble stating that the measures were taken to “prevent excesses” and whilst it would dissuade investors seeking short-term gains, it will not deter those looking for long-term returns (the real was trading at a 13 month high against the US dollar half way through October according to IBGE statistics). Nick Chamie, from RBC Capital Markets, stated: “Its relative success will be watched by other governments to gauge whether it is a potential policy tool to tackle stretched budget deficits and the appreciation of emerging market currencies.” However, it was also noted by the International Monetary Fund (IMF) that this tax would be quite easy to avoid making the effectiveness of the tax questionable; the organisation said: “with today’s financial engineering, it’s not very difficult to disguise pure financial flows as trade flows or even foreign direct investment.”
The Santander intial public offering made modest gains and disappointed investors hoping for quick profits by flipping their shares. Nevertheless, as the banks executives highlighted, the fact that it raised 14.1 billion reais ($8.05 billion) with its IPO in São Paulo and New York made it the largest ever in Brazil and the biggest in the world since March 2008.
In a mid-month press conference, commenting on Brazil’s position in relation to other industrialised countries, President Lula stated: “Suddenly they realised our economy was much more solid than theirs. The crisis is allowing this country to become real again.” The International Monetary Fund forecasted that the world economy would grow by 3.1% with Brazil having a better than average rate due to its increasing ties with Asia amongst several other factors. The country’s National Supply Corporation, Conab, stated that it expected the 2009/10 grain crop to reach 141.1 million tons, an increase of 2.9% to 4.8% from the previous year. Soy bean was expected to grow in response to increase export demands (particularly from China).
Former President Fernando Henrique Cardoso identified four main challenges: “Brazil suffers from a shortage of infrastructure, poor quality of education, environmental issues and crime.” A survey by the FT reported São Paulo’s bankers and economists to be ‘cautiously optimistic’ particularly in light of the fact that many of the world’s economies faced a long road to recovery. According to Antonio Quintella of Credit Suisse: “it is very hard not to be bullish – we’re not in a bubble but there is excitement.” According to Luiz Muniz, Head of Investment Banking for Rothchild Brazil: “Corporate Brazil wasted a lot of time and effort worrying about economic and political volatility – now people are able to focus on managing and growing their businesses.” The key national interest rate was held at 8.75% with the Central Bank sending clear message that, despite economic recoveries, there would be no movement for the foreseeable future. The IBGE pointed to a marginal fall of 0.2% in unemployment from September bring the level to pre-crisis levels. Brazil tax receipts also rose for the first time in 11 months whilst the current account deficit widened to reach a 12 month figure of $18.86 billion ($17.19 billion in September).
A report entitled ‘Who’s really fighting hunger?’ published by NGO Action Aid stated that Brazil ranks first in the fight against hunger based on research in 51 countries. The success was said to be due to governmental and Ministry of Social Development & Fight Against Hunger (Ministério do Desenvolvimento Social e Combate a Fome) initiatives. The report drew particular attention to the Fome Zero (Zero Hunger) program (which, within six years, has decreased child malnutrition by 73 percent and child deaths by 45 percent) and the Bolsa Família (‘Family Grant’) program.
The Brazil President visited many countries of the world advocating the country’s position in the world economy. To see the FT interview (along with others with Henrique Meirelles, governor of the Central Bank of Brazil, and Dilma Rousseff, chief minister of the presidential staff) please click here.
In a further bid to slow the sharp rise of the real against the dollar, Brazil’s Central Bank revealed plans to authorise the opening of foreign currency bank accounts. ‘Globo’ newspaper also reported that the Finance Ministry was set to approve a decree authorising the country’s Sovereign Wealth Fund, sourced from the budget surplus, to buy dollars with the aim of “lessening the pressure” in the exchange system. President Lula was also pushing a bill to give the government more control over the oil industry and also shored up the state development bank – BNEDS – with 100 billion reais funded by the National Treasury. Such state intervention was criticised by economists but the general consensus was that Lula (who has governed mostly as a centrist) would not abandon economic stability for left-wing policies (such as those adopted in other Latin countries). According to José Luciano Dias, Political Consultant in Brasília: “”The government definitely has become more affirmative but it’s a cautious, calculated type of intervention.”
