EconoView

Brazil & Mexico,
a Bipolar Outlook

Brazil and Mexico, Latin America’s largest economies, tend to polarize investors’ perception about the region. Economic growth has alternated between the two countries in the past decades. After a period of prosperity in Brazil, the pendulum now seems to swing towards Mexico.
The Brazilian American Chamber of Commerce and the U.S.-Mexico Chamber of Commerce brought together a panel of economists to discuss commonalities and distinctions between the two regional powerhouses. Thomsom Reuters co-sponsored the event.
Speakers included Nomura’s Latin American strategist Benito Berber, NWI Management’s Hari Hariharan, Mauro Leos, Moody’s Credit Officer for Latin America, and Tony Volpon, Nomura’s head of Emerging Markets Research. Tandem Global Partners’ Paulo Vieira da Cunha moderated the panel.
Geographically and culturally, Brazil and Mexico couldn’t stand farther apart, a condition that may date as far back as their past as colonies of Portugal and Spain, which also determined the fundamental distinction between the two countries: their different languages, Portuguese and Spanish.
But even long before the influence of Portugal and Spain over them had faded, both nations remained identified with each other. If at first, such coincidence of fates and development was similar to that of countries discovered, harvested for their natural riches, and dominated for three centuries by Europeans, now it’s mainly through the sheer power of their economies.

BRAZIL’S PREDICTED SLOWDOWN
‘The long run has arrived’ for Brazil is how Volpon characterizes the Latin American giant’s current momentum. Favorable conditions present in the early 2000s – a boom in global commodity prices, increased foreign reserves, and an overall improvement of its risk profile – have all contributed to the country’s growth in the period.
It was a time of unmatched political and economic stability, with higher consumer credit fueling increased domestic demand by a re-energized middle class. New markets to its exports, such as China’s, also helped compensate for the slowdown of the U.S. economy, then Brazil’s main trade partner.
Revitalized capital markets also attracted badly needed investments to the country’s technology and infrastructure industries. Credit should also be given to the central bank, whose policies were instrumental helping Brazil navigate through the collapse of the world’s financial markets of 2007.
But alas, it was not to last forever. While President Luiz Inacio Lula da Silva‘s two terms in office saw an unprecedented spike in growth of Brazil’s work force, so did labor costs. Along with an outdated tax code, and as commodity prices reached a plateau, the Brazilian economy is now expected to go back to levels of growth of the early 2000s, if not lower.
For Leos, the consequence of years of necessary intervention by the central bank on the country’s financial markets, to ward off an artificial boost of its currency driven by speculation and over investments, may lead to an ‘hyper active government.’ That may translate as uncertainty to investors.

MEXICO’S NEW HONEYMOON
A radically opposite picture can be drawn about Mexico’s momentum, mainly centered in the election of its new president, Enrique Peña Nieto. Fresh investments are beginning to pour into the country economy, perhaps due to the return to power of the president’s party, the PRI, which had dominated Mexican politics for over half a century.
Even without conveying a radical message, a fact underlined by his lack of commitment to changing the conversation about the bloody and costly war on drugs going on in Mexico, Peña Nieto is naturally riding the wave of a new hope for the country. And so far, his most visible reform proposals have stricken a positive chord in the markets.
Among factors that may work to his advantage, are the signs of economic recovery of Mexico’s main commercial partner, the U.S., and a new take on the issue of immigration, a matter that directly affects a large segment of its work force. By the way, labor costs and wages are much lower in Mexico than Brazil.
Berber touched on what’s likely to be the biggest expectations about Peña Nieto’s tenure in office: his commitment to a market-based economy, which is all that investors wanted to hear, and the creation of a social security system, which may prove way more challenging even to the PRI’s formidable structure and powerful reach.
The new president’s also alluded to the possibility of open up the country’s oil industry, but made sure he has no intention to allow the privatization of state-run Pemex SA. He may wind up favoring a similar arrangement that Brazil’s own state-run Petrobras SA has, with part of its capital open to investors.

