This portion of the web-log continues to summarise the prime events that impacted the busts and booms of the national economy in the modern era (the 1980s onward); having already described the major impacts of :
- The Latin American
(Sovereign) Debt Crisis
- The Plano Real
- The 'Asian Tiger'
Crisis
However, after nearly 2
decades of stagnancy and delayed economic fruition, Brazil did indeed
experience what might be termed as its '3rd Golden Age of
maintained growth with the arrival of the 21st century.
The Global Commodities
Boom -
(1999 – 2013)
As is well appreciated,
for investors and the mass-populace alike, the 'psycho-geography' of
the country is its prolific connection to the provision of basic
agriculturally grown and ground-extraction commodities.
Previous description
highlighted how 'the earth' originally provided for aboriginal
peoples, but thereafter became an engine of wealth creation for the
first European settlers and their successive generations, who
satisfied not only local demand for foodstuffs and materials, but to
great advantage also financially gained enormously from the
exportation of an ever greater spectrum of items to Europe, North
America, and thereafter the Middle East, Asia and Africa.
This ability brought
the regional land-owners immense wealth and effectively continued the
'Patron' and Subordinate relationship well into the 20th
century, as such incomes were re-directed into more and more
industrialised activities, on the farm, under the ground and across a
plethora of secondary and tertiary commercial activities.
At the national level
through-out Brazil's modern history, it has largely been the income
made available from that combination of mother nature's bounty
coupled with man's technical ingenuity that has provided the national
income to create the foundations for further increasingly diversified
growth that has promoted ever greater social inclusion. Whether that
be industrial subsidisation together with legislatively capped
wage-rates to allow SOE companies to employ greater numbers of
workers and so spreading the national wealth more evenly (such as
1960s FNM trucks), or the well-considered latter-day social-welfare
programmes designed to reach those trapped in the vicious cycle that
is poverty (seen in the 2010s with education and child-support for
single young mothers).
The re-investment from
commodities then help to 'de-commodify' what was once a relatively
homogeneous workforce, as the generational off-spring of farm and
building labourers themselves became better skilled and so
perpetuated Brazil's economic expansion.
However, as well
recognised by Brazil's 1930s economists, reliance on commodities was
and is a precarious affair, given the typically low volumetric value
of many grown crops and mined ores
compared to higher
value-added products and services, and the volatility of national and
international markets. The only exception that of precious and
semi-precious gem-stones, but these obviously only minuscule in terms
of volume and offering little to the overall national GDP and
regional GRP.
Thus for all the
arguments for uncoupling Brazil from its economic roots in
commodities, the sheer size of the massive contribution agriculture
and extraction makes directly to corporate profits when times are
good, and indirectly to those most in need, cannot be ignored or
indeed undermined in any objective consideration.
For this reason
government after government has – whilst promoting diversification
of the economic base - sought to also effectively bolster the
critically important commodities sector, also well recognising its
contribution to the continued diversification goal.
Between the late 1960s
and the mid 1990s the global commodities market – and so Brazilian
activity – was in an effective slump.
The period started with
the North American recession, its ripples throughout Europe, the
impact of the mid 1970s Oil Crisis resulting in high energy prices
and so cost-disadvantageous growing and extraction and through the
1980s and early 1990s the Anglo 'trans-Atlantic' investment focus
decidedly inward and dedicated to 'de-industrialisation' (including
asset-stripping), new “transfomative” IT, the growth of knowledge
services and of course the banking and investment profits enabled by
the expansion of the housing sector (in new build and redevelopments)
assisted by sizeable base-rates and so interest-rates.
Effectively over that
long 25 year period the only interest from specialist investors
within the general commodities arena was regards oil-price spike
speculation in 1974/5 and gold as many specialist and lay investors
sought safe-haven allocations through the much-distressed era.
With most of the world
in what appeared a slow economic melt-down (excluding the continued
rise of Japan), consisting of high inflation, public disquiet,
trade-unions' voices, workers strikes, increasing unemployment and so
decreased tax-takes to central government and municipal budgets
creating further unemployment and so economic malaise, there was
seemingly all the reason in the world that the commodities sector
would inevitably become as much a 'ghost territory' as the mining
'ghost-towns' of old.
But from the mid 1990s,
and most visibly from 1999 onward, a massive change of sentiment
would occur as the global economy became stronger thanks to the
outcomes of results of previous historical 'Global-Macro' events.