The countries federal tax receipts rose 26.4% in the month to their highest level in 2009 and consumer confidence reached 111 points against a historical average of 107 points (any figure above 100 indicates positive consumer sentiment). These figures prompted speculation that interests may have to be raised sooner than later. According to economists at Banco Santander: “The central bank confirms market forecasts that the economy will become very heated in the coming year, making the start of a rate-tightening cycle necessary.”
HSBC’s Global Asset Management mutual fund based in Japan investing in Brazilian stocks beat its biggest peers in the Asia-Pacific Fund boosted by the fast recovery, Olympics Games winning bid and the real’s 33 percent appreciation against the Yen. It was also reported that there have been strong inflows from Japanese retail investors into a new type of mutual fund known as ‘emerging market foreign exchange overlays’. US private equity group the Carlyle Group announced its intention to invest in two or three major deals in Brazil in the near future. Co-founder David Rubenstein stated: “I think private equity firms that are entering Brazil need to recognize that you only make money when the economy grows. We also recognize that Brazil is the fifth most populous country in the world and its GDP will probably be the fifth-largest in the world in the next decade, so we need to be here.”
The country generated 246,695 jobs in the month mainly in retailers, manufacturers and builders, the 10th straight month of rising employment. According to Labour Minster Carlos Lupi: “The internal market is very hot. It’s the best November in history.” Analysts said that this news would, in turn, bolster growth – according to CM Capital Markets (a São Paulo-based brokerage): “The numbers indicate a strong recovery of the Brazilian job market, giving support to domestic demand and so, too, the economy.” However, it was further noted that approximately half of the workforce is not registered at the registry and belongs to an informal economy (an issue the President Lula pledged to resolve in the form of social security and other programmes, such as the Bolsa Família).
According to PricewaterhouseCoopers, São Paulo was predicted to rise to 9th position in the world’s wealthiest cities by 2025 (ahead of Paris but still behind the current and projected top five of Tokyo, New York, Los Angeles, London and Chicago).
Ricardo Mader, executive head of Latin America Inter-Continental Hotels Group (IHG) said the company’s Brazilian operation had a much better than expected year and whilst noting that overseas clients were stopping their trips – the groups two to four star hotel businesses remained “beyond stable”.
Two of the worlds largest car manufactures announced expansion in Latin America’s largest country. Germany’s Volkswagen announced its intention to manufacture one million vehicles a year in Brazil with an initial investment of $3.5 billion. Brazil is the company’s third largest market after China and Germany and it will expand its capacity at its Anchieta, Taubate and São Carlos plants. According to Chief Executive, Martin Winkerton: “The Volkswagen group will strengthen its leading competitive position in Brazil over the long term with these investments. Brazil is one of our most important growth markets worldwide. We expect demand there to rise significantly over the coming years and we are now systematically adjusting our manufacturing capacity.” Ford also stated its intention to spend $2.3 billion on expanding its Camacari factory that makes the ‘Fiesta’ and modernising its Troller plant that manufactures utility vehicles.
Attention was bought on the fact that the huge agricultural potential Brazil is being impeded by inadequate transport infrastructure. Whilst several rail and waterway projects are under construction, Brazilian agricultural owners are tired of waiting for projects to materialise under the weight of red tape.
Iranian President Mahmoud Ahmadinejad visited Brazil to boost its ties and welcome Brazils support for its nuclear development programme. Lula, who also hosted Israeli President Shimon Peres earlier in the month, backed the programme as long as it is peaceful (Brazil continued to seek a boost its diplomatic profile by adopting a mediation role in the Middle East).
Ban Ki-Moon, UN Secretary-General, asked for $4.9 billion to finance the organisation’s budgetary requirements at a time of increased financial stringency in many foreign ministries. It was reported that country’s such as Brazil and India, who will be urged to increase their contributions to UN funds, will argue that they should be entitled to seats on the Security Council as a result of giving money to the organisation.
