Friday 21 April 2017

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 5.1.4)




This section relates to the observations of the OECD (Organisation for Economic Cooperation and Development) - complimented by those of the IMF (International Monetary Fund) - regards the current issues faced by President Michel Temer and his administration.

The most recent Economic Forecast by the OECD released in November 2016 is recounted here; an update expected soon.


OECD Report Summary -

- Emerging from a severe and protracted (4 year) recession
- Political uncertainty diminished
- Business confidence rising
- Consumer confidence rising
- Investment sentiment and cases strengthening
- Unemployment a mid-term challenge
- Inflation expected to gradually return to target range

- Fiscal conditions still fragile
- Need to to re-balance the Fiscal and Monetary by:
- 1. Consolidate public finances
- 2. Underpin macro-economic stability
- 3. Loosen monetary policy
- 4. To create the investment climate

- Raise productivity by:
- A. Strengthen competition
- B. Reduce administrative 'red tape'
- C. Continue infrastructure improvements

- Need to manage expected rising inequality



Pulling Out of Recession -

By November 2016 Brazil had experienced 6 quarters of technical recession, with accordant rising unemployment, business bankruptcies likewise and corporate debt higher.

But after heavy falls of business and consumer confidence sentiment appears to be increasing, albeit from lowly bases. Whilst industrial production figures have been mixed, tending to negative, investment growth has become positive. The replacement of Rousseff by Temer has tempered the previous political uncertainty, with next elections in October 2018 and the next government installed on new year's day 2019.

With that increased certainty the sovereign debt (bond) rate has fallen by a third back to 10%, but the period since 2013 has seen the fiscal balance decline to -11% by early 2016, now sitting at -9%, so showing improvement. Although down dramatically since its 2015 EoY high of nearly 11%, inflation now sits at 8%, so well above the 4.5% target and the 6.5%-2.5% 'tolerance band'.

Rebalancing Fragile Fiscal Conditions via Monetary Policy -

- 1. Consolidate public finances
- 2. Underpin macro-economic stability
- 3. Loosen monetary policy

A New Fiscal Rule imposed to reduce the fiscal deficit from its 9% of GDP, whilst the primary deficit of 3% hampers the need to create primary surpluses to keep public debt on a firm and sustainable declining path. Weakness obviously lies with the cyclical nature of reduced revenues during a recession, but critics cite poor taxation policy regards exemptions which are yet to be discontinued. This 'slack' backdrop means that the fiscal stance is expected to be only mildly contractionary; yet still part of necessary process to correct past excesses and strengthen the fiscal future; in essence the avenue chosen to try and strike an appropriate balance.

But rising current expenditures, plus projected increases in pensions costs, is an argument that undermines fiscal health over the mid/long-term. The reaction has been a new expenditure rule, which matches the recommendations of previous OECD economic surveys. This new rule limits real increases in expenditures whilst simultaneously lessening the rigidity of the budgeting process; except for pensions and benefits which amounts to almost half of government spending.

Separate pensions reform is noted as required to ensure the created fiscal adjustment is able to be successful. That reform though necessarily seeking ensure adequate continued decline in inequality and poverty by improving the targeted social benefits. Better spending efficiency is believed to exist across many areas, and it is believed that the new fiscal rule provides sufficient room to attain a balance of objectives regards overall spending and social cohesion.

The commitment regards public expenditure will provide for further monetary easing going forward, which should in-turn give rise to stronger investment (as public investment projects are followed by private investment interest).

A raft of structural reforms have the potential to boost growth significantly and make it more inclusive.

Reducing what are viewed as high compliance costs which relate to a complex state-based and fragmented indirect taxation regime is viewed as immediately advantageous to firms, an effort to consolidate the varied 'mini-taxes' into a singular VAT that encompasses import and export measures so as to strengthen international trade. The idea is that a full deductibility for imports would provide greater (price-based) competition for domestic producers/providers, so enhancing overall productivity.

Improved infrastructure would reduce transport costs, especially so for exporters, (so providing an effective efficiency boost regards price and speed to markets.

Stronger trade integration would benefit low-income earners specifically as the export sector would have a larger impact on the demand for unskilled and low-skilled workers.

Further educational attainment would raise productivity and allow more low-income households to join Brazil's middle-class.

These very broad policy avenues enabling the country...


