On
Track for Long Term Growth
After
a decade of trade liberalization and six years of a successful
anti-inflation drive, Brazil is firmly on track for
long-term growth despite slowing economy in 2001.
Brazil’s optimism is rooted in the sweeping and
positive reforms that have been wrought via industry
privatization, a transition to democracy, liberalized
trade, a dynamic banking system and its ability to
attract large sums of foreign investment. These factors constitute a critical mass of irreversible
change in Brazil and are providing a solid underpinning
as the nation moves forward from the boom-bust cycles of
the past onto a course of sustained growth.
The
Brazilian economy of nearly US$1 trillion (measured in
purchasing power parity) ranks fifth in the world and
comprises 45% of Latin America’s gross domestic
product while it’s population of 170 million is larger
than Russia’s. In recent years, Brazil has been a leading destination for
foreign investment, attracting more than US$30 billion
during 2000. With
a substantial industrial base, political power and large
population, Brazil is pivotal within Latin America
allowing it to play a leading role in regional
integration and multilateral negotiations making it a
principal nation in an era of globalization.
Moreover, the Brazilian economy is becoming
increasingly interconnected with world markets and is
developing both as a large exporter and importer of
manufactured goods. The opening up of Brazil’s economy over the past decade has
produced a sharp rebound in productivity as increased
foreign competition set off a wave of cost-cutting,
initially in manufacturing, but that is now spreading
into the services sector.
Economic,
political and social progress in Brazil remain ongoing
challenges. Although
the framework for achieving market-based growth is
falling into place, the country remains vulnerable to
external shocks given the high burden of its external
debt and dependence on foreign investment to shore up a
low savings rate. However,
foreign investment flows are positively shifting more
towards durable bricks and mortar outlays and away from
volatile portfolio investments which can and do flee
quickly when problems arise.
And although Brazil’s budget situation has
improved materially, the public debt is being
exacerbated – at least temporarily – by rising
interest rates and a weakening Real.
However, the government’s actions to defend
Brazil’s currency demonstrate its resolve to defend
its hard-won credibility in its conduct of monetary
policy which became the key tool of economic policy
after exchange-rate targeting was abandoned in early
1999.
The
administration of President Fernando Henrique Cardoso
has successfully put in place an improved fiscal
framework over the past three years which has reigned in
spending at the federal and state levels.
The objective of consolidating a primary budget
surplus was achieved in 1999 and 2000 and future budget
targets appear within reach thanks to unprecedented
cooperation with state and local governments as well as
stringent enforcement.
In the pension scheme arena, progress is being
made to reduce Brazil’s high public pension outlays
presently equivalent to approximately 9% of GDP.
A revised scheme relates pensions more closely to
the duration, level of contributions and life-expectancy
while benefits are adjusted for the affects of
population ageing.
A priority is now to reduce entrenched and
inflated civil service pensions and privileges that
represent about half of total pension outlays.
Brazil’s
financial system has proved resilient to crisis, but
still has room to develop further.
The nation’s banking system has shown itself to
be more resilient to international shocks and currency
crises than those in many other emerging markets.
Most private banks are well capitalized while
foreign financial institutions are playing a key role in
the restructuring of state level banks.
Meanwhile, regulation and supervision have been
strengthened. However,
Brazilian banks’ disproportionate focus on lucrative
treasury operations has come at the expense of extending
needed credit to the private sector.
Domestic capital markets have yet to take up the
slack left by banks.
As a result, Brazilian companies are financing
their capital expenditures by as much as 50% via
internal profits. Indeed,
while Brazil is among the 10 largest economies of the
world, it has only the 40th biggest credit
market. This
state of affairs is producing pent-up demand for credit
to fund expenditures for new plant and equipment.
In 1997, capital goods imports comprised just
over 42% of total imports, a percentage that dwindled to
under 25% during 2000.
Meanwhile, domestic output of capital equipment
has lagged behind other types of production while the
share of total business fixed investment (equipment plus
structures) has been stuck at an average 19.5% of GDP
over the past several years.
