Brazil Outlook 2014: Positive Opportunity for Foreign Direct Investment

As we enter 2014, there are a few givens regarding Brazil’s outlook for the new year. Partying across the nation will ramp up leading into Carnaval. The country will go crazy hosting the World Cup in June & July. The construction and remodeling of numerous soccer stadiums will be completed just barely in time, provoking much negative commentary from FIFA and other “soccer countries.” The renovations of infrastructure will not be fully completed. Airline ticket prices, hotel rates, restaurant costs and a plethora of other service areas will gouge every Dollar, Euro, Yen, etc. out of the multitude of tourists attending both events. There will be increased protests leading up to and during the international competition provoking much uneasiness among travelers and investors.

In my post from 15 August 2013 (“Brazilian Protests and Foreign Direct Investment”),¹ I looked at economic data from the first two quarters of the year and suggested a positive investment environment moving forward into 2014.  Last month (21 Jan 2014), Frederico Rosas and Carla Jiménez reported in the Spanish newspaper El País that Brazil remains one of the ten countries most attractive for foreign direct investment based on year-end economic indicators. They emphasized that Brazil’s situation remains strong in spite of the perhaps exaggerated pessimism surrounding the Brazilian economy due to concerns about a fall in its investment ranking.² On June 6, 2013, Standard & Poor’s revised its risk analysis for Brazil from “stable” to “negative” indicating: “Slow GDP growth and continued expansionary fiscal policy (including off-budget measures) risk weakening Brazil's financial profile and could, absent corrective measures, result in weaker fiscal performance and an increase in the government's debt burden.”³  The company’s press release indicated:

“The credit ratings on Brazil reflect its well-established political institutions, diversified economy, manageable levels of net external debt, and political commitment to policies that maintain economic stability," said Standard & Poor's credit analyst Sebastian Briozzo. "The ratings also incorporate its relatively large government debt and refinancing needs." Moreover, they reflect the country's substantial demand for investment to improve its physical infrastructure, as well as structural impediments that contribute to low overall investment as a share of GDP (just above 18% in 2012) and constrain GDP growth potential.⁴

Nevertheless, Standard & Poor’s analysis affirmed Brazil’s investment ratings based on counterparty risk, political risk, monetary stability, and the country’s overall debt burden:

Local Currency: A-

Foreign Currency: BBB

Transfer and convertibility (T&C) assessments: A-

This affirmation probably reflects Brazil’s relatively steady albeit low GDP growth rates and its fairly stable inflation over the past two years, among other factors. Moreover, during the last two years, the exchange rate for the US dollar has remained strong, ranging from 1.8676-to-1 in January 2012, to 2.2118 in December 2013.

Table 1: Brazilian quarterly GDP growth, core inflation & US$ exchange rate, 2012-2013. Data source: Banco Central do Brasil, and http://www.tradingeconomics.com based on reports from the Instituto Brasileiro de Geografia e Estatística (IBGE).

In their mapping of global risk, Marsh consultants in conjunction with Maplecroft Global Risk Analytics ranked Brazil as “medium”; among the BRICS group, the Marsh-Maplecroft study ranked only South Africa at the same level. It ranked China and India as “high” risk, and Russia as “extreme.” Their website explains: “The Political Risk (Dynamic) Index assesses risks that have the potential to undergo change and in particular to deteriorate rapidly. It is comprised of 30 political risk indices under the four themes of governance framework, political violence, business and macroeconomic risk and societal forced regime change risk.”⁵ The completeness of this analysis underscores the potential for positive returns in the Brazilian economic sphere. In spite of the still present fall-out from the Mensalão and other political scandals, Brazil’s national political arena remains relatively stable with President Dilma Rousseff’s approval ratings climbing slightly to 41% towards the end of 2013, after plummeting during the protests mid-year, according to Datafolha.⁶ There is no significant political violence or threat of popular uprisings that could threaten national security, and the economy remains relatively strong. While the Brazilian stock market BOVESPA is performing poorly, the US dollar’s consistently firm buying power favors foreign direct investment in the country.

1. http://latamperspectives.blogspot.com/2013/08/brazilian-protests-and-foreign-direct.html

2. http://economia.elpais.com/economia/2014/01/21/actualidad/1390262836_394451.html

3. http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245352730529

4. http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245352730529

5. http://usa.marsh.com/Portals/9/Documents/Political_Risk_Map_MARSH_MAPLECROFT_2014.pdf

6. http://datafolha.folha.uol.com.br/opiniaopublica/2013/12/1379486-41-aprovam-dilma-apoio-ainda-distante-do-cenario-pre-protestos.shtml

