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Brazil keeps economic excitement in check

October 26th, 2009

gdp-realIt is the kind of news that would normally spook investors: Henrique Meirelles, the governor of Brazil’s central bank, is preparing to go into politics.

The threat of political interference used to hang over Brazil’s economy like a black cloud. Yet Mr Meirelles explains with customary aplomb that by joining the centrist PMDB, Brazil’s biggest political party, he is only exploring possibilities. He may enter politics at next October’s general election, perhaps running for the senate; he may stay at the bank; or he may rejoin the private sector.

“I am merely taking an option on my future,” he tells the FT at the central bank’s offices in São Paulo.

Whatever his choice, investors appear unperturbed. Even a 2 per cent tax on foreign portfolio investments, imposed last week to stem the rise of the currency, seemed unlikely to cause more than a pause in the flood of capital to Brazil this year. Brazil’s benchmark Bovespa index dropped on the news but quickly rebounded, and the real continues to appreciate. It has gained 36 per cent against the US dollar so far this year. The stock market is higher than before the collapse of Lehman Brothers.

Hosting the 2014 World Cup and 2016 Olympic Games has added to Brazil’s sense of arrival on the world stage. Illustrating the effervescent national mood, sales of locally made sparkling wine are up 20 per cent this year over last. Yet Brazilians are not getting carried away.

One reason is that the state continues to make itself felt in the economy. Government pressure on Vale, the mining group, to invest in steel mills in Brazil has fuelled concerns that a more active state could jeopardise recent efficiency gains.

Other concerns must be addressed before the country fulfils its enormous potential. Former president Fernando Henrique Cardoso identifies four main challenges. “Brazil suffers from a shortage of infrastructure, poor quality of education, environmental issues and crime.” Mr Cardoso’s fears on that last point have been underlined by the violence in Rio’s favelas.

Such realism helps explain why Brazilian self-confidence is different from the swagger of fellow Bric countries, such as China and India. Rational optimism, rather than irrational exuberance, is what you encounter among São Paulo’s bankers and business leaders.

Still, “it is very hard not to be bullish”, says Antonio Quintella, country manager at Credit Suisse. “We’re not in a bubble. But there is excitement,” he adds.

Brazil entered the financial crisis well-prepared and its subsequent recession has been short. It is relatively isolated from economic travails elsewhere. Exports amount to less than 15 per cent of economic output. Little credit is sourced from overseas.

Orthodox economic policies, begun under Mr Cardoso and continued under President Luiz Inácio Lula da Silva, have added to its resilience. Counter-cyclical measures such as tax breaks on cars and electrical goods have helped keep the economy afloat during the financial crisis.

Meanwhile, a decade and a half of economic stability, low-inflation and carefully targeted welfare programmes have introduced millions to the consumer market. In the world’s most unequal society, more than half the population is now considered middle class.

Brazilian companies, after decades of uncertainty and sequential financial crisis, have a new spring in their step. “Corporate Brazil wasted a lot of time and effort worrying about economic and political volatility,” says Luiz Muniz, head of investment banking for Brazil at Rothschild. “Now people are able to focus on managing and growing their businesses.”

From 2004, spurred on by sweeping reform of Brazil’s capital markets, businesses began to gain confidence. There was a surge of equity issuance which, after a hiatus during the global crisis, has resumed with the world’s biggest share offerings this year. Spanish bank Santander raised $8bn (€5.32bn, £4.88bn) when it floated 14 per cent of its Brazilian operation on the local market and in the US.

Foreign investment has risen but more Brazilian companies have advanced overseas. AB InBev, the world’s biggest brewer, is managed and controlled by Brazilians. Vale, Petrobras and Gerdau are global players in mining, energy and steel. Poultry and beef company JBS Friboi is the world’s largest “protein ­producer”.

As for financial services, the BM&FBovespa ex-change is worth more than the New York Stock Exchange, Nasdaq and London Stock Exchange combined, while Itaú Unibanco, with a $96bn market capitalisation, is the world’s 12th largest bank. Talk that it considered buying Morgan Stanley last year still brings a gleam to local deal-makers’ eyes. With the economy heading for growth of at least 4 or 5 per cent next year, there is a feeling, new to many, that Brazil has achieved such successes on its own merits.

Yet few Brazilians are euphoric. There is uncertainty about the transition to the next government when Mr Lula da Silva’s second consecutive term – the most allowed by the constitution – ends next year. Dilma Rousseff, his chosen successor, is a tough technocrat. José Serra, the likely opposition candidate, is from a similar mould. Both suffer from a charisma deficit. Mr Meirelles agrees that the country faces shortages of infrastructure and skills. These are pressing issues but not overwhelming ones.

By Lionel Barber, Jonathan Wheatley and John Paul Rathbone

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