There has been a lot of negative commentary about Brazil recently, not least some in this magazine – for example, this month’s look at the precarious state of Petrobras, which should be of real concern. But it does feel that everyone now is piling in. Market observers, it seems, are disillusioned with the Brazil play and fund-flow analysts such as EPFR report long and lengthening streaks of equity and fixed-income money leaving the country.
Bankers in São Paulo were saying that there was too much hype three or so years ago, and suggest that now there is too much pessimism. International investors are certainly bearish on Brazil. It has been sluggish in comparison with its larger Latin neighbours and low investment, high inflation and a deteriorating fiscal position are points of concern. Productivity is hampered by poor infrastructure, over-regulation and high taxes, and a public education system that needs radical improvement.
But investors shouldn’t forget the long-term trends and the fundamental strengths of the Brazilian economy that got the country so over-hyped in the first place. Brazil is resource rich – with oil, gas, minerals and other commodities, as well as the water, land and technology to further develop an already mighty and successful agribusiness sector. Brazil has a large domestic market with an attractive demographic profile. It is still growing. Its fiscal surplus may be eroding at an alarming rate, but it is still a fiscal surplus. Its banks are well capitalized and well run.
Brazil has a strong entrepreneurial class and protects the rights of business and intellectual property. Latin America’s intra-regional growth looks set to be a driver of economic development and Brazil will benefit. It will benefit from the long-term development of the emerging markets story, the convergence of which with the developed markets still seems sound. The country has a hugely ambitious infrastructure growth pipeline, driven by state development bank BNDES, but partnering with the private sector, which should drive growth in GDP and also lead to productivity gains. And even if there is a ratings downgrade it will retain its hard-won investment-grade status.
Next year will be a big one for Brazil and it faces many short-term challenges, many of which are of substantial consequence. But as necessity is the mother of invention, then next year could be the mother of serious reform.