The 1989 collapse of
the USSR initiated the 'opening' of Eastern Europe and Russia to
Capitalism and economic revival, the 1992 shift in India from an
effectively closed 'Raj' operated industrial economy to a more open
and competitive one, and the impact of China's increasing internal
reforms and more 'open door' policy (aided by the return of the
trading hub that is Hong Kong), and the integration of Europe under
the 'EU', together all meant that the economic 'techtonic plates' of
world had economically shifted massively within a decade.
This socio-political
shift would be the precurser to a new globalist growth mentality that
spanned from from Wall Street to Warsaw to Wuhan. The adoption of
seemingly raw capitalism however was tempered with very necessary
inclusion and growth social agendas. That in turn meant truly
metamorphic physical alterations to cities, towns and whole regions
by way of major infrastructure projects which in turn provided the
impetus for incoming private capital to literally and metaphysically
rise from the foundational infrastructure provided.
Brazil would experience
what became arguably its most meaningful leap into a better future,
surpassing its previous golden age represented by Brasilia. Whereas
then the same upper-middle class merely relocated to a totemic city,
from the 1990s onward a whole new lower-middle class would be created
thanks in no small part to the direct and indirect income provided by
globally exported basic commodities.
By the early 1990s the
economic template of Brazil regards industry and services had
broadened considerably, but services and the automotive element of
production industry were still somewhat infant, especially regards
export earnings.
Although Brazil had
long since modernised, at this time there was far greater internal
and external income bias towards extractive and agricultural
commodities. But an renewed export stance was especially vital given
the unserviceable foreign debt load of $122bn, declining internal
growth, high inflation and poor policy formation.
The following
comparison provides a much simplified picture regards the export
split by monetary value, with a 1993 estimated vs 2015 actual.
Sources: OEC and
Harvard's Economic Complexity 'Tree Maps'
Comparative Export Earnings....set-out as:
1993 (est) vs 2015
Total Value:
1993 approx $34bn
2015 approx $195bn
Commodities...
Extractive :
Iron Ore and
Concentrates 15% vs 8% ($15.2bn)
(as Granular/Powder) 2% vs 3.2%
Crude Oils 4% vs 6% ($11.8bn)
Refined Oils 1.5% vs 4% ($8.04bn)
Gold
2% vs 1.7%
Agricultural :
Arable -
Soyabean 15% vs 11% ($21.1bn)
Soyabean Oil/Cake 6% vs 3.9%
Coffee 7% vs 2.5%
Maize 5% vs 2.3%
Sugar Cane 6% vs 4% ($7.83bn)
Fruit Juices 3% vs 1%
Tobacco 3% vs 1.5%
Livestock -
Poultry 1.5% vs 3.3% ($6.53bn)
Pig Meats 0.5% vs 1.8%
Skins 2% vs 1.4%
Automotive :
Assembled Vehicles 0.5% vs 2.56% ($5.0bn)
Components 0.9% vs 2.76% (5.4bn)
(All Other Items)
(not shown to aid clarity)
This illustrates the
re-shaping of the general export-base of goods over two decades. But
what is most obvious is the manner in which commodities maintained
and indeed grew their importance to Brazil for foreign currency
earnings as the notional pie grew 670% between 1993 and 2014,
contracting by 14.5% in the following year shown.
An export earnings
time-line depicts the impressive impact of the 'commodities
super-cycle' on national income.
1993 - $39bn
1995 - $50bn (an
initial 25% jump to feed China, Asia and E.Europe)
1996 - $52bn (new
flat-line trend over next 3 years - effects of Asian Tiger Crisis)
1997 - $55bn
1998 - $55bn
1999 - $49bn (the
beginning of the globalisation 'super-cycle' for the next 13 years)
2000 - $60bn
2001 - $62bn
2002 - $63bn
2003 - $79bn
2004 - $105bn
2005 - $122bn
2006 - $141bn
2007 - $166bn
2008 – 208bn
2009 - $160bn
2010 - $202bn
2011 - $261bn (the
'super-cycle' peak, three years after Western Financial Crisis)
2012 - $250bn (the
beginning of the EM slow-down)
2013 - $245bn
2014 - $228bn
2015 - $195bn
As regards export
destinations, as is well known, a fundamental re-proportioning shift
took place with the rise of China (and SE Asia).