However,
the demand for credit presents an enormous opportunity
for lenders and eventually Brazilian capital goods
producers and foreign exporters of capital goods.
The shortage of capital is being partially
addressed by the establishment of the Novo Mercado,
launched by the São Paulo Stock Exchange, that is
designed to stem the slippage of business into foreign
exchanges and attract foreign and domestic investors
looking for new investment opportunities in Brazil,
particularly in its cutting edge technology sectors.
While this will provide cheaper equity capital to
expanding Brazilian firms, the development of a
long-term credit market remains a key challenge.
Brazil’s
energy sector is taking center stage during a year of
drought-induced energy shortages.
Although the current crisis has highlighted the
country’s dependence on hydroelectric plants for
approximately 90% of its power supply, it is having the
positive outcome of hastening the diversification of
Brazil’s energy mix.
Business and government are focusing on renewable
sources of energy such as sugar cane and other biomass
from Brazil’s abundant agricultural sector as well as
the construction of gas-fired plants fed with gas
imported through a newly opened Bolivia-Brazil pipeline,
using state-led investment.
Together, both private companies and the
government are expected to spend US$12.8 billion by the
end of 2003 to increase energy output. Over the longer
term, it is estimated that US$91 billion will be needed
by the power sector to meet fast-growing demand.
Investment
in Brazil’s infrastructure is surging.
As a result of a broad opening to the private
sector through concessions and the sale of state assets,
annual investments in infrastructure have surged from
just US$4.5 billion in the early 1990s to around US$15
billion in 1999 and US$20 billion last year.
As a result, telecommunications, roads and some
ports have improved dramatically. But recent investments only represent a recovery in
infrastructure investment.
According to ABDIB, an industry association,
1,300 infrastructure projects worth US$215 billion will
be carried out between 2000 and 2005. While the bulk of investments in recent years have been in
telecommunications, the focus in coming years will be on
power and transportation, including railways and
seaports.
During
2000, Brazil enjoyed a broad based economic expansion
that was driven by the strongest consumer spending in
five years, a recovery in industrial output, record
exports, a buoyant stock market and a record inflow of
foreign direct investment.
The outlook for 2001 is for continued economic
expansion during the first half of the year followed by
contraction in the second half owing to several factors
both internal and external.
The nation’s energy shortage is expected to
negatively inhibit industrial production this year while
the weakening of the Real is triggering a swift
rise in interest rates to shore up the currency.
Since much of Brazil’s debt is tied to either
interest rates or the dollar, the rise in both is
pushing up its debt burden.
Although Brazil no longer has an exchange-rate
target, it does have an inflation target of 2-6% this
year which may be exceeded, but not significantly so
given an otherwise sanguine inflation outlook.
The combination of a slowdown in production and
rising interest rates will stem overall GDP growth to
1.5% this year with most of the weakness concentrated in
personal consumption and manufacturing.
A bright spot in 2001 should be a trade surplus
– the first in seven years – as import demand
softens in tandem with the economy and a weakening Real
while exports continue to expand at double-digit rates.
Meanwhile, a slowdown in the U.S. economy and investor
concerns over a deep recession in neighboring Argentina
are anticipated to lessen the flow of direct investment
by firms into Brazil and elsewhere in Latin America.
Overall, direct foreign investment to Brazil is
forecast to slow to US$20 billion this year, down from
US$31 billion in 2000.
Despite
a less than robust economic outlook in 2001, Brazil’s
economy is enjoying far more resilience and stability
than in previous periods of slowdown while the country
continues to make significant progress in facing
problems that are a legacy of its past.
But as is the case in any dynamic, forward-moving
economic system, business cycles are a fact of life and
will remain so. However,
with economic stabilization being reinforced since the
devaluation of the Real in 1999 and with fiscal
responsibility as the credo in Brasília, the reforms
requisite to long-term growth appear well on track. All
in all, Brazil’s transformed economic environment
places the country’s boom and bust cycles firmly in
its past and brings the nation to the threshold of an
era of sustainable growth.
 
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