BRACING FOR A SPLIT OUTCOME
So, if both Brazil and Mexico, for all their regional might and combined wealth many times that of the countries that colonized them, lack ‘stature at the international scenario,’ as Hariharan’s put it, in the past decades they’ve both become crucial players in the world economy.
The biggest factor in such a rise in relevance may be their opening towards Asian markets, specially of China, which both countries conducted as an alternative to, and independent from, the U.S. and the European Union nations they used to primarily trade in the past. Such opening, which many so far see mostly to China’s advantage, may prove very productive indeed to Latin America, going forward.
As some Asian economies continue to struggle to regain a path for growth, as it’s been happening for so long in Japan, or for trade diversification, which southeast Asian countries lack, and let’s not even consider what goes on in the Middle East, it’s left to Latin America to offer the much needed alternatives for a global economic growth.
As it’s obvious that Africa is far from ready to prime time, it may be still up to Brazil and Mexico to save the day for a hungry world population that will continue to explode, as it seems inevitable. That, despite the fact that Brazil is in a slowdown pattern of growth expected to last for a couple of years, and that Mexico has some serious social and infrastructural woes to overcome.
Leos seems to have an appropriate metaphor to explain how these two countries are to be perceived by investors. As ‘markets are manic depressive,’ he says, (Mexico playing the role of the ‘manic,’ in this illustration, and Brazil, the ‘depressive’), it’s important not to expect too much slowdown from Brazil, or hyper-activity from Mexico.
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Mantega Sees Brazil, Emerging
Economies Leading World Recovery

The Brazilian economy is on track for a sustainable rate of growth, boosted by strong domestic demand, Brazil’s Finance Minister Guido Mantega said in his keynote speech at the 2011 Brazil Summit, sponsored by the Brazilian American Chamber of Commerce.
He said that Latin America’s biggest economy may grow at a 4.4% rate, which is considered a sustainable rate, based on the latest estimates for the country and the outlook for the world’s economy in the next few years.
Mantega said that the “imbalance” of the global currency markets, and the weakening dollar, have the potential to hurt Brazilian exports. But except for oil prices, which depend on the political situation of the Middle East, he doesn’t expect commodity prices to keep on rising indefinitely and may even drop in some cases.
In his analysis of the world economy, he said the emerging markets were already leading the global growth, even before the financial crisis of 2008.
Brazil adopted a series of measures to counter the effects of the crisis, by boosting its domestic demand and the rate of foreign investments, along with other polices.
But with recent inflationary pressures driven by global commodity prices, Mantega said it’s been necessary to calibrate Brazil’s rate of growth to prevent inflation from increasing and the country’s currency , the real, from appreciating.
BRAZIL SUMMIT
The annual gathering also had the participation of former Brazilian Central Bank President Henrique Meirelles, which is generally credited with helping Brazil to successfully navigate the financial and other global economic crisis, during his tenure between 2003 and 2010.
He spoke about the evolution of the Brazilian economy, from its high level of dependence on external markets and high level of debt and sovereign risk, to its current stability. Among the measures the country has adopted, he cited its austere approach to monetary policy, increased foreign reserves and growth of the middle class’s acquisition power.
He said that Brazil’s growth has “switched to high gear” for growth when it took steps to boost its domestic market, and, as a society, consolidated its respect to the rule of law.
Meirelles is expected to be appointed to lead a government agency that will coordinate the Olympics Games of 2016, in Rio de Janeiro.
OTHER GUESTS
Brazilian Ambassador to the U.S. Mauro Vieira, the U.S. Ambassador to Brazil Thomas Shannon, and the co-Chair of the Brazil-U.S. Business Council Anthony Harrington participated of a panel about the outlook for relations between Brazil and the U.S.
Petróleo Brasileiro executive Theodore Helms and Advanced Biofields Association President Michael McAdams discussed the outlook for ethanol and biofields.
And Tandem Global Partners Paulo Vieira da Cunha moderated a panel on the macroeconomic outlook for Brazil, with Oppenheimer Funds Claudia Ribeiro de Castro, the Secretary of Finance of Rio de Janeiro Eduarda de La Rocque, the Head of Latin America Sovereigns at Fitch Ratings Shelley Shetty and the Chief Economist of Barclays Capital Marcelo Salomon.

