This weblog – at long
last – returns to the subject of Brazil and its socio-economic
present and future, and so overall investment potential.
As seen previously,
having enjoyed a record growth period for nigh on two decades from
the mid 1990s onward, but inevitably suffered because of the negative
chain reaction effects of: firstly the American created Great
Financial Crisis, then the European Sovereign Debt Crisis and so
inevitably the concomitant “Contraction Effect” to the BRICs and
'Next 11' nations.
Brazil like most was
overtly exposed given its innate global inter-connectedness. But
those previous twenty years of prosperity aswell as its socialist
start-point means that – unlike others – by comparison Brazil
enjoys a level of theoretically readily adjustable socio-economic
leeway (and thus a buffer) by which to steer its future course; by
'trimming its fat' seen across heavy bureaucracy and generous social
provisions.
As a recent FT graphic
displayed, EM central and institutional banking sought to effectively
increasingly de-couple from the US$ ( historic global reserve
currency) since 2006, by generating core national debt precisely for
domestic B2B and B2C banking purposes. Greater self-sufficiency to
avoid replays such as the Latin American Debt Crisis of the 1980s and
early 1990s in which ineffable close ties to the US$ both assisted
stability yet also ironically created domestic collapses. So since
2006, EM central banks have effectively retained an overall near
static lending level from the USA, and grown the presence of domestic
currency based lending both at home and across EM nations. Hence for
the MINTS and CIVETS a far greater portion of their own foreign debt
resides in Reals, Rubles, Rupees and of course Renminbis.
Thus whilst EM
countries are still much affiliated with the West and likewise
“caught a serious cold” when America sneezed enormously in
2008/9, whilst the West still effectively experiences its 'New Norm'
of slow growth within Main Street and thus very financial slow
trickle-down to the masses given the massive over-capacity in capital
and labour to be absorbed (labour participation rates still
questionable), EM nations have been far better placed because of
their changed stance toward domestic reliance and cross-EM
cooperation.
So whilst the GFC
debunked the previous ideology of secure EM “de-coupling”, whilst
at the complex nexus of 'macro-led' international high finance it was
not yet so, it seems that domestically from both national treasury
budgeting and sector/company exporting perspectives, there is reason
to believe – by way of delayed and lesser recession and more rapid
rebound – that the strong foundations of ongoing “de-coupling”
are indeed in place.
Those AEMs (Advanced
Emerging Markets) with broader economic activity bases across varied
sectors and well balanced Domestic vs Foreign Trade-based Current
Accounts, have been typically well positioned to expect renewed
growth through positive government incentives and yet stronger FDI
interests in their own emergent commercial spheres.
As seen, China going
through its own period of economic rotation from an
infrastructure/supply and export-led model to that of an increasingly
domestic/demand internally-led stance; so as to perpetuate its 'soft
landing' transformation. In comparison to such a subtle and thus far
well-managed economic shift, India with its far greater
shadow-banking and black-markets economic environment was forced to
undergo drastic currency reforms designed to both create better
transparency and prompt an increase consumer spending. By contrast
again, instead of seeking to prop-up a devalued Rubel because core
Oil and Gas market reliance, Russia sought to await renewed global
expansion, subtly expand FDI in other arenas such as agriculture, and
vitally sought to expand its own geographical influence - to both
typically distract its populace from its own economic woes in the
period, aswell as seeking to gain a return to the Russian fold those
ex-Soviet peoples whose lives had not been transformed by EU
expansion, because of their location in the effective 'buffer-zone'
between East and West..
Thus on paper, and
thereafter seen in the sharp rise of the Bovespa, to domestic and
worldwide investors, since 2016 Brazil stood-out as the sole
“unencumbent” of the all too obvious socio-economic headwinds
affecting the other other BRICs, MINTS and CIVETS.
And additionally as the
pumping heart of pan Latin American/Mercosaur economies –
themselves individually undergoing very visible socio-economic
change, from Venezuela’s unrest to new Modernisation of the West
Coast countries through much from rare materials extraction to direct
'low cost' oceanic connectedness with China – Brazil still leads
the way as an economic model of the region and Central America.
So much so that the
recent interest by America's Boeing into Embraer was hardly a
surprise; to both immediately strategically off-set Airbus-Bombardier
alliance efforts and to gain a large stake in the 'high-value' aspect
of pan LatAm growth itself more reliant on air-transport to quickly
cross the Amazon and Andes.