1993 – the EC 27.6%,
LatAm 21.8%, USA 17.4%, Japan 6.3%, RoW 26.9%
2015 – China 18.4%,
USA 12.56%, the EU (F,D) 14.3%, Argentina 6.6%, RoW 48.14%
With lesser relative
imports, in 1993 Brazil had a Balance of Trade surplus of $13.1bn,
whilst in 2015 the figure rose to $25.3bn. Given that in 1993 the
surplus was one-third of export value, and that in 2015 the surplus
amounted to 'only' 13% of export value, it is easy to understand the
great degree to which Brazil both opened its borders to higher-value
imported goods and services whilst arguably suffering from the
exportation of low-value commodities.
Whilst its export
income rose five-fold in this period, its surplus only doubled.
This then follows the
necessary adherence to follow globalisation policy by better
balancing the BoT so as to generate increased international
mutuality. Yet Brazil well recognises the possible derogatory
long-term impact of lower-grade exports vs higher-grade imports as
the standard of living and expectations of the populace grows and
commerce demands high-quality foreign capital goods to boost the
quality of Brazilian made goods and services.
Thus possibly leading
to an increasingly negative BoT if the export dimension is not well
managed.
The need to adequately
protect the nation's financial standing as commodity exports decline
seen in the next item, government recognising a need to deflect the
level of foreign imports in B2C and B2B goods and the need to
internally re-invest to raise Brazil's industrial and service
capabilities.
Whilst the last item of
this web-log looks at how corruption around “national commodities
for the public good” has recently come to light.
The 'Plano Brasil
Maior' -
(2013 onward)
Brazilian economic
growth between the early 1990s through to 2013, provided twenty years
of improvement for many.
Wherein the old,
typically functionary based middle-class (professionals, senior civil
servants, etc) became the new Upper-Middle whilst others (teachers,
administrators etc) expanded to comprise the new Core-Middle. And
critically this new growth era allowed many to rise from the Working
Poor to fill a newly emerged category: the New Lower-Middle.
Whilst obviously
favourable boom economic conditions for many, the raised standard of
living came at the cost of relatively high inflation rates, seen with
the strengthening of the Brazilian Real.
The heavily populated
urban coastal regions, the cities and tentacle suburbs, saw a vicious
circle of spiral of cost and so price inflation, as the sensitivity
between input costs and output costs and so ultimate price rose. This
ranging across base materials to semi-finished items to physical
labour to a new sets of 'professional' disciplines (formulated to
propel the 'lower-middle' zeitgeist and compel consumption) to
critically IT and associated services.
The ripples of the
global economic recession finally hit Brazil in 2013 and even though
high value exports such as vehicles are still strong, the country has
found itself caught between the after-effects of its expansionary
modus operandi and the new need to re-align its national cost-base
(and indeed the strength of its currency).
Recognising the
predicament, the Roussef government created the 'Plano Brasil Maior',
which itself echoes the 'Import Substitution Industrialisation'
policy of Vargas and Kubistcheck.
Of primary concern is
the emerged pattern of B2C and B2B purchasing behaviour, buying ever
more from foreign countries, inevitably much from the USA and so
arguably an over-reliance on external entities who have vital core
competencies / human resources, elements of which are beyond the
domestic industry and services skills-base.
Furthermore, during the
expansion of the national Service sector what is now viewed as
problematic 'De-Industrialisation' also took place (this historically
typical). With this a loss of suitable professionals in various
fields and invariably little education and training to fill what were
thought to be yesteryear activities and roles. So, just as advanced
economies are struggling to re-kindle the 'economic mass' of their
old industrial activities, so Brazil has also recognised this
problem.
Added to the problems
of the advanced skills vacuum, and those lost core skills, is the
fact that those twenty years of economic expansion were also assisted
by government spending on high cost infrastructure and social
programmes, all paid by increasing tax revenues and increasing 'take'
and higher foreign capital markets debt.
[NB The inability of
the City of Rio to make a recent payment and subsequently
'bailed-out' by national coffers depicts much about the current
unsustainable situation for the hosts of the Olympics and Paralympic
Games].
“Innovate to Compete”
is the slogan which endeavours to nurture a Silicon Valley mindset,
but also beneath which a swathe of protectionist measures (in the ISI
manner) are designed to provide the necessary defence against global
forces (especially so Chinese...as with Autos and IT). So as to allow
Brazil to reconfigure itself from a late 20th century
'commercially yesteryear' economic engine into a 21st
century 'commercially advanced' economic powerhouse.
Thus more government
and private investment is being funnelled into engineering and
technological careers, an absence of these skills recognised as
severe barriers to continued development.