***

Green Party Adviser Sees Brazilian
Economy On Track for “Overheating”

Eduardo Giannetti da Fonseca, economic adviser to Brazil’s Green Party presidential candidate Marina Silva, says the government push to expand the country’s economy is at odds with its central bank policy, which has already began to tighten policy and raised interest rates this week for the third time in a row.
Speaking at a conference sponsored by the Brazilian American Chamber of Commerce, moderated by Tanden Global Markets’s Paulo Vieira da Cunha, Fonseca discussed the background of Brazil’s current unprecedented growth, conditions for its sustainability and the outlook for a next administration.
Brazil will elect a new president in November and President Lula da Silva’s candidate, Chief of Staff Dilma Rousseff, is in a tight race with former Sao Paulo state Governor José Serra. Senator Marina Silva (no relation to Lula) is in third place.
Fonseca, who came to the U.S. as a member of Silva’s entourage, was careful not to criticize the Lula administration’s successful strategy through the global financial turmoil of 2008, 2009. Brazil went through the crisis relatively unscathed and emerged reenergized, perceived by investors as a safe haven for their assets.
In his opening remarks, Fonseca pointed to the central bank’s consistent monetary policy, improvements in the country’s internal debt, increased foreign reserves, which are no longer anchored to the dollar, and a healthy banking system as some of the factors for the country’s performance during the crisis.
But he also sees much to be done about Brazil’s tax code, specially its payroll tax system, the “dysfunctional” labor market, the overbearing role of government-run development bank BNDES in the economy, and the need for a more effective regulatory framework where government spending is concerned.
As Brazilian state banks have low capitalization rates and relied heavily on Treasury loans to extend consumer credit, he sees distortions in the fact that such banks are accumulating very high collateral subsidies. According to Green Party data, such subsidies can run as high as $8 billion a year.
OBSTACLES FOR GROWTH
Other factors that may be conspiring against the sustainability of Brazil’s growth rates are the size of its so-called informal economy, which is estimated to be a third of the overall economy; the general sub-standard qualification of the Brazilian professional, since there’s little or no investment in what Fonseca calls the “human capital”; and the challenges facing companies doing business in Brazil.
To underline this last point, he cited the World Bank’s annual “Doing Business” report, which rates 183 countries by their openness to companies willing to operate on their soil. Brazil ranks at number 129. Within a universe of 36 South American and Caribbean nations, it still fares poorly, at number 26.
About the presidential elections, Fonseca worries about José Serra’s perceived impatience with Brazil’s current monetary policy and the floating exchange rates regime, which often times require the adoption of unpopular measures. And is equally concerned about Dilma Rousseff’s manifest support to an ever-increasing government role in the country’s economy.
He stayed cleared of making any statements concerning state-run Petrobras’s role in the outlook for growth of Brazil, but may have some questions about the way the oil giant is being prep up to fund government projects. Recent discoveries of rich reserves of oil and gas may boost Brazil to a global leadership position as an oil producer and redefine Petrobras’s relationship with the state.
Part of the political debate in Brazil right now is indeed whether the allocation of the potential wealth to be generated by the exploration of the new fields will be used politically by the government, and the election of either Rousseff or Serra – it’s unlikely that Silva will be able to challenge their front running positions – won’t change that.
But Silva’s supporters count on the party’s good showing in this election to give it credence to bring these and other questions to the fore of the discussion. Not the least of them are concerns about a potential Gulf of Mexico-style ecological disaster, new policies and law enforcement measures to better protect the Amazon rain forest, and a variety of relevant issues usually championed by the Green Party.
Brazil needs “not to miss out on this opportunity,” Fonseca concluded.

