Brazil's BRIC status at risk from weak investment
A $900 billion programme to upgrade Brazil's ramshackle infrastructure is clearly a step forward.
20th February 2013
The BRICs are in danger of becoming the RICs as Brazil loses ground to its major emerging market rivals Russia, India and China, says Flavia Cattan-Naslausky, Director of Latin America FX Strategy at RBS.
Brazil, Latin America’s largest economy is forecast to have grown just 1 per cent in 2012 and 2013 threatens to be another disappointing year.
President Dilma Rousseff recognises the danger. Throughout 2012 her administration eased credit limits, raised import duties, spent billions of reals on buses, trucks and other home-made goods and cut payroll taxes and energy prices to encourage business.
Yet third quarter growth figures were startling. Tucked away in data showing growth of just 0.6 per cent in Q3 was news that investment spending had tumbled 5.6 per cent since Q3 2011. Given the glut of unsuccessful stimulus measures, it is increasingly difficult to escape the conclusion that the government is running out of ideas.
Raising purchasing power
The government’s defenders would claim that a decade of policies focused at raising ordinary Brazilians’ purchasing power have lifted millions out of poverty. Unfortunately its approach has also shrivelled the savings rate, starving industry of vital financing. While Chinese investment looks heavy at 47 per cent of GDP, investment of just 20 per cent in Brazil looks woefully inadequate. The result has been an economy incapable of absorbing domestic demand. The risk this poses to Brazil’s medium-term growth prospects cannot be overstated.
Investors are increasingly asking whether the hype around Brazil as a major foreign investment hub is warranted. Regional rivals such as Chile and Columbia are all raising their game. The recent growth of Mexico’s automotive sector should serve as a wakeup call to a country that produces 2.5 million vehicles a year.
What should Brazil do? On the monetary side, the strong consumer economy and Brazil’s tight labour market bar the way to further rate cuts. At least now policymakers can’t blame the strong real as it lost over a third of its value in step with interest rate cuts. The country’s failure to sustain investment spending, even in such favourable conditions, leaves little doubt that investors are rattled.
On the fiscal front, a USD $900 billion programme to upgrade Brazil’s ramshackle infrastructure is clearly a step forward. But a more fundamental change in the state’s approach is required to arrest the fall in private investment. Rousseff’s administration may be aware of the challenge but it has done little to change old habits.
Brazil would benefit from less government meddling, fewer policy objectives and a clearer business-friendly agenda.
The Brazil cost
First, it must tackle rigid labour markets, under-skilled workers, corruption, complicated taxes and arcane regulations known simply as “the Brazil cost”. These bottlenecks have already neutered the impact of growth acceleration programmes and relegated it to 126th place in a World Bank survey of where to do business.
Rather than micro-managing, the government should play a more modest role. Instead of burning through money to support growth with consumer tax breaks, it should cut total spending and ease the burden on business instead. Extending last year’s payroll tax cut right across the economy would be a good start.
The price for this more progressive policy would be weakened consumer spending in the short term for more sustainable, and higher, growth over the long run. In truth, the failure of the existing monetary and fiscal approach shows Brazil has little alternative if it wants to stay inside the exclusive club of BRIC nations.
What do you think about this?
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Although, Brazil's current fiscal policy is not demonstrating to be the most effective on the short term, one must note that its spending has focused on its infrastructure, which will pay off in the long run and its government policy has closed the gap among the different social classes, which has translated on GDP growth in the past.
Brazil will now need to focus on maintaining that smaller gap which will be a difficult terrain and find ways to keep up with education, so the jobs created can be a fit of its current population.
Also, one must take into consideration the major events that will be hosted by Brazil. These events will bring monies into their current economy and will be the push Brazil needs for GDP growth, after all they are an emerging economy.
In the pre-crisis world, strong global growth lifted all boats. The immediate post-crisis period was similar in the sense that the vast majority of emerging markets grew strongly. However, this has given way to the realisation that not all emerging markets will continue on an uninterrupted path toward developed world prosperity levels. Country-specific shortcomings have come to the fore in the current subdued pace of global growth. The problems with Brazil outlined above are not new. What Brazil has successfully done in recent years is achieve financial stability, integrate many workers from the non-formal into the formal sector, reduced poverty and successfully rode the commodity boom. Hidden beneath this was a consistently poor productivity performance.
But Brazil is not alone. India is not returning to the heady days of 9%+ growth any time soon without fundamental macroeconomic reform. Unfortunately, the current leader of the ruling party is an aggressive proponent of welfare-state policies which do little to boost long-term growth. Recent moves at opening up the economy were encouraging but modest. The recent pullback in Indian equities reflects the realisation that there isn't going to be a reform 'big bang'. Like Brazil, the depressed share of private investment in the economy is a big issue.
It's a similar story in Russia. A small share of investment to GDP (around 20%) is a problem similar to Brazil.The economy remains heavily dependent on oil. It comprises half of government revenue and two-thirds of exports.
The issues in Brazil are simply a sign of a changing emerging world. Thinking beyond the BRICs is a necessary first step.