Brazil: uncertainty and mixed signals
December 07, 2012

Untitled Document

While the international allure with Brazil is fading, an internal pessimism is returning. The Brazilian Government has been adopting differing policy decisions to stimulate economic growth and so far, the result has been a confusion and uncertainty. There are both interventionist and protectionist measures mixed with more “liberal” measures. The interventionism has jeopardized public companies/ areas controlled by the federal government – for instance utilities and oil. Another example is the government’s decision to force public banks to reduce the interest on their credit lines. On the other side, the government has been privatizing some airports, has resumed the privatization program of highways, and yesterday, launched a program for the Ports. The Government reduced taxes for certain sectors, increased import taxes, reduced the interest rate, put more control on foreign capital and now lifted some of those restrictions.

Petrobras is a good example of the erratic government policy. For the first time in thirteen years, Petrobras experienced a loss due to the price control and the uncertainty in regards to government regulations. Some American analysts are recommending shorting Petrobras. Yet another example is in the utilities sector; the changes in regulation have caused a large volatility in shares that were once steady. An analyst from Itau noted that it is better to gamble in Las Vegas than invest in the utilities sector in Brazil – or at least more fun.

Nothing has worked so far to improve economic growth. In the third quarter, the GDP grew half of the estimate, or 0.6%; it grew 0.1% in the first trimester and 0.2% in the second. Consumption grew 0.9% and investments fell -2%. Compared to the third trimester of last year, China grew 7.4%, the USA grew 2.5% and Brazil grew a mere 0.9%. The Finance Minister is optimistic for 2013 but the sentiment is not shared internally. At the end of the day, Brazil is paying for its recent success: the years of growth in China had a huge positive impact in the Brazilian economy, leading the government to delay important structural reforms. One of Brazil’s structural problems is that it is exceptionally uncompetitive, inflation is always a problem and wages are rising by +10% nominal, or +4.0% real. Retail sales are growing at 17% a year; 10% without vehicles and building materials, while the GDP is growing at 1% a year.

As if all of the above was not enough to cause uncertainty, the Labor Party (PT) became a factory of scandals: when you think it is ending another one comes up.

In the meantime the social policy is expanding. It started with “Bolsa Familia” , then “Minha Casa, Minha Vida”; in May “Brasil Carinhoso” was announced and it was recently expanded for children up to 15 years old. All the programs are important to reduce inequality in Brazil and improve income distribution. I don’t think anybody is against the programs that also brought consumers to the market and stimulated the home-building sector. We all want a better, more inclusive and more equal country.

Some points, however, must be mentioned. As political scientists already noted, the program leaves a big part of the population dependent on the federal government with a tendency to vote for the Labor Party. With different methods the Labor Party created a captive constituency and here, as in the past, this constituency is concentrated in the Northeast and in the C and D classes. This is not even the main problem. My question is whether that is what we want for the country: do we want 40 million people living on alimony from the Government?

The social programs will not be efficient if they are not associated with both a policy on education that improves people’s skills and with investments in research that allow companies to improve their productivity. Brazilian education is improving but is far from what we need in order to compete in a globalized economy. In recent research, IPEA showed that the share of social expenses as percentage of the GDP grew from 0.49% in 2001 to 1.07% in 2010. The expense in education grew from 0.83% to 1.11%. The issue is not only that education expenses grew less than social ones, but more importantly that they remain only at 1.11%. The world economic forum defines 12 pillars to determine competitiveness; the basic pillars are institutions, macroeconomic stability, infrastructure, and health and primary education. High education and training are enhancers and are key for efficiency. In 2012 Brazil was ranked 56 in their Global Competitiveness Index.

The agro business sector is a good example of how much good technical improvement can do. In the past decade, there was an increase of almost 200% on production, notwithstanding the fact that the area for agriculture grew less than 20% and that research made by Embrapa – a estate company – was the reason for the technological improvement. So, we can do it, if there is political will.

Brazil is not in crisis, it is only facing difficult times. These are two very different things. To achieve sustainable growth, however, we need a new vision. Of course the Government has to address the short-term problems, but the time has come to take a longer view of the country’s future.

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