However, by 2017 that positivity had shifted somewhat toward temperate
caution, with the combined negative effects of a concerning 2 issues.
Firstly, the specific
effects of still evident foreign trade contraction, affecting aspects
of both its primary and secondary industries. China's own ongoing
shift in iron-ore, general metals, minerals and agricultural products
meant that slower demand and less elastic pricing curves continued to
be felt in primary sectors. Whilst in secondary sectors, activities
ranging from food processing and sub-component assembly, still
awaited meaningful new consumer and business growth in what were the
still cautious Triad regions, likewise negotiating harder in
procurement to buoy their own unit margins.
Secondly, the ongoing
affect of the “Lavo Jato” (carwash) scandal, which unearthed
widespread 'kick-back' contract corruption (in oil and construction
sectors) across what should be independent, separate political and
commercial realms. Allegations spread across both sides of the
political divide, with the innate irony that a recent prosecution of
people's favourite “Lula” (Luiz Inacio Lula da Silva) has not
undermined his attractiveness; whether true or not, that judgement
believed by the masses as politically driven to ensure tabled and
unpopular necessary reforms.
Unsurprisingly given
its long drawn out affair, “Lavo Jato” has created a quake of
confidence across politics, industry and of course the general
public; leading to one-day strikes and for a time apparent simmering
mass unrest – since seemingly quelled.
All of this undid much
of the good-work experienced over the previous 20 years that had led
to fundamental 'bottom-up' social improvement, to the extent that in
recent years the expanded middle-class has enjoyed better living
standards than not just those others within EM nations, but also
on-par and better than many Europeans and Americans.
With such political
ructions there have been worries by some overtly 'nay-say'
international investors that Brazil might possibly returning to its
“dark days” and “lost decade” of the 1980s.
Though it must be
recognised that precisely because of a more internationalist and
equitable experience of 21st century globalisation –
beyond the previous 'Washington Grip' - and the innate failure of
centrally-planned Communism, much of Latin America is itself today
the pro-markets counterpoint of its old 1950s – 1980s Red-Led self.
To try to dismiss such
homeland and foreign angst about Brazil via a powerful new economic
template, Michel Temer was appointed President in August 2016. (His
replacing the impeached Dilma Rousseff) so as to serve-out the
remainder of the Party's elected term, (until January 2019).
Since appointment he
has indeed set-out the new governance template – and expectantly
suffered loss of popularity for doing so. The vision to roll-out very
necessary socio-economic reforms that seek to re-shape what is now
(realistically on a worldwide basis) a Brazil that is notably less
competitive than its former yesteryear self. From that of an overtly
'socially burdened' nation to a far more future-facing and dynamic
country. Indeed to regain a competitive strength reminiscent of its
1950s/60s and 1990s heydays.
This can only be
achieved via reforms virtually “across the board”, but with
specific focus upon the endemically damaging and untenable budgetary
costs of (globally comparatively) over-entitled elder citizens, who
enjoy retirement at 54 upon overtly generous state and private
incomes.
The off-set of this
unpopular move is far greater support for the young by way of
education etc, and critically including those much marginalised, the
newer immigrant population (both legal and otherwise) that have
travelled from neighbouring countries to seek better lives. (The
sizeable regional impact of Venezuela's economic problems creating
overland migration into Brazil).
In essence, to take
from the 'comparatively rich' and give to the 'new poor'. Obviously
many who have retired remember their negative experiences of the bad
old days, which when added to their productive efforts over the last
twenty years means that have gone 'from famine to feast', and see
themselves as deserving of their awaited retirement benefits; even if
regarded as 'Champagne Socialists'.
Foreigners appear then
to question whether Brazil/Brasilia will continue to engage in what
is now possibly a BRIC led new version of global capitalism; possibly
operating as the guiding 'go-between' influence amongst AM and EM
participants. Or whether the country returns to a protectionist
stance akin to the 'ISI' (Import Substitution Industrialisation)
paradigm of seventy years ago; itself now prompted again by Trump's
'America First' stance.
The outcome remains to
be seen, but given the massive shift in EM collaborative power, a
retraction back to an inward-biased economy appears unlikely,
especially since itself was between the 1930s and 1980s wholly based
upon the advantages of foreign owned technology transfer, as well
illustrated by the American, German, Italian and French industrial
nameplates of its notionally domestic auto-industry, even if
badge-engineered as homegrown.
