To once again have a highlighted position in the map of international capital, Brazil must undertake modernizing reforms that regain the investors' trust; infrastructure will have an important role in this processOctober-December | 2017
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” The quote from the mega-investor and philanthropist George Soros applies to many foreigners with an eye on Brazil in 2018. There are political and economic uncertainties, but the prize to those that make the right bet is promising. Those, from the United States, Europe or Asia, interested in high earnings turned the radar back on the Latin America locomotive.
Still, there’s no shortage of people who prefer caution until the macroeconomic and political scenario is clearer. Will there be major reforms? Will there be more privatizations? How open or closed Brazil will be to direct foreign investments after three years of crisis? Will the Country return to attend the leader forums it has been missing?
The doubt is present in all foreign narratives about Brazil 2018. Even those who have a bit of Brazil and a bit of foreign in their blood don’t yet see with clarity. “The certainty we have is the uncertainty that we are living”, says the president of the Brazilian Association of Financial and Capital Markets Entities (Anbima), Robert van Dijk, who has a Dutch father and a mother from Trinidad and Tobago. “The sustainable development of the capital market and the investment industry necessarily goes through the qualification of its investors and professionals – a job that is even more relevant in the current moment, when there are so many uncertainties in our planet, and in particular, the Brazilian scenario.”
However the next year will be, foreign investors are almost unanimous on sinking their feet in Brazil in medium and long term, regardless of the current questions and although not all sectors should experience an auspicious 2018 in view of international investors.
All international organizations foresee some economic recovery next year, especially after a slight recovery already announced in 2017. However, the questions are fair: this improvement is a rebound or has Brazil returned to some sustainable growth? The Finance Minister, Henrique Meirelles, talks about a 2.5 percent expansion on the Gross Domestic Product (GDP) next year. The International Monetary Fund (IMF) believes in a maximum of 1.5% growth, while Bank of America economists sees room for up to 3%.
Deloitte’s global chief economist, Ira Kalish, also sees slow progress in Brazil. “The stabilization of the currency, the drop in inflation and interest rates, the global economy recovery and commodity prices stabilization have worked for it. However, it is undeniable that the uncertainties about politics and structural reforms have a negative effect”, says Kalish.
For the Chief Executive Officer (American Chamber of Commerce’s (Amcham) CEO, Deborah Vieitas, the crisis dragged on since 2016 is dissolving because Brazilian and foreign economic players are separating the bad news from politics from what happens in the market. “Today we’re watching a relative detachment between economics and politics. There is a growth process that is already evident for some sectors, although not for the entire economy” she says.
However, there are also questions on the other end of the Americas. North-American President Donald Trump’s electoral base is in favor of more protectionist barriers. The Central Bank of the United States, the Federal Reserve System (FED), must resume the rising of interest rates in the near future, which could lead market players to more risk aversion, withdrawing money from Brazil right at the time of resumption.
The gaining of trust
While the United States look inwards, China, Brazil’s main trade partner, has its attention to Latin America. The Asian giant waves with more than US$ 500 billion in infrastructure investments in the region for the years to come.
Charles Tang, Brazil-China Chamber of Commerce and Industry president, says Chinese President Xi Jinping will remain interested in the region because he wants to consolidate the leadership role of the second largest global power. Tang believes that the current turmoil is transitory and that, in the medium term, Brazil will become again one of the greatest players in the world.
“The Country is gradually strengthening. If it approves the tax and social security reform, it gets even better, because the labor reform will already have effects in 2018. Brazil lost a lot during the crisis; I would have a hard time convincing an American Bank to currently invest here. However, foreign companies have a more strategic view than short-term profit; this will help” says Tang.
For the Chinese Chamber leader, as well as many foreign executives, the fight against corruption in Brazil may have affected businesses at first, but it should help soon because of the increased trust from companies operating in the country. “Brazil has received and will continue to receive many investments because, in the past, the infrastructure area was basically closed to foreigners. As the affected [by the ongoing investigations] companies cannot operate, the climate for foreigners has improved and the assets became cheap.”
In addition to domestic issues, experts from around the world still raise questions about the claim that the credit China offers to its partners will be there after the adjustments expected in Beijing. In 2018, China should also renew some of its policy frameworks. Abrupt changes are not expected, but caution should be exercised.
The Brazilian Government’s privatization program, which at first had 57 companies, has a special appeal to China. However, since doubt is the keyword, investors became less confident when they saw some of these assets being removed from the showcase, such as the Congonhas airport. Even IMF also recognizes the privatization as a positive step, although there are many questions still to answer.
“Continuous efforts to make infrastructure concessions more attractive to investors, while improving the governance standard and the concession program’s format, can help relieve bottlenecks and support demand in the short term” said IMF in a recent document. “[However,] no uncertainty is good for infrastructure investments, which are inherently long-term.”
On the more optimistic side, the Brazilian Government hopes that the negotiation of a trade agreement between MERCOSUR and the European Union, which has lasted more than 17 years, is announced in December. There are still rough edges to trim in the bovine meat and ethanol area, but the two sides confirm the optimism with a hit – which can help boost the Brazilian consumption companies.
However, again comes the question: the advance of consumer goods companies would have to do more with the release of the Severance Fund (FGTS), which injected billions of reais into the economy, or it is a real sustainable growth?
For Monica de Bolle, assistant Economics professor at Johns Hopkins University, in Washington, and a researcher of the Peterson Institute for International Economics, the movement of recovery in Brazil in 2017 has more to do with some high on the commodities prices and the record harvest which has led to an increase in exports. The researcher believes that the renewed optimism in the market is not due to reforms – not the realized ones, nor the promised ones.
“The rapid drop in inflation and the wages indexation was an auspicious combination. Now that salaries were adjusted for the past inflation and current inflation is much lower than the last, families had some wage gain”, says Monica. The drop in inflation and the FGTS release, concludes the economist, are factors which will not be repeated in 2018.
On the other hand, says Ira Kalish, from Deloitte, Brazil, even in the midst of turbulence and uncertainties, cannot be ignored. “Yes, the country has problems that require structural attention, such as lack of fiscal probity, especially on the question of social security. There are restrictive rules in the labor market. There are high tariffs for trade and investment. Not to mention corruption and mismanagement. However, Brazil has many natural resources, large supply of skilled and innovative workers, world-class companies and high degree of entrepreneurship” she says.
Even in the midst of so many uncertainties, what the foreign look points about Brazil is that those who bet in positive surprises coming from here will run a great risk: watching an early return to the good days already in the coming year.