When presented by
Rouseff et al, the 'Plano Brasil Maior' had six prime 'pillars':
1. Re-Integra : tax
exemption for exports, the scheme will refund between 0.5% and 4% of
the costs of taxes incurred in the creation of industrialised goods.
2. Government Purchases
: establishing a “margin of preference” of 25% for domestic good
and services in state tendered contracts, relative to specific
strictures for national and regional (re)planning regards investment
in jobs, industries, locales etc around innovation.
3. Commercial Defence :
the scope and depth of investigations into 'anti-dumping' practices
by foreign interests strengthened fourfold in associative Ministry
headcount, with specific focus on imported goods' true origins and
under-pricing.
4. Certification and
Research: strengthened product and process standards set by a new
Quality Institute. Its prime attention regards any disparity between
the quality of foreign made goods and nationally produced goods, and
the creation of a network of laboratory centres across the country
that formulate and 'incubate' advanced scientific and technological
activities to support the initial phases of commercial transfer and
exploitation.
5. Payroll Tax
Exemption : to create job creation stability no new employee tax
burden to those firms operating in sectors exposed to dominant
foreign competition (eg clothing, shoes, furniture and software),
with taxes paid refunded by a central governmental body.
6. PIS-Cofins, Tax
Exemptions and Digital Book-Keeping : vitally to the auto-sector, a
reduction in the 'IPI' tax on trucks and light commercial vehicles
(aswell as building materials and capital goods) to promote building
activities. Also, payments and compensation claims to be paid by
government within 60 days to those firms with digital book-keeping.
As always such reforms
generate reaction, and so various criticisms have been voiced within
Brazil.
Firstly, that the
pledges made by national government to take on the fiscal
responsibilities of per state bodies that directly interface with
commerce and workers will not be upheld, leaving firms and people to
ultimately fend for themselves; this seen from a long history of such
empty promises (eg the withdrawn 1950s assistance pledge
Isotta-Romi).
Secondly, that this
manifesto plan is limited to micro-economic issues, and absolves
itself of as important macro-economic factors (ie interest rates,
exchange rates and salaries).
Thirdly, that of the
level of public indebtedness, whereby (as seen with the city of Rio
de Janeiro) the National Treasury has taken on the weight of
notionally Independent State incurred debt.
Fourthly, the
likelihood that such (obvious 'back-door') protectionism seen with
“Certification-ism” will compel and invoke similar actions from
foreign importing nations of Brazilian exported goods and services.
Operation “Car
Wash”...
and the Required
Reforms -
There is an old saying
that “a Policeman's lot is not a happy one”, precisely because
maintaining the civil body of what passes as 'civilised society' is a
very hard task. The recent events next to the heart of government in
London well illustrate that whilst politicians provide the rhetoric,
it is the police-officers on the ground who really 'represent' the
people.
[NB it should be noted
that whilst politicians are elected, seen and have a modicum of
influence, it is the purity and strength of internal institutions
(from social services to policing to the law) that are the effective
agents of the people and for these to be strong they must be both
efficient yet also well supported by a strong national purse].
This notion perhaps
best seen in recent years in Brazil, wherein once near broken federal
and state
police bodies have
themselves gained from Brazil's commodities' driven global rise, so
as to crystallise the nation's motto of “Order and Progress”.
This so at both the bottom of society and at the top.
At the bottom the world
witnessed how, in the run-up to both the World Cup and Olympic Games,
para-military style policing was the only way by which the favellas
of Rio de Janeiro, Sao Paulo and elsewhere could be cleared of the
once entrenched violent drug gangs. This then providing the required
home environment in which a new generation could improve itself to
inturn improve Brazil.
But more recent years
have seen how Brazilian law enforcement has also targeted those at
the very top of society in business and politics who – although
already extremely comfortably-off – sought to utilise their power
for their own material gain.
Most notably by
effectively creating collaborative inner-circle cliques by which to
'skim from the top' from the massive revenues and capital
expenditures of the national oil giant Petrobras (and other large
firms) through the intentionally inflated costs of procured
infrastructure contracts.
This cam to light in
2013/14 just as the Brazilian economy started to contract because of
global trade conditions caused by both the 2008 western financial
crisis and the fact that the EM regions had both not ultimately
'de-coupled' from the west, and because China sought to cool-down its
own over-heated economy.
These conditions led to
collapse of the global oil price and a new unseen fragility to an
over-indebted Petrobras. This would have immense repercussions for
the national purse given the enormous contribution to government
income the essentially part-privatised state-controlled oil company
provided.
