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With Brazil set to achieve real GDP growth of just 2.4% in 2013, which according to Euromonitor estimates will be the lowest rate of growth across the BRICs, many analysts are questioning whether Brazil deserves its place in the BRIC markets. I would argue that it does, and that despite its challenges, Brazil remains a key location for global business.
Real GDP Growth in Brazil, BRIC and Emerging and Developing Countries: 2001-2020
Source: Euromonitor International from national statistics/UN/IMF
Note: Data from 2013-2020 are forecasts
The need for a new growth path
In the recent past, the Brazilian economy has benefited from high commodity prices, Chinese demand for its exports and a credit-fuelled consumption boom. As these drivers of growth unravel, Brazil is clearly in need of a new direction. Challenges to the economy are very real and Brazil’s detractors point to:
Its poor business environment. Brazil is ranked 130 out of 185 countries in the World Bank’s Ease of Doing Business ranking in 2013, this places it behind China and Russia. Its business environment is characterised by an over-complicated tax system and overly bureaucratic processes;
Weak infrastructure. Brazil’s poor-quality infrastructure is notorious. Its rail network is flimsy – the USA, with its similar land area, has a network more than 7 times larger – and its roads are in a parlous state of repair – added to which only 14% were paved in 2012. This adds costs to doing business – both financial and in terms of time. In 2013 the government has acted to improve investment in infrastructure and Olympics-related projects should also have some impact;
A reliance on credit-fuelled consumption and a lack of investment have led to imbalances in the economy. Consumer lending in Brazil outpaced that of the other BRICs in 2012, and gross fixed capital formation, at 18.1% of GDP in 2012, was the lowest of the four economies. A lack of domestic savings makes Brazil dependent on inflows of foreign capital which at a time of heightened volatility in markets is a clear risk;
For a large economy, Brazil is not a big player in terms of global trade. In 2012 it ranked as the 22nd largest exporter globally, far behind Russia, India and China and accounting for just 7.8% of total BRIC exports. This indicates a lack of global competitiveness which has been particularly visible in manufacturing;
Along with many emerging markets, Brazil is suffering from a weak currency. Depreciating currencies make exports cheaper and the weaker Real has been a contributing factor in the acceleration of Brazil’s container trade, which according to data from Maersk rose by 3.8% in the second quarter of 2013 over the previous quarter. However, a weak currency also fuels inflation by increasing the cost of imports. Brazil’s inflation is expected to increase to 6.5% in 2013, although this is still lower than that of India and Russia it is a problem for policymakers.
An impressive transformation
I would argue that despite these challenges, Brazil’s transformation from economic mismanagement in the past – it has had six currencies since 1970 – through to its openness to Foreign Direct Investment (FDI), macroeconomic stability, low unemployment, inflation targeting and fast-growing consumer market is hugely impressive.
Brazil’s chief positive attributes include:
Sheer scale – in 2013 it was the world’s 7th largest economy (in PPP terms), had its 6th largest population and spans its 5th largest land area. Its sheer size makes for an interesting consumer market by itself. Even with consumer expenditure set to grow by an average of 4.5% between 2013 and 2020, the lowest of the BRICs, in absolute terms this means an increase of US$515 billion (in 2012 prices) – the third largest increase globally, above India and Russia;
The middle class has seen phenomenal growth in recent years. The number of households with a disposable income over US$10,000 (in 2012 prices) grew by 27.0% between 2007 and 2012. In 2013, 72.6% of households are estimated to fall into this category. Brazil’s new middle class offers considerable opportunities for a wide range of companies that offer goods and services which are now within the reach of many previously poor consumers;
Notwithstanding recent protests, in terms of government stability Brazil consistently outperforms the other BRIC markets, performing particularly well (by BRIC standards) in terms of control of corruption and rule of law;
Corruption Perceptions Ranking in BRIC countries: 2012
Source: Transparency International (Note: Data refer to a ranking of 176 countries)
As well as being home to 195 million inhabitants in 2013, Brazil also has a large proportion of working age adults and this proportion is set to grow to 2020 – in contrast to both China and Russia. It is expected to see the largest fall in the dependency ratio (a ratio of those not of working age to the number of people who are) of the four BRICs during this same period. A low dependency ratio is good for the economy as the economically active pay more in taxes and tend to consume more and demand less from the state in terms of benefits and spending on education and healthcare;
Brazil is also home to a vast array of natural resources and is a leading producer of beef, poultry, orange juice, sugar, coffee, soybeans, iron ore, copper and ethanol. Recent discovery of offshore pre-salt oil reserves could, according to the Energy Information Administration, transform Brazil into one of the largest oil producers in the world;
Finally, Brazil was the world’s fourth largest recipient of foreign direct investment in 2012, added to which it was the only country amongst the top four destination countries which saw its FDI increase over 2011.
Plan for the long term
As I have argued before, any emerging market strategy is a long term one and can be expected to be characterised by ups and downs. Brazil’s scale, comparable stability, favourable demographics, sizeable consumer market and abundant natural resources all combine to make it one of the world’s pre-eminent economies and for these reasons its position in the world order remains well-founded. Yet the government, now more than ever, must act to increase Brazil’s competitiveness globally, invest in infrastructure and reduce bureaucracy. Complacency, which was possible if not desirable during the boom years, will lead to further questions about Brazil’s standing amongst its detractors and could swing the balance in favour of RIC rather than BRIC.