Brazil's Economic and Political Outlook in 2008

Speakers:

• Hon. Luiz Augusto Araújo Castro, Consul General, Consulate General of Brazil in Miami (opening remarks)
• David Fleischer, Professor, Political Sciences Department, Universidade de Brasilia
• Mauro Leos, Vice President, Sovereign Risk Unit, Moody’s Investor Service
• Ross Kaufman, Shareholder, Greenberg Traurig (moderator)

Summary

On February 19, 2008, the Americas Society and the Council of the Americas, in association with the Brazilian-American Chamber of Commerce of Florida, held a panel discussion focusing on Brazil’s political and economic future. The discussion provided an opportunity to evaluate Brazil’s recent advances, analyze how the approaching municipal elections will impact growth, and consider the possibility of an investment grade credit rating.

Substantial Reforms

The overall outlook for Brazil in 2008 is positive, according to panelists. Both Moody’s Mauro Leos and Universidade de Brasilia’s David Fleischer said fundamental changes and reforms in Brazil over the last few years had led to promising economic indices. Growth has been stable at about 4.5 percent, inflation has reached a manageable level, and the trade surplus stands at about $40 billion in 2007—despite a $6 billion drop from 2006. In the last two years, foreign exchange flows and foreign direct investment doubled while international reserves increased.

On the domestic side, retail sales rose 9.7 percent and auto production increased by 13.9 percent in 2007. At the same time, unemployment fell and new job creation showed improvements. Fleischer noted that even social mobility has risen since 2002; just 32 percent of the population was in the middle class in 2002 compared with 49 percent in 2007.

Leos attributed these successes to two factors: the GL factor (good luck) and the HW factor (hard work). The two go hand in hand, he said, but Brazil’s Central Bank has taken advantage of favorable circumstances by assuming an independent role, reducing inflation, and raising its credibility across the country.

Election Year Impact

President Luiz Inácio Lula da Silva’s political machine will be put to work this year with municipal elections approaching in October, said Fleisher. The president plans to expand programs to supplement police salaries and other salaries. He also hopes to boost two popular social programs. The first, Bolsa Família, provides financial aid to impoverished Brazilian families. The second, Luz para Todos, aims to provide access to electricity to an additional 12 million people by 2008 and to secure the electrification of all Brazilian households by 2015.

Meanwhile, the opposition is occupied with promoting their own candidates and has rejected tax increases proposed by Lula’s government. The provisional contribution on financial transactions (CPMF) was defeated in December 2007 while the tax on financial operations (IOF) and the social contribution for net profits (CSLL) could be defeated this year.

Deputies will also be campaigning for mayoral candidates, who they hope will reciprocate this support in the parliamentary elections in 2010. This could hinder legislative reforms in the coming year. Leos warned that fiscal reforms must continue, however, and cautioned against government officials’ unrealistic optimism about the economy and corresponding inaction, both of which would constitute major challenges for Brazil. Both Fleischer and Leos agreed that beyond the various labor, public safety, and judicial reforms that have been carried out recently, pension and tax reforms will be essential in coming years.

Corporate and Financial Outlook

Brazil is currently one step below investment grade status as measured by Moody’s. But despite moving up five notches in four years, Brazil probably will not cross the line to investment grade this year, says Leos. He emphasized that Brazil’s problems are no longer external, but instead consist of domestic fiscal concerns.

Credit has been stable, with low interest rates and positive debt-to-income ratios. Fleischer was reluctant to cite this as a positive development, however. He says that the rates, though low, are “criminal” considering the very low default rate and the fact that most loan payments are deducted directly from paychecks or pension.

Several top companies in Brazil have seen important developments since 2007. Expansion of the Bovespa (São Paulo Stock Exchange) was second only to China’s stock markets in 2007, with a growth rate of 72 percent. Privatizations are underway in various industries, including the Companhia Energética de São Paulo (CESP) and a number of federal highways. Petrobas, Brazil’s state-owned energy company, shows strong signs of growth, particularly after two new offshore discoveries last year. Furthermore, mining and transportation company Vale has been investing in the region and contemplating global purchases.

Brazil’s Advantage in the Region

The theory that Brazil’s economic outlook indicates a decoupling from the world situation amounts to little more than a “so far, so good” prediction, said Leos. He stressed that Brazil’s economy must be viewed in the global context. He said the possibility of a recession is high; the only remaining questions are how bad the global downturn will be, how long it will last, and to what extent it will affect the Brazilian economy.

Brazil boasts a diverse economy with strong energy, metal, and agricultural industries. In the case of falling prices in one sector, this diversity will function as a built-in fallback system which most other countries in the region do not command. Still, Leos defined Brazil’s exceptional stock market growth as a bubble in the country’s economy, saying, “Bubbles do not deflate; they burst.”