Bold and Boundless

Two extremes.  That might have crossed the mind of Luiz Inácio Lula da Silva, the Brazilian president, when he visited Panama last year and compared the size of his own country, the continent’s largest, with the sliver of land famous for its canal.  But when it comes to economics, size can be deceiving and this year Panama’s GDP is expected to be twice that of Brazil’s.  The minute, mercantile republic has been included in a list prepared by The Economist’s Intelligence Unit of the 10 countries which are expected to have the fastest GDP growth this year.  It may be number ten on the list, but it is also the only Latin American country on it.  Panama comes in just behind China with Angola (just over 20%) taking first place; the World Bank expects Brazil, the region’s largest economy, on the other hand, to grow by 4.5%.

Foreign Direct Investment is another thing.  In 2007, Brazil overtook Mexico and became Latin America’s largest FDI recipient.  In fact, the inflow figure this January was US$4.8 billion – over US$2 billion more than the total in January, 2007.  According to the Morgan Stanley Capital International index, Brazil has become the world’s biggest emerging market, moving ahead of China. 

An abundance of investment funds, however, cannot disguise the problems highlighted by the Latin American Economic Outlook, published by the Organisation for Economic Co-operation and Development at the end of last year.  Brazil, (along, it should be said, with the rest of Latin America) must invest a lot more in health, education and services.  The tax regime needs a complete overhaul (tax revenues collected presently equate to about 35% of GDP) because the present system is confusing and complicated to follow.  Fiscal reform should be a priority.

Brazil remains both ambitious and confident, but its vitality and boldness need to be harnessed and its economy better organised for its true potential to be realised.  Last year the Bovespa, Brazil’s stock market, rose in value by 60% and Brazilian companies raised capital of $32 billion (which was twice as much as companies in the United Kingdom did); and all of it from within the country.  The country’s potential is boundless.

I have written about the anticipated Chinese investment in Brazil’s infrastructure, as opposed to the normal transitory nature of FDI.  It is true that trade flows between China and Latin America as a whole have exceeded expectations, but the hoped-for long term investment in Brazil, as well as the rest of the region, has not materialised.  What’s more, 90% of China’s direct investment in Latin America in 2006 was found to have had a Cayman Islands connection.  This raised doubts in the minds of a lot of economists who began wondering about just how direct these investments truly were. 

Africa is a different matter altogether.  The Chinese are pouring funds into the Darkest Continent and it must be asked why would the Chinese choose Africa over Latin America?  Stability, for a start, would not have been the attraction.  It’s more a case of several favourable factors fitting China’s way of doing business which are welcomed by the Africans but shunned by the Latin Americans. 

The Chinese will bring their workers with them to build, for example, roads and ports.  Besides the degree of control this gives them, it entails foreigners taking jobs from the local market which, in the case of Latin America, and particularly Brazil, would be political dynamite.

Importantly, it should be remembered that unlike Latin America, China has had a presence in Africa that goes back decades.  In fact, China began courting Africa through diplomatic channels in the 1960s.  Then there is geopolitics.  Despite the fact that Brazil and some other Latin American countries have become more global in their thinking and their trade, the United States of America is still perceived by the Chinese to exercise significant influence across the continent.  In Africa, however, there is no one dominant foreign power wielding influence, creating a free-for-all atmosphere with the many advantages this represents. 

Defying the Critics

How will Brazil fare this year with the world in the financial doldrums?  The answer would seem to be, rather well.  For a start, domestic demand has increased and the country does not rely on just the US and Europe for overseas markets.  The US, for example, accounts for under a fifth of exports, with Europe, Asia and the rest of Latin America making up the balance.  In January, Brazil became a net creditor to the rest of the world for the first time.    

Brazil is also better insulated against financial shocks than it once was.  A well-functioning and transparent central bank coupled with a floating exchange rate (since 1999) has contributed greatly to this.  Having retired all its US dollar debt, with government debt now denominated only in reais, means that the country avoids the past exchange rate shocks it experienced whenever its currency depreciated.  But government debt is still uncomfortably high and needs to be addressed.

The robust economy owes much to the world demand for commodities which, at the same time, has meant that a great deal of reliance has been placed on commodity prices for export growth.  Commodities, of course, have provided a hedge against inflation which is something that Brazilians need to keep a close eye on.  It is a dependency that could prove to be a weakness unless you belong to the school of thought that is convinced that the demand for raw materials, driven by the 21^st century’s new economic powers, will be a constant and will serve as a counterbalance to the weak, world economy – including a US recession. 

Is Brazil set to defy the critics and begin an era of steady growth?  It has always been known as the land of the future, but one which has never arrived; perhaps it hasn’t yet, but one thing is clear:  Brazil is certainly a land with a future.

Letter from Panama is published by Trust Services, S. A. which is a British- managed trust company licensed under the fiduciary laws of Panama.  It is written by Derek Sambrook, our Managing Director, who is a former member of the Latin America and Caribbean Banking Commission as well as a former offshore banking, trust company and insurance regulator.  He has over 40 years private and public sector experience in the financial services industry.  Our website provides a broad range of related essays.

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