- 4. To create the investment climate


Expected Slow and Gradual Recovery -

2017 should see progressive growth thanks to rising investment sentiment, but the pace of this recovery will inevitably be impacted by the size of corporate debt and the over-capacity/spare-capacity in various sectors.

Speedy implementation of structural reforms should see greater immediate momentum compared to historic re-growth periods....but....the measures highlighted are not adequate compared to the ambitious agenda needed.

Slow earnings growth and continuing contraction in private credit will initially limit consumption, this environment much assisted by the achievement of lower interest rates, which if attainable and properly entrenched would provide for improved recovery.

But critically, the background of low international trade growth and ongoing competitiveness challenges, the external sector will not be able to provide as much support as in past years. Inflation will continue to ease because of this weaker activity and reduced administrative costs, expected to return to the tolerance band by end 2017. Unemployment expected to rise until mid 2017 before falling as the economy gains new stride in 2018.

'Upside Risks' could be seen with a stronger momentum from Brasilia regards structural reforms could create better conditions and so more sooner, domestic demand boosted by lower spreads (regards government bond prices), less currency devaluation, and lower real interest rates.

'Downside Risks' could arrive from the corporate sector if a protracted recession results in rising corporate defaults as a consequence of high debt levels, which would weaken various parts of the financial sector.

And lastly, although political risk appears much diminished, it still remains under the surface with respect to the final implementation of the New Fiscal Rule.


Summary -

The OECD's remarks effectively parallel those of the IMF (International Monetary Fund) in as much that (to quote the IMF's November 2018 report)...

“Whilst capital markets have responded positively to the new political stability introduced, so bolstering asset prices and confidence, and helping the country ride a positive wave of sentiment regards emerging economies – and some high frequency indicators suggest the recession may be nearing its end – the implementation of much needed reforms to durably restore policy credibility is subject to risks”

This presently appears 'all to true' with the likelihood that such reforms – especially pensions and benefits - will be harder to implement than academically perceived given the social tensions that exist amongst the lower middle and poor regards the aftermath effects of the public indebtedness created by World Cup and Olympics projects (such as rising public transport costs) and now the fear of impacted state-provided incomes for OAPs and the increased number of marginalised people.

It is for these reasons – and especially the fragility of the inter-connected EM economies, much reliant on China - that investment-auto-motives previously implicitly and explicitly highlighted the need for Brazil (and the Latin American region en mass) to encourage greater trade with the USA , Europe and the UK.




Friday 7 April 2017

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 5.1.3)



The following few sections seek to provide a synopsis of the present economic picture given the very mixed highs and lows of celebratory world showcase events set within what rapidly became a deflationary and now seemingly static economic climate, as EM nations experienced their own global slowdown from 2013 through to late 2016.

This portion starts with a recap of the general background, with provision of key data sets from the CIA Fact Book for 2016 and recent YoY data, thereafter followed by a synopsis of the OECD's latest report.


Background to the Modern Day -

Unsurprisingly, given the socio-economic previous realities of a markedly delineated society and a bottom-up groundswell passion for fairness, justice and improvement, like much of Latin America, Brazil has been historically beset by very disruptive and volatile 'left-right' reactionary politics, with broad swings in policy consequences regards the influence of the outside world.

Hence the ideologies of a very left-leaning and idealised 'social utopia' versus those of right-leaning 'engrained stability' have historically clashed.

But critically, though undoubtedly with major disruptions, over the last 6 decades true social progress has been made; whereby necessary pragmatism has overcome past engrained combative ideologies; so leading to far greater social cohesion and decline in poverty rates.

After the massively positive impact f the Vargas-Kubitschek eras, the next prominent watershed period came in the late 1980s, with efforts to overcome the suffering of the 'Lost Decade', finally taking affect as of 1994 onwards. Herein it was re-recognised that devout leftist or rightist stances would not suffice in a rapidly globalising age, and so a new 'middle way' path was sought and seen to deliver.

The ability to convince the public of the force for good that globalisation and capital markets could bring to a broadened mixed-market economy was thanks to the very personal understanding – from his auto-industry experience - of the previously highly leftist President 'Lula'.The results of his own learning was in effect imparted to his people given their confidence in him as “one of our own”.

That internationalist yet fiscally conservative 'middle-way' would serve as the basis for socio-economic improvement for the many, across the previously entrenched race divide, and with it the ability to better mix in new workplaces, social situations and en mass, so reducing the previously engrained 'under the surface' tensions between ethnically distinct social groups.

