Sunday, 4 March 2018

Macro Level Trends – (Return to) Brazil – Firm Domestic Foundations vs International Econometrics.

The recent S.Korean Winter Olympics, buoyed by the ground-breaking move toward apparent entente cordiale across the South-North Korean border, dims the positive memory of the previous Brazilian Olympics and Paralympics from 19 months ago.

The old adage is that any host nation pays twice over: once regards the enormous infrastructural costs, then by way of negative economic aftermath soon following the event. But likewise the theory is that such heavy spending creates new economic possibilities in terms of transport, housing and improved 'sports economy'.

[NB as regards advancement toward a more unified Korea, the progress made by the previous metamorphosis of parts of the DMZ (de-militarised zone) toward the current existence of the specific 'commercialisation-zone' would bode very well for major aspects of S.Korean industry. As any initial 'free-port' ideology would in time seemingly extend toward major public works and replay the beginnings of Chinese-style shift from Communism to increasingly mixed-economy Socialism].

During the 2016 event Brazil itself was already suffering in the midst of global economic problems, those tsunami waves not of its own doing but obviously having impact. (Though far lesser than compared to the West, for all the contraction data sets; given its central place in the burgeoning 21st century global growth story.

Nonetheless, to overcome a 'top-heavy' socio-economic model, remedial action was and continues to be necessary. President Temer's attempts to re-shape Brazilian industry, commerce and society with a rational and fair new model template seeking to re-orientate Brazil's increasingly recognised reduced competitive global position.

[NB full details illustrated in the previous web-log].

Those Reforms creating the new super-structure to the macro-economic foundations that have and are being laid.

So to expand the Brazilian perspective, and highlight the efforts already made, it is worth looking at 3 other pertinent aspects of the economy that may (beyond the centrality of Brazilian economists and western/worldwide investment bankers) may have over-looked given the North American and Asianic focus of recent times.

The Base Rate and Inflation Rate -

The Central Bank of Brazil has seemingly worked wonders in the stabilisation and decline of the key metric that is the (Overnight Interbank lending) 'Selic' Rate. At the turn of the century with distrust abound it stood in 1998 for a short time at an eye-watering 42%.

[This illustrated the damage wrought by both poor policy, seemingly unlimited money-printing (with various previous fiscal and monetary experiments and resurgence of rabid investment expansion even after the earlier Latin American Debt Crisis, itself fuelled by the same aspects of crony-capitalism that previously led to the ASEAN Tiger Crash a year earlier].

Since that unfortunate monumental high the Banco Central do Brasil has gained much rightful international respect by using the economic rewards of the previous Brazilian growth story very well, steering that transformation via its institutional dynamic levers, so as to 'about-turn' the previous short-term skepticism of domestic and international lenders and investors toward increasing long-term trust.

Major reforms in 1999 saw the SELIC Rate drop precipitously from 45% to 20% over that year, then to see trend-line decline – though in a much wavering oscillatory pattern – until the previous low in Q4 2012 and Q1 2013 of 8%. An upturn to 15% caused by Olympics spending in 2015/16 (and arguably some 'hot money' from China and elsewhere) has since been quashed; primarily via the sharp felt retraction of constructional spending and exports contraction, to the now historical SELIC low of 6.75% (set most recently on 07.02.2018).

That feat was the latest of eleven straight rate reductions by the COPUM Steering Group, taking the SELIC to a level even below the previously set target inflation rate. Given the emergent rebound of consumer spending and retail price inflation of near 3% in December 2017, mostly driven by non-disposable fixed-expenses through housing and transport rises; so upping what had been a more sluggish general Consumer Price Inflation over the previous 4 months, but more than broadly amenable to all given the previous 6.29% a year earlier.

Ordinarily, when climbing out of a recessionary period such costs would have an effect on more discretionary expenditure, typically brought about for a period because of the spending gap between static personal incomes and increased personal costs of basics; so potentially affecting sectors such as FMCG and Leisure.

However, mirroring the Chinese effort, there has been effort by Brasilia's economists to create B2B and B2C demand-pull, doing so via the much improved health of national credit markets and so availability to business and consumers.

This seen in two specific areas: the massive upward growth in new car sales (as exemplified by Volkswagen's 45% YoY rise), presumably to SME's and wealthier individuals, and the success of the relatively newly established e-retail realm that reaches nearly all levels of digitally connected consumer.

Hence overall there has been positive inflationary traction across two of the three types of inflation: Cost-Push and Demand-Pull, with expected absence of Wage-Push until possibly the long term, that economic gain stemming from the planned Labour Reforms that would overcome the stubbornly 'inelastic' labour capacity that had become a defective aspect of the system.

