There’s none so blind as those who will not see. After months of warning about how disastrous a Dilma Rousseff re-election would be, Brazil’s financiers and economists now seem to think it will be all right after all, just as long as she picks someone the market likes to be finance minister.
A senior economist speaking to Euromoney on the sidelines of the Felaban conference in November suggested that growth would return – and pretty aggressively – if there were simply a signal of a policy shift in Brasilia. That would lead to investment, which would lead to growth. The switch from consumption-led economy to an investment-led economy would be that easy apparently. The Chinese, struggling to re-orientate their economy, might be surprised to hear how easy it is to transform the fundamental model of economic growth.
Brazil’s problems won’t be solved by appointments or statements, however investor-friendly. The country faces a fight with inflation that will be long and painful and will test the patience and discipline of policy making as the economy – and the public mood – sours.
Investments won’t just materialize – they will need structural reforms to transform the basis of the economy. Fiscal cuts won’t just be achieved through realization of the problem: 85% of rampant spending is non-discretionary. Real cuts will need real reform. Good luck with that. Devaluation is likely to bring some potential growth from the export sector but Brazil’s productivity weakness goes far beyond the value of its currency.
Not everyone is complacent of course. One leading Brazilian investment fund, Credit Suisse’s CSHG Verde, recently wrote to investors saying that Brazil was “way more fragile than the market prices suggest”. The fund, which was founded by Luis Stuhlberger in 1997 (who according to Reuters has generated total returns of 8,800%), has lost money in recent months hedging against expectations of negative asset performance.
The client letter said that: “The reasons why our hedges have not been triggered are the following: the global outlook and the extreme complacency of investors, especially foreigners, with Brazil.” In Euromoney’s recent experience, locals are just as likely to be guilty of this as foreigners.