However, 'to add insult
to injury' for the people of Brazil, thanks to an altered hard stance
by judges and better empowered police, it became clear by late 2015
that Petrobras had been used as a 'gravy train' for about two-hundred
senior figures
The scandal became
popularly known as 'Operacao Lava Jato' (Operation Car Wash), the
initial police code-word for the investigations.
[NB the promotion (by
the press) and popular adoption of this very phrase itself indicates
that today's masses may have greater faith in the idea of a
responsible and benevolent authoritarianism, by individuals whose
existence is based upon morality and decency, as opposed to the
club-like 'high-tower grandiosity' of senior politicians and
corporate executives].
The scandal began with
an investigation into money-transfer/laundering in early 2014 between
a black-market currency dealer and, his 'client' and the present of a
new Land Rover Evoque. It was not the car that provided the name of
the affair, but the fact that it apparently started at a
Petrol-Station/Car-Wash.
[NB the deniers of the
allegations will undoubtedly highlight that this location origin
appears very convenient – almost unbelievably so -and was used to
initially target Petrobras and gain widespread public belief in the
story and so topple a powerful cohort of business people and
poliicians].
It seems this activity
had connections to a police report by Hermes Magnus back in 2008
regards similar attempts to launder money through his electronics
parts manufacturing business.
The weight of this case
led to wider exploration based upon conspiracy allegations and so
possibilities between various Petrobras directors and construction
firms regards the allocation of lucrative (overly high-priced)
tendered contracts.
Press reports state
that by by late 2016 more than R$30bn / US$8.9bn had been potentially
illegitimately moves and involved a group of nine construction
companies and disparate group of people numbering about 200.
The effect upon
Petrobras was nigh-on implosive, delaying its FY2014 results and
seeing a write-down of $17bn in 2015, nearly prey to its bond-holders
who were on the fringe of seeking full liquidation had the results
not been published in time, was forced to suspend its dividend
payments, cut capital expenditures by 40% over the 2014-18 timelin,
and required to sell $13.7bn worth of assets to reduce its high
balance sheet debt.
The political impact
was equally large, with enquiries into the seemingly boosted fortunes
of the Worker's Party Treasurer, a Former Chief of Staff, the Speaker
of the Chamber of Deputies, the Former Minister for Energy and Mines
and a Former President indicted.
The gravitas of the
matter, indicating its scale, became sharply apparent when the small
plane carrying the Supeme Court Justice who was administering the
corruption trials crashed into the sea near the tourist town of
Paraty in the state of Rio de Janereiro; many believing this hardly a
coincidence.
Investigations are
ongoing, but the scale of the matter became apparent when the CEO of
the Odebrecht conglomerate was given over 19 years because he
provided over $30m in bribe payments to Petrobras personnel.
But whilst justice is
seen to be done, this will not be of help to those directly affected
by the virtual collapse of the oil giant. As a major employer its
delicate condition means operational cut-backs so affecting the
income of many; which obviously effects regional local economies,
from general retailers to municipality incomes.
Petrobras was a major
show-case and development vehicle for the over-due Brazilian
privatisation drive, but without major change, the few but powerful
internal investment institutions, the general public and external
investors may be cautious about putting their personal or client
monies into a what might be seen as still a questionable entity.
Perhaps the only future course being a massive clear-out of top-tier
seniors and their immediate lieutenants.
Critically, given the
real-world impact of the scandal upon the public and investment
community alike, it seems only sensible that to ensure such an
episode cannot occur again within Petrobras or a similar corporation,
that very necessary commercial reforms are undertaken so as to put a
larger slice of the many government-controlled firms into the hands
of more prosaic owners, executives and managers.
This means greater
exposure to the national and international public bourses; wherein a
new round of successive stake-holders – critically with financial
and strategic acumen – would be better able to ostensibly 'police'
the firm through much improved transparency and executive
questioning.
The impact of the
Petrobras scandal demonstrates that any possibility regards the
overly cosy relationship between Brazilian politicians, those state
appointed national champion executives and the seniors of
contract-supply firms, must surely be over.
The true scandal would
be if the current status quo continued unabated, since it would deter
optimism and new allocations of domestic and foreign capital; new
capital that would serve the many, not the few.
To Follow -
A summary of the
current economic climate, underpinned by the OECD's observations and
findings regards Brazil's near and medium term socio-economic
picture.
