Brazil’s Economy Seen in a Major Downturn – time to look beyond the BRICS?

Although so-called BRICS have still have massive expansion potential, entering those countries today is fraught with additional risk and the rewards for direct investors may be more elusive than ever.

Over the last 12 months the Broad Street Capital Group and Fluent In Foreign Business, have guided their clients to expand into a number of attractive new smaller emerging markets. So far the predictions have been dead on and we still continue to maintain that for those seeking interesting international opportunities, it’s time to look at the next wave of emerging smaller markets around the globe.

New Data Suggest Growth Weakened Over Past Two Quarters

Brazilian President Dilma Rousseff giving a speech on Monday Agence France-Presse/Getty Images

Brazilian data released Friday suggest economic growth has weakened over the past two quarters, illustrating how far a country once considered the darling of emerging-market investors has fallen.

The central bank’s economic activity index fell 1.35% in December from November, dented by a drop in industrial production and weak retail sales. Economists say the data mean the government is likely to declare that economic growth declined in the year’s last quarter after contracting 0.5% in the third period, suggesting the country had entered a technical recession.

Although preliminary data suggest the economy will grow again in the first quarter, a dip into a recession would be a major turnaround for an economy that grew 7.5% in 2010. As China’s growth has slowed and prices for commodities like the soy and iron ore that Brazil exports have cooled down, the country has found itself without an external engine for its economy.

Brazil’s economic performance today is a far cry from its emerging-market peers China and India, which are still growing strongly despite their slowdowns. The collective cooling of the markets has been an unexpected setback for many, particularly consumer companies that invested heavily in these countries in recent years, relying on them as a cushion as demand slowed in developed markets.

 Economists now expect Brazil’s economy to grow as little as 1.5% this year, less than the 2.3% estimated growth for 2013.

The contraction comes as President Dilma Rousseff gears up for a re-election year amid challenging economic conditions at home and abroad. Mass street protests over rising prices and poor public services racked the country in June and have continued on a smaller scale in the largest cities as the country is struggling with preparations to host the soccer World Cup this year.

“My company laid off 12 people last month. We’re almost closing our doors. A lot of stores here have already closed because people can’t make rent,” said Angela Marques, 39, manager of an electronics wholesaler in downtown Rio de Janeiro. She isn’t hopeful that the World Cup will turn things around.

Ms. Rousseff’s popularity has rebounded after falling sharply during the protests, which were sparked by a decision to raise bus fares. But the slowdown adds pressure on her administration, which won popularity by continuing her predecessor’s policies, including expanding social welfare and granting billions of dollars in loans through government banks, fueling consumption.

Consumption remains a growth driver, but even so, retail sales grew only 4% in 2013 from 2012. That is the worst performance since 2003, leading economists to believe Brazil will no longer be able to depend on consumption to drive growth.

Geraldo Mello, manager of a large mall in Brasilia called Brasilia Shopping, said sales grew 20% to 35% each year until 2008, but only 10% last year.

Consumers “accumulated debt with mortgages, new cars and other items and now their budget is tight.…They are insecure about the future, so they hold off on spending,” Mr. Mello said.

Investments are expected to disappoint as well. A recent survey by Brazil’s National Confederation of Industry showed that private investment intentions have fallen to the lowest level since 2010.

Meanwhile, government investment will be limited as Brasilia comes under pressure to cut spending and Brazilian banks tighten lending after a credit expansion in the past decade.

“Brazil will struggle to see growth of 2% this year,” said Robert Wood, a Brazil-focused economist with Economist Intelligence Unit in New York. “Consumption will be less of a driver for growth and there are no signs that investment is picking up.”

Bruno Roval, a São Paulo-based economist at BarclaysBARC.LN -1.33% said the latest data make it likely he will lower his outlook. “The negative influence will be carried over into 2014. We were expecting a GDP expansion of 1.9% But there is a real chance we will revise that downwards after the GDP results for 2013 and the fourth quarter are released at the end of February,” he said.

Industry has been one of the weakest points of the economy in recent years as output has stagnated, and Brazilian manufacturers have struggled to compete with international rivals.

“The ongoing situation in Argentina may have a substantial impact on Brazilian industry, as over three-quarters of Brazilian exports to Argentina are manufactured goods,” said economists at Nomura Securities in a note.

The silver lining for Brazil is that unemployment rates remain at record lows and wages are growing. Unemployment in six of Brazil’s largest metropolitan areas dropped to an average of 5.4% in 2013, from 5.5% in 2012, according to the Brazilian Institute of Geography and Statistics. Average monthly wages rose 1.8% in real terms.

But persistently high inflation continues to squeeze Brazilian consumers. Last week, Brazil said annual inflation in January was 5.59%, above the central bank’s target of 4.5. As a result, the central bank has gradually raise interest rates, a move that could slow growth even more. The central bank has raised its base interest rate to 10.5% from 7.25% in the past year.

“The main problem I see is not a cooling of the economy,” said Davi Alves, 24, the sous-chef of a high-end restaurant in São Paulo. “The problem I see is of high prices. Everything, from cars to homes, is expensive.”

—Rogerio Jelmayer, Paul Kiernan and Matthew Cowley contributed to this article.

 

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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