Presently the CBoB states that it will maintain an 'accommodatory' monetary policy, with interest rates below the 'structural norm'. This policy eased as the broad economy grows as forecast at approximately 2.75% per annum (the 'averaged consensus' of polled economists), so as to reach a broad relationship equation between overall inflation and interest rates. Whilst those economists also expect the SELIC to remain flat at 6.75% throughout the remainder of 2018; presuming the CBoB will maintain a reduced structural differential vs creeping inflation.

The Unemployment Rate -

The Unemployment Rate fell 0.2% between Q3 and Q4 2017, to 11.8%. Some observers expected greater decline, however undoubtedly this appears to indicate the cautiousness of still tentative business community regards new recruitment; awaiting instigation of what would be very beneficial Reform change regards recruitment bureaucracy, obligations and labour availability.

At 11.8% this is the lowest rate in 17 months and illustrates that the previous peak of 13.5% is well behind, but given the present attitudinal stance of business, it may be assumed that the present “aroundabout 12%” unemployment rate may be the 'static floor' until those critical Reforms are enacted.

The Political Slant -

Finance Minister Henrique Meirelles remarked on 27.02.18 that overall 2018 growth would be higher that the 2.75-2.80% estimated by economists, also believing that the 2017 measure of 1.0% may have to be revised (upward 10%) to 1.1%.

Exactly how Meirelles reached this conclusion is vague, but it appears obvious that the Temer administration is trying to enthuse both business people, the national populace and foreign investors and governments, by maximising the good news story.

This enthusiasm balanced by conjecture of “above 2.5%” for 2019.

Obviously seeking to manage expectations over the short and medium terms, with knowledge that the economic metamorphosis sought should allow for provision of a well-managed steep growth climb from 2020 onward. Hence his desire to buoy the here and now and beat the forecast beyond the next few years.

Debt to Gross Domestic Product -

Key for Brazil is the vital need to manage its national liabilities, the most prolific of which is its ageing workforce and the enormous burden of overly generous (early) pension availability and costs, with other issues pertaining to level of remaining state control of industry and commerce which itself because of Socialist past is equally mired in financial burden and inevitable operational inefficiency and under-investment.

Some commentators will relate the 'liability issue' to Brazil's notionally high Debt:GDP ratio at 74%, markedly above its previous lowest of 51%.

Compared to many 'top-heavy' Triad nations this appears mild. Presently we see Japan: 250%, Greece: 179%, Italy: 131%, Portugal: 126%, USA: 105%, France: 96%, Canada 92%, UK: 89%, EU Area: 89%....Germany: 68% the well managed exception (thanks to its education system, its level of high 'added-value' and its worldwide export-base as the enabler of other nations).

Hence Brazil seemingly sits comfortably here, but this is to compare “apples with pears” given the differing stages of economic progress between the advanced EM and arguably post-peak AM examples..

Compared to the measures of its truer counterparts in the BRIC, MINTS / CIVETS and a very different picture can be seen. Russia: 12%, India: 69%, China: 46%.

Hence seemingly metrically upon par with India, and with similar younger population-pyrimid. But critically India has enormous room for expansion thanks to population size of 1.34bn vs Brazil's 211m; thus Brazil sits in a comparatively negative position (simplistically by a factor of six). And whilst there is periodic western talk of China's own demographic crisis resulting from an ageing population and the effects of the previous one-child policy, its own pyramid is relatively balanced across the generations, it has 1.38bn people and it enjoys a substantially lower Debt:GDP ratio. Russia sits numerically in the apparent best position, but only because of the disparity between its enormous Oil and Gas income, under-investment in education and economic diversification and lacklustre public-spending programmes.

As per the MINTS and CIVETS: Mexico: 48% with 130m people, Indonesia: 28% with 263m, Nigeria: 18% with 192m, Turkey: 28% and 80m, with Colombia: 47% and 49m, Vietnam: 62% and 95m, Egypt: 92% and 95m, South Africa: 51% and 64m
Thus we see that presently Brazil sits in a precarious competitive position if its Reforms are not implemented. Specifically regards India and China over the near and medium term, and in the longer term Indonesia (given ASEAN: Japanese, Chinese and Australian interests), and possibly Nigeria (given Chinese, British and European interests), with a new era American soft-power influencing much of the remaining nations previously viewed as Pioneer regions.

In Summary -

The apparently improving relationship between S. Korea and N.Korea seen at the Winter Olympics (literally watched by the American Vice-President) well illustrates the seeming intentional renewal and expansion of a long distant Asia-pact ideology in its own form; something not seen for centuries. The China sponsored 'New Belt and Road' scheme encompassing a new growth stratagem centred upon the Far East, Indian Sub-Continent, Central Asia and the Near East.