That recognised, even with the social lubrication of improved general wealth - as with any mixed society - the tribal mentality of “birds of a feather sticking together” still typically in extremis over-rides improved social dynamics. (The aforementioned idioms of: self-perpetuation for the upper echelons, self-education for the middle and self-preservation for those still struggling.

[NB herein the slow but seen rise of social and political influence from distinct previously marginalised groups such as Afro-Latinos and the Aboriginal peoples have partly generated a new idea of proud racial distinction – as with the rise of self-proclaimed 'Negritude' – so discouraging inter-breeding outside of racial boundaries so as to maintain what is regarded as ethnic purity].

Thus old class-bound and new sociological idioms about the true limits of the idealised the “melting pot society” may reshape Brazil's peoples, with both the fused and distinct cultural identities no doubt seeing emergent trends in tomorrow's consumer trends

The major issue and realisation is that since 1994 major swathes of previously virtually destitute people across Latino, Afro-Latino and Aboriginal spheres have through opportunity and application been able to rise into and populate much of the new lower middle class; with even with the present economic contraction, today's poverty rate being about 21%, as compared to 40% in the early 1990s.

This thanks to the created foreign policies which by default and design had the door of international relations (and so FDI) always open, though at differing degrees. At times fully open, or left partially ajar, but never wholly closed. Even when the rhetoric of 'self-protectionism' was voiced to the populace and the very real introduction of import tariffs, it was done reliant on foreign input to nurture modern developing industries - such as with energy, automotive, IT, healthcare and pharmaceuticals and now the simultaneous ambitions regards exploration of both outer-space (aero-space) and inner-space (nano-technology).

Depending upon the era and the ideals of elected and non-elected governments, Brazil's relationship with the rest of the world – America, Germany, Italy, Russia and latterly China – meant that such external input to boost domestic self-development altered as circumstances changed and as the government seat of Brasilia sought to ply one foreign powerhouse country against another for access to Brazil.

This EM typical 'half open, half closed' policy stance obviously to leverage any threat of foreign 'commercial imperialism' for its own ends, so as to advance indigenous technical capabilities.

This has been the central pillar of Brazil's industrial and commercial strategy throughout time, so as to subsequently introduce – with reduced early-phase superficiality – the idea of truly indigenous modern industry.

Given its complexity, demand and so wealth creation opportunities the automotive industry has always been centre-stage of the development agenda. Part of that agenda is to remain through growth the largest vehicle producing country in Latin America and so likewise remain the most powerful trading partner within the Mercosaur region in the 21st century.

Thus, perhaps because of the very nature of its 'mosaic' populace (facing across Latin and Central America, Europe, Africa and now China), its simultaneously multi-directional and very pragmatic foreign policy, and a history of recycling previous foreign technology transfers under its own branded banners, means that Brazil could be viewed as the archetypical template of the necessary 'hybridised' and deeply 'globally integrated' 21st century nation.

However, the present circumstances of Brazil means that although this is already well underway, the ambition has slowed as the country tries to rebalance its economic basis, both internally and externally.


Today's Broad Picture -

The following provides observational snap-shots of Brazil today as conveyed by the best regarded - though still heavily US influenced - external agency with remit to measure and advise on global and nationhood economic matters.



The Central Intelligence Agency :
Fact Book 2016.

Espoused as the “ear to” America and the World, the CIA has become legendary and almost mythical given its apparently enormous intelligence gathering capabilities; that ability increasingly externally focused across the world and with increased Presidential empowerment since WW2 and the later half of the so called 'American Century'.

Today its activities are worldwide and expansive, spanning hard and soft-power activities, and though with an understandable prime focus upon counter-terrorism, at times in service of its homeland its actions highly questionable.

Yet its breadth and depth of intelligence gathering within the public sphere, and its desire to appear a very useful soft-power instrument, has meant that it publishes critical information to the world, which itself often underpins governmental, academic and commercial economic and socio-economic research around the world.
A key part of that research provision is the World Fact Book for each country, Brazil outlined by following:

To paraphrase: “In 2010 the 25 years record growth rate of 7.5% was achieved, but GDP slowed since 2011 because of several factors including: over-dependence on exports of raw commodities, low productivity, high operational costs, persistently high inflation and low levels of investment. Unemployment reached the historic low of 4.8% in 2014 but has since risen

[NB this actually now 11.8% and resulting in a dramatic lowering of the cost-base and so comparative productivity rates].