***

Brazil May Benefit from Lower
Global Growth, Economists Say

* Central Bank Raises Interest Rates for Third Time in a Row

Investors may continue finding safe haven for their assets in Brazilian markets due to favorable conditions for economic growth and stability of the country’s political institutions, a group of economists and political analysts say.
They point the recent state-run Petrobras’s discovery of robust oil reserves, which may generate record profits and lift the country to become one of the world’s top producers, along with two major global sports events to take place within its borders in the next six years as main factors driving Brazil’s growth and appeal to investors.

Such conditions are expected to remain in place after November’s presidential election regardless of who wins, if President Lula’s candidate, Chief of Staff Dilma Rousseff, of the ruling Workers’ Party, or former Sao Paulo State GovernorJose Serra, a member of PSDB (Social Democrats), the party of the previous Brazilian president, Fernando Henrique Cardoso.
In aconference sponsored by the Brazilian American Chamber of Commerceand moderated by Tandem Global Partners Paulo Vieira da Cunha, economists Marcel Kasumovich, of Woodbine Capital Advisors, and Marcelo Salomon, of Barclays Capital, and political analysts Christopher Garman, of the Eurasia Group, and Woodrow Wilson Center Paulo Sotero Marques, also discussed Brazil’s fiscal policies, central bank’s inflation target regime and some of the vulnerabilities and challenges of its capital markets.
The conference coincided with the decision by the bank to raise itsbenchmark interest ratefor the third straight time, from 10.75 percentage points to 10.25 percentage points. The monetary policy committee, known as Copom, voted unanimously to lift the so-called Selic rate by 50 basis points to keep inflation under control, despite the current slowdown on the country’s economic growth.
CHALLENGES AHEAD
For Salomon, the effectiveness of such monetary policy, its transparency and stability against a backdrop of global economic turmoil, is also one of country’s challenges. For how long will it be one of the only mechanisms of control of the exchange of goods in a country known for the strength of its informal economy, is what some economists ask.
Also, the relative lack of securitization of Brazilian markets, along with the banking system inability to compete in equal terms with government-mandated rate of savings, has been often invoked as a contradiction of the Lula administration’s economic framework.
So far, the unprecedented strengthen of the middle class has compensated for the relative weakness of Brazil’s capital markets, along with an expanding labor market and steady, albeit low, levels of personal incomes, driving internal consumption and long-term credit to record levels. But there’re those who wonder how corporate growth can be nurtured and will play out with such a widening gap between a weak corporate bond environment and the ever-increasing Bovespa stock market growth, for instance.
Kasumovich signals the “staggering” decline of volatility in the Brazilian inflationary cycles in the last 15 years as a positive sign, along with the young medium average age of its working force, currently approaching 30 years of age.
MARKET OPPORTUNITIES
He sees the global turmoil of 2008 and 2009 as a kind of “cyclical adjustment” for the rest of the world economies and a factor in Brazil’s outlook, and notes that the “fear of low growth in the developed world is Brazil’s opportunity.”
Like many economists, who are still concerned about finding a “missing ingredient” in current models for Brazil’s growth, Kasumovich sees risks for the banking system, in trying to compete with the government’s low lending rates, to become too “aggressive” and vulnerable to a possible shock.
NEW PRESIDENCY
Marques and Garman agree in many of their insights about the outlook for the presidential elections. Both say that Rousseff has the slight edge over Serra, but the fiscal policy differences between the two are narrower than commonly perceived.
Marques sees a favorable environment for the “continuity” represented by Lula’s candidate, and recent polls seem to confirm the trend. As her TV exposure time is slated to increase in the coming months, her message may be more effective than Serra’s, by portraying her as a truly heir to the unheard-of growth and stability currently experienced by Brazil.
Since neither Rousseff nor Serra is as charismatic as Lula, the deciding factor may be the formulation and potential popularity of each one’s oil and energy policies. Thus how the new administration will direct Petrobras’s allocation of the funds generated by the oil exploration, being towards social projects or the implementation of Brazil’s infrastructure needs, may be a more important factor than her inexperience or his perceived lack of touch with the working classes.
Curiously, these two qualities could be major assets to each one but, because of idiosyncrasies typical of Brazil’s political system, they are not. Rousseff could turn into a breath of fresh air her constant gaffes and blunt personal style that often lands her on hot seat. Instead, she’s generally seen reduced to the condition of Lula’s protégée and many have no idea how she’ll navigate treacherous political negotiations in congress without her patron’s skills.
Serra, a medical doctor with deep involvement in Brazil’s health issues, is known for getting the job done, often at odds with the political common sense of the jour. Again, what could be a display of independence is perceived as arrogance and many wonder whether, at the end of the day, he’ll swing one too many times before making hard and necessary decisions.
ELECTION OUTLOOK
Both Marques and Garman concluded their presentations with the cornerstones by which they think both candidates may distinguish and gain an edge over the other: Brazil’s fiscal and monetary policy, including central bank autonomy and mechanisms to control government spending. As whoever wins is expected to be equally absorbed by concerns about energy policies and infrastructure projects needed for the World Cup, in 2014, and the Olympic Games, two years later, it’ll be in such structural details that may reside their most important tool to win the election.
But the general consensus of these analysts seems to be that the election, per se, will have little or no influence on decisions concerning Brazil’s policy and political governance.