Brazil was praised by the European Commission for pledging to take emissions back to 1990s levels by 2020 – which translates as a cut of over 20 percent. These cuts would assume an annual economic growth of between 4 and 6 percent and would not hamper the economy. According to Environmental Minister Carlos Minc: “Brazil will grow and develop. We will create more green jobs, more efficient jobs, a cleaner energy matrix, more efficient agriculture.” President Lula also criticised other world leaders for their unwillingness to cut greenhouse gas emissions, stating: “We may not reach an agreement because of a deficiency of global leadership. The discussions have been outsourced to advisers but it is better that the ones who say yes or no are prime ministers and presidents.”
Economics Nobel Prize winner Paul Krugman praised Brazil’s performance during the credit crisis due to the “excellent fundamentals and anti-cyclical” policies patiently built in recent years. However, he also warned that it was necessary to keep tabs on the optimism, stating: “Brazil is doing fine. It has a good track record but this is not the same as saying that Brazil is going to become a super power overnight, next year. And I believe markets are acting as if this was a divine revelation.” He went on to comment that, as the year was drawing to a close, that the real was priced “unrealistically” and this will have an effect on Brazil’s foreign trade with an increase in the trade deficit as imports soar. He did not see it as a huge problem: “Basically it has increased risks for the economy, but we are not talking of an apocalypse, we’re not talking of Argentina.” Indeed, his comments were supported by the fact that the country’s trade surplus shrank to its smallest in 10 months on the back of weak demand from developed markets. Nevertheless, several prominent Brazilian economists pointed to the fact that Brazil will need to invest more of it’s GDP in order to sustain its growth levels: in 2009, this percentage was 19% which, whilst increasing since records began in 2000, was lower than the 24% average in developing countries. According to Luis Fernando Lopes, at Patricia Investments in São Paulo: “There isn’t the slightest possibility Brazil can sustain its present pace of growth with this investment rate – to maintain 5 percent growth on average, Brazil would have to invest 22 to 24 percent of GDP.” During the Christmas break, Planning Minister Paulo Bernardo stated that, even with lower revenues in 2009, the government did not cut investment and will continue its programmes into 2010 and beyond (he also said the rise in public spending in recent years would bring no problems for the government taking office in 2011).
In separate news, the Financial Times reported that Brazil was one of the four leading emerging countries that accounted for the bulk of 2009’s investor interest, funds of which have been boosted by those that normally only focus on developed worlds stocks.
With end of year predictions for 2010 ranging from 3 to as much as 8 percent a renewed risk of inflation emerged. The fourth quarter Central Bank inflation report forecast a rise in inflation from 4.3% projected this year to 4.6% both 2010 and 2011 – slightly above the bank’s target for the next three years at 4.5%. According to Flavio Serrano, an economist at the BES Investimento fund in São Paulo: “Although there is a seemingly benign inflation outlook, there is always a risk when inflation goes above target. Because of this, we’re expecting an increase in interest rates next year.” A Central Bank survey of private economists predicted a rise of the rate from 8.75 to 10.75% by the end of 2010. The report also highlighted potential difficulties in Brazil being able to meet the heavy demand that will be brought in the future (in October Brazil was already using 80.5% of its installed industrial capacity, up from lows of around 78% earlier this year and back on track toward the 82% level seen before the global economic crisis hit Brazil in 2008): “The remaining margin of idle capacity may be occupied more swiftly than contemplated under the main scenario, which is based on a gradual recovery of the economy. In other words, there’s a risk that supply conditions won’t fully respond to a case of more accentuated demand.”
December 9th was the ‘International Day Against Corruption’ and President Lula, whilst signing a bill to be sent to Congress, encouraged people to report such acts whilst pledging to offer support for those that do. He stated that: “Corruption is like a drug. Sometimes it’s inside the house and people don’t know. That’s why we need to act as when we do a medical check up. We must be ever more efficient to control public money. The other way is the reporting process, people must be assured they will be protected.” He stated that he would be taking the bill to the G20 yet pointed to the fact that measures like this are difficult to implement as they attack fraud in the financial system that causes massive losses to several countries: “This law may not solve the problem, but if Congress approves it, maybe we can convey the idea that there is no impunity in the country. If we do not increase the punishment for these people, we will continue filling jails with poor people. It’s very strong in people’s minds the idea that the guy who steals a loaf of bread goes to jail and the one who steals 1 million will not be arrested.”