With tie-in to the present ASEAN trade-bloc the stage is being set for a re-balancing of the global economic order. Even if progress appears slow to date, the promise of greater autonomy and socio-economic strength for many presently insignificant countries that once were vital to the over-land trading of yesteryear's 'Silk Road' (which ran Beijing to Venice) is undeniable. So much so that the modernisation plans and implementation seen in small-scale urban planning precedes expectations of economic planning and the previous post-ponement of the 'Economic Miracle' dream seen elsewhere; Brazil a shining example in the 1950s/60s and 1990s/2000s.

With an increasingly defensive and possibly insular USA (its metals manufacture protectionism hurting Brazilian exports) and a slowly growing but realistically North-South fractured Europe (echoing much of the 20th century experience), Brazil must more than ever look beyond its ethnographic roots and historical trading template associated with nominally titled AM nations, and better connect to its BRIC counterparts, the MINT nations, those of the CIVETS and indeed even further afield in Africa and vitally act with renewed vigour in Latin American leadership.

Brazil then must not only re-organise itself across its Foreign Relations front – this much improved over the last 20 years – but ensure its internal re-organisation via the raft of socio-economic Reforms are implemented as envisioned.

Any short-fall in making Brazil more globally aware, fit-for-business, better educated, entrepreneurial and so internationally competitive, would be to fall short of its massive potential as an EM leader across a myriad of fields which impact upon prosperity and ecology, from green-power generation to smart-cities and satellite-towns, to new nation-wide planning formulas to lightweight standard and autonomous vehicles to end-of-life recycling and ethical disposability.

Just as China has become the industrial powerhouse of the world, India the IT consulting hub and Russia still the eponymous lowest-cost fossil-based Energy centre, so Brazil must intelligently deploy its enviable spread of human, industrial/commercial and natural resources; doing so in a unified way that truly convinces, both at home and internationally across 2nd, 3rd and 4th Tier countries.

Brazil's central bank has long undertaken what was initially an onerous task to much improve domestic and international confidence in both the its currency, base rates and interest rates, the former previously massively affected by the extremely damaging historical syncronicity of the latter two, that unhealthy co-dependent relationship now essentially defunct with what might be deemed and broad 'structural normality' at amenable levels now in place.

The foundations of the economy then have been put in place over a long period. Precisely because the high costs, disfunctionality and so volatility as output of yesteryear's Socialistic Statist mantra has – and continues to be – recognised as inevitably inefficient and so dismantled.

Yet as illustrated by worldwide metrics, even though a beneficiary of late 20th and early 21st century global capitalism, the costs of this ongoing transformation have been costly as the expenditure public infrastructure projects of whatever colour and ideology still weigh heavy on the national balance sheet; even the gain of realised assets vs accumulated projects' debts.

Without addressing this paper-based imbalance, by exporting more products and services and importing more FDI and expertise and labour to better 'sweat' those physical assets, Brazil looks to be caught in the classic 'middle-income trap' – effectively the reluctance to improve its mid-level cost-base, which in fact appears overtly high to other up-coming nations who themselves seek the assistance of lead EMs for their own growth toward prosperity.

To this end, beyond Temer's vitally important raft of competitively transformational Reforms, the business community – historically led by the Sao Paulo Chamber of Commerce – must continue to deepen and expand its offering to both the nation and the world at large. New expansions of incumbent companies such as: Troller (specialist vehicles), Marcopolo (Coach and Bus), Avibras (military products), Klabin (recycled paper goods) and the rise of all-new entities from within industry and academia and indeed from the supported energies of the young, to befit a myriad of today's and tomorrow's needs, wants and desires...[and so brightly shine above the previous dark clouds associated with Petrobras, Odebrecht and JBS].

The Latin American adjunct to Davos 2018 takes place very shortly in Sao Paulo (13th to 15th March at the Grand Hyatt), with special note of the intersect between Brazil's upcoming elections, the need for Reform, the trade pipeline and springboard that is the increasingly important Mercosur-Pacific Alliance, and the continued unfolding of the digitally enabled '4th Industrial Revolution'.

Perhaps as never before have the eyes and minds of Latin American leaders been so avidly focused in 'Shaping the New Narrative' across a plethora of socio-eco-techno-commercial arenas.

If Brazilian business both old and young can acquit itself upon the worldwide stage as well as the former Olympic showcase, there is good reason for an increasingly synchronised EM-AM world led by fair capitalism and centrist moralities to be optimistic.