Brazilian Protests and the Confederations Cup

Above the fold on the front page of today’s (06/19/13) hardcopy New York Times a large photograph shows a Brazilian police officer dousing a protestor’s face in pepper spray from barely over a foot away [permalink to the online Times article below]. The unarmed and seemingly unthreatening protester is cringing and raising her hand in a vain attempt to cover her face as the officer in riot gear soaks her in enough spray to drip down her neck. This is the kind of image that undoubtedly interferes with the sleep of President Dilma Rousseff, herself a former urban guerrilla who decades ago most likely would have been on the receiving end of such governmental shows of strength. Tens of thousands of similar episodes took place across the country today, mostly in Rio de Janeiro and São Paulo, but also in Porto Alegre, Belo Horizonte, Salvador, and especially national capital Brasília, along with many other major cities. According to the newspaper Jornal do Brasil, in Rio alone, more than 100,000 people took to the streets to protest rising bus fares and the lack of investment in urban infrastructure and education. The flash point for these protests that have been growing over the last few months was the increase in the cost of municipal transportation in various major cities, notable Florianópolis (capital of Santa Catarina state) were rioters have been setting fire to local buses all year, sometimes (albeit rarely) with people still on board. The deeper problems, however, relate to the country’s massive investment in the 2014 World Cup and the lingering irritation with a huge corruption scandal that unfolded during the presidency of Luis Inácio Lula da Silva, predecessor and political godfather to current president Rousseff.

Currently Brazil is hosting the Confederations Cup, a shake-down for next year’s World Cup which serves to both ramp up enthusiasm for the quadriannual sporting event and also to test infrastructure preparations in terms of transportation, lodging, security, and most importantly the stadiums themselves.  Even though the country already boasted major league soccer stadiums in every large city – and cities such as Rio, São Paulo and Porto Alegre each had several – all of the venues required significant retrofitting, and in some cases entirely new stadiums are being built. The hundreds of millions of dollars flowing from public coffers to cover these costs promise to provide significant returns as visitors flood the country in July of next year, and for Rio again in 2016 for the Olympics.  While the accepted wisdom may be that the investment will pay for itself in the short term and provide long-term benefits for the populace, the rash of ever more violent conflicts around the country demonstrate that the government sorely underestimated the level of resentment over corruption, exacerbated by a slowing economy and a renewed specter of inflation. According to the newspaper Zero Hora, a new poll released by the National Confederation of Industry together with the Brazilian Institute of Public Opinion and Statistics (Confederação Nacional da Indústria-CNI, and Instituto Brasileiro de Opinião Pública e Estatística-Ibope), President Rousseff’s approval rating fell another 8% since March. Moreover, the percentage of people who consider her administration bad or terrible grew from 7% to 13% in the same period. The irony of Rousseff’s position is not lost on the people of Brazil, especially among those who traditionally were the strongest supporters of the Workers’ Party (Partido dos Trabalhadores-PT). In the 1960s and into the 1970s, Rousseff was part of Marxist urban guerrilla groups that engaged in armed conflict in opposition to the oppressive military regime. Now as president she is ultimately responsible for the policing of the present day activists and protesters, in essence the one commanding the force that pepper sprayed the unarmed woman in the Times photo. Moreover, Rousseff’s rise to the presidency was a direct result of the corruption scandal under Lula’s watch which toppled his Chief of Staff José Dirceu. Until that happened, Dirceu was Lula’s political heir apparent, and Rousseff not only filled his cabinet position but also assumed the role as Lula’s chosen successor. To date, none of the politicians found guilty in connection with the "Mensalão" corruption scandal has served time in prison.

In soccer, the Brazilian national team needs a strong showing in the Confederations Cup to boost public morale and player confidence. Indeed, anything short of total victory will be viewed as a significant disappointment. Politically, Rousseff needs a quick win to control the protesters not only to ensure the success of this Cup and the next, but also to bolster her own agenda. Her harshest critics are openly questioning if Rousseff will be able to govern effectively if/when the popular manifestations die down. When introduced by FIFA president Sepp Blatter to officially open the Confederations Cup on Saturday, Rousseff was soundly booed by the tens of thousands filling Maracanã Stadium. The Times article compares what is happening in Brazil to what has happened in Turkey and other Arab countries where seemingly local protests quickly exploded into large-scale national uprisings. While the comparison seems far-fetched, given that even the most violent of these Brazilian protests do not include armies of citizens aiming guns at government troops, the parallels are worth considering. The article does emphasize the difference of Rousseff’s approach: today she officially changed tactics and praised the manifestations as signs of Brazil’s strong democracy. She is right. Some 45 years ago the people would not have even had the right to protest and the troops would have responded with bullets rather than pepper spray, but if Rousseff cannot successfully co-opt and appease – as she is trying to do – the wide range of people taking to the streets, she could end up out of the game. 

http://www.nytimes.com/2013/06/19/world/americas/brazilian-leaders-brace-for-more-protests.html?smid=pl-share