The previous investment grade standing of Brazil has seen quick decline as efforts to prop-up a positive primary account surplus failed, with the three main credit ratings agencies prescribing 'junk' status.

Brazil hopes to restore its strength by imposing local content and technology transfer requirements on foreign businesses, by investing in education at all levels and expanding its national research projects.

The general indicators:

1. GDP (Purchasing Power Parity levels at 2016 figures) shows the country as standing as 8th in the world, behind China, EU, USA, India, Japan, Germany and Russia, but ahead of Indonesia, UK, France, Mexico, Italy, S. Korea, Saudi Arabia, Spain, Canada, Turkey, Iran and Australia.

This theoretically puts the spending power of the average Brazilian adult, business and government in a comparatively powerful position, even though declined in real terms since the high of 2014 when the total equalled US$3.37tr against $3.13tr in 2016.

2. GDP (real Growth Rates at 2016 figures) illustrate that in the real – growth adjusted for inflation – economy, posits Brazil as ranked at 55th in the world. The after-effects of the 2008 Financial Crisis and 2013 European Debt Crisis upon global trade so leading to contraction saw Brazil's growth rate significantly alter, today standing at -3.3%. This however is better than the -3.8% seen in 2015, itself possibly the trough of the recession.

3. GDP (Per Capita at 2016 figures) shows an estimated average of $15,200, itself down $700 on the previous year, and lower by $1,400 on 2014. However, 2013 was measured as $12,100 (then 94th in the world) which suggests a sizeable change in government statistics or measurement anomaly given unlikely real-world per capita leap by $4,500 in a single year.

4. Gross National Savings (as % of GDP at 2016 figures) shows 17.2% est, itself up on 15.9% in 2015 and the 16.7% in 2014. Presently the country stands 104th in the world.

5. GDP Composition (by End Use at 2016 estimated figures vs 2013 figures) illustrates that Household static with 62.5% vs 62.5%, Government has declined to 20.^% vs 21.7%, Fixed Capital Investment has declined to 15.8% from 18.3%, Exports (Goods and Services) has risen to 13.9% from12.4% and Imports (Goods and Services) lessened to -12.7% against a previous rise of 14.9%.

6. GDP Composition (by Sectors showing 2016 est vs 2013 figures) shows Agriculture rose to 6.3% vs 5.5%, Industry lessened to 21.8% vs 26.4% and Services grew to 72% vs 68.1%

[NB of these Agriculture consists of: coffee, soyabean, wheat, rice, corn, sugarcane, cocao, citrus and beef, whilst Industry consists of: textiles, shoes, chemicals, cement, limber, iron ore, tin, steel, automotive (parts and complete), aircraft (parts and complete) and other plant and machinery items].

7. Industrial Production Growth Rate (at 2016 figures) was a contractory -3%.

8. Labour Force (as at 2016) was 110 million people. Occupations are delineated as
(at 2011 estimate) Agriculture 15.7%, Industry 13.3%, Services 71%.

9. Unemployment Rate (at 2016 vs 2015 vs 2013 figures) 12.6% vs 9% vs 5.7%.
[NB the latest Q1 2017 readings being 11.4%, thus showing improvement]

10. Poverty (at 2013 figures) shows 21.4% below the poverty line and 4% below the extreme poverty line.

11 Household Income (by % Share at 2013 figures) shows the lowest 10% of households with 0.8% of generated income, and the top 10% with 42% of generated income. This demonstrates that whilst Brazil has seen much improvement, an enormous disparity still exists between the top and bottom tiers, with over 40% directed to what appears the ultra-wealthy 'Patron' establishment

12 Budget (at 2016 vs 2013 figures) US$ 632bn vs $851.1bn in Revenues, and $677.2 vs $815.6bn in Expenditure. [NB hence the relative positions have since changed significantly].