***

Brazil Is Poised for
IPO Market Growth

After a slowdown during the world’s financial crisis of the 2007-08, Latin American economists agree the Brazilian market will experience another wave of initial public offerings this year. In a Brazilian American Chamber of Commerce conference, Gustavo Souza, managing director at Banco do Brasil Securities, Matias Santa-Cruz, a director at Latin America Equity Capital Markets, and Enrique Corredor, of BTG Pactual, discussed the outlook for Latin America’s biggest economy. The conference was moderated by Paulo Vieira da Cunha, of Tandem Global Partners.

Brazil’s investment grades, growth of its Gross Domestic Product, and strength of the Bovespa Stock Exchange are some of the factors invoked to justify a positive outlook for the country’s economic prospects. Companies such as state-run Petroleo Brasileiro SA, the country’s biggest, are expected to raise about $25 billion in a planned offering in the second half of 2010.
Despite disappointing share sales by companies such as Brazilian billionaire Eiko Batista’s EBX Group Ltd., and some readjustment of WTorre Empreendimentos’ strategy for an IPO, the market seems to be on track for growth this year and the next, the three economists say.
A healthy appetite from foreign investors for Brazil’s oil and gas, infrastructure and services industries, and the country’s future role as host of two of the world’s biggest sports events in the next six years, the World Cup in 2014 and the Olympic Games two years after, are other factors to boost economic growth.
During the global financial turmoil, Brazil has solidified its role as a safe heaven for investors among emerging markets economies, due to the liquidity of its capital markets, solid central bank policies and expansion of credit to its middle classes. For the first time in history, the country’s productive work force outgrew its so-called informal economy, a production of wealth virtually invisible to economic indicators.
Another factor that points to the strength of Brazil’s IPO market is the return of hedge fund investors, the three economists say. As companies streamline their production portfolios and turn them into simpler, more attractive point of sales, such investors see better opportunities to invest and profit from Brazilian assets.
But if much has been improved about the country’s attractiveness to investors, a lot has also to be implemented in its markets. High interest rates, the illiquidity of corporate bonds and inconsistencies in the savings legislation and regulatory framework, for example, are obstacles for growth of Brazil’s initial share offering market.

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