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.