13. Public Debt of GDP (in 2016 vs 2015 vs 2013 figures) are 75.4% vs 66.5% vs 59.2%, now showing as ranked 37th in the world

14. Inflation Rate (in 2016 vs 2015 figures) is 8.4% vs 9%, ranking it as 199th in the world.

15. The Central Bank Discount Rate (2014 vs 2012 figures) was 10% vs 11%

16. Commercial Bank Prime Lending Rate (2017 vs 2016) is 47.4% vs 44%. Here Brazil is only 2nd in the world for the highest 'prime rates' (behind only Madagascar at 62%, and ahead of Malawi at 44.5%, thereafter Argentina and Syria both on 32%). This is of course a massive issue of major consequence, when what effectively is a much developed country has rates so much higher than what could be termed a 'banana republic' and what is a war-torn region. This effectively blocks domestic lending, so becoming even more reliant upon the stored wealth of national 'Patrons' and the FDI initiatives of foreign corporations themselves with either cash-piles or able to borrow at historically low rates.

17. Stock of Narrow Money (EoY 2016 vs EoY 2015) shows $107bn vs 85.64bn, demonstrating increased narrow liquidity. Ranked 34th in the world.

18. Stock of Broad Money (EoY 2014 vs EoY 2013) shows $928.9bn vs $835.3bn, this period demonstrating a substantial increase in broad liquidity. Ranked 18th in the world.

19. Stock of Domestic Credit (EoY 2016 vs EoY 2015) shows $2.076tr vs $1.644tr. This seen to be raised appreciably. Ranked 13th in the world.

20. Market Value of Public Shares (EoY 2015 vs 2014 vs 2013) shows $490.5bn vs $843.9bn vs $1.02tr. Ranked 20th in the world. These figures illustrate the enormous retraction from capital markets, over one-half of the value withdrawn in the space of two years, as local and foreign investors sought positive returns elsewhere.

21. Current Account Balance (est 2016 vs est 2015) is -$14.11bn vs -$58.88bn. This very positive news illustrates one avenue by which Brasilia has sought to vie against international credit agancy down-grades. The reduction of the balance however appears as much influenced by the deflation of the Brazilian Real. Now ranked 184th in the world.

22. Exports (2016 est vs 2015 est) shows $189.7bn vs $190.1bn. Ranked 24th.

23. Imports (2016 est vs 2015 est) shows $143.9bn vs 172.4bn. Ranked 28th.

24. Export Partners (2015) China 18.6%, USA 12.7%, Argentina 6.7%, Netherlands 5.3%.

25 Import Partners (2015) China 17.9%, USA 15.6%, Germany 6.1%, Argentina 6%

26. Foreign Reserves Exchange and Gold (est EoY 2016 vs 2015) $352.1bn vs $356.5bn. Ranked 10th in the world.

27. External Debt (est EoY 2016 vs 2015) $544.1bn vs $542.3bn. Ranked 21st in the world.

28. Stock of FDI at home (est EoY 2016 vs 2015) $673bn vs 615bn

29 Stock of FDI abroad (est EoY 2016 vs 2015) $295.3bn vs $288.5bn.

30. Exchange Rate vs US Dollar (2016 vs 2015 vs 2014 vs 2013 vs 2012) 3.483 vs 3.3315 vs 3.3315 vs 2.3535 vs 1.95. This illustrates the enormous drop in value against the US$ that the Brazilian Real has experienced, stemming from both the massive shift of contracted global trade, the 'pull-out' from the domestic bourses by domestic and foreign investors and the likely rise and influence of US$ driven black-market FX exchanges, demanding ever higher differential rates (disengenuosly) set against record prime bank lending rates.


To add greater comprehension to the present state of Brazil's economy, the following commentary by a commercial research firm is also given (though with the proviso that there may be a pro-LatAm sentiment so as to promote business).


Focus Economics :

With an webinar talk titled “Latin America in 2017: A Turning Point?” this economic forecasting firm sets the premis that any heightened uncertainty in the northern hemisphere could redirect stronger investor sentiment back toward South America.

Its mid March 2017 commentary stated that Brazil's dynamics were “bleak” with a failure to see significant gains in Q4 2016 and another steep contraction in GDP, progressing the worst (technical) recession on record. High unemployment, austerity measures and tight monetary policy hamper the economy with “muted” gains in Q1 2017. Industrial output sank in January whilst business confidence fell in February. However February also saw improvements in consumer confidence and manufacturing PMI, so providing reason for shift in general sentiment.

Of further assistance has been governmental creation of an infrastructure concession programme as of 16.04.17 so as to prompt renewed investment interest – to the value of US$14bn – in various national airports.


To Follow -

The observations of the Organisation for Economic Cooperation and Development.