Indeed, today thanks to
past international cooperation, Brazil relative to the 'Next 11'
countries and beyond sits as their industrial and commercial patron
and mentor. So whereas once the domestic patronage system of the land
was reviled by the underling workforce, today as 'EM Patron', Brazil
sits in an enviable position; its increasingly privatised industries,
array of private firms and new university spin-outs and incubators,
able to take advantage of their highly competitive position; if given
the freedom to do so.
Temer's government
recognises Brazil's path toward gain from such increased global
potential, one that would see the descendants of Brazil's own
immigrants of a century ago, themselves seek fortune in the wider
world.
But the fact remains
that to do so the success of Temer's reforms are indeed still very
necessary, and indeed provides an economic uplift for the most
marginalised people.
Rationally compare
these change in retirement and so pensionable age, which is not
materially detrimentally on an immediate and personal basis, to the
far more harmful actions of various Western governments. Whereby to
reduce costs the already very minimal social security net is often
wrongfully withdrawn; done so knowingly, and to the detriment of the
recipient so creating further social marginalisation.
In contrast, Brazil is
undertaking its budget balancing in a fair and open way.
The Reforms would allow
Brazil to supercharge further transformative FDI (so allowing for
further climb up the value-added/value-creation ladder) and allow
Brazilians to re-embrace the very idea of positive globalisation.
And at worst, if a new
ISI path is ultimately formed – no doubt centred on further
imported IT and Digital Sciences knowledge – with New
Protectionism, the Reforms would provide yet greater budget
flexibility to encourage greater prevalence of domestically nurtured
copy-cat industries and services across an ever broadening spectrum.
The President's Speech
at the WEF -
(Davos, late January
2018)
To gain insight the
remainder of this web-log summarises Temer's speech at the recently
held World Economic Forum meeting in Davos, Switzerland; introduced
by Prof Schwab with the sentiment of new future “Smart
Globalisation”.
Loose transcript...
“Brazil is back in
business, with more opportunity for trade and business, following the
most severe recession we have ever faced, yet returned to 'growth
track' illustrated by the fact that inflation – once in double
digits – was under control at 3% - very close to the base-line
level. Interest rates likewise from previously 14% to 7%. SEOs in the
past suffered losses in the billions, but now enjoy substantial
profits, crop yields beating all records, the 2017 trade balance over
US$60bn, and up until November 2017 the Net FDI totalled $64bn.
The 'country-risk' has
dropped significantly, from over 500 basis points in Jan 2016 to
today's 200 basis points - achieved in 1 year and 8 months by our
Administration in Office; not 4 or 8 years (as might have previously
been so). In this short time we have drastically changed the face of
Brazil, reforms aimed at modernising and up-grading the economy and
business environment, the labour market, public management practices
and administratyion of SOEs. The current agenda the most serious of
reforms for many dacades.
Five key elements
(principles and objectives) underpin this historic journey:
1. Responsibility -
Dealing (in a
straight-forward manner) with the inherited problems. A diagnosis of
a serious Fiscal crisis requiring equally seriously matched Fiscal
responses. Transparency of public accounts as opposed to half truths,
no pretence or pretexts or excuses. A Budget-Cap ceiling extending to
20 years now operational, to ensure proper rebalancing of government
accounts. Such consolidation efforts allowed the 2017 posting a
Primary Fiscal Deficit well below the target and expectations.
The flip-side of the
Fiscal coin being Social Responsibility – often empty rhetoric –
and only truly tenable when public accounts are in good order, so
giving the space to overcome still evident high inequality.
2. Dialogue -
It was absolutely
necessary to join forces across the previously broken-down triumvite
of Government-Administration-Judiciary (ie Legislative) to face
enormous challenges. The ability to listen and to compromise. Doing
this we have garnered support.
3. Efficiency -
Passing crucial reforms
for Brazilian productivity and so the competitiveness of Brazilian
products. An example is labour reform, previously stuck in the past
from decades ago, now reflective of today's reality in the 21st
century. To match international precedents, critically re-balancing
the protection of employees against the legal certainty of employers.
We likewise reformed
Education, particularly Secondary education, wherein an old, obsolete
standardised curriculum has been reshaped and led by the needs of the
job market, which far better directs students toward their
professional call or vocation, from a young age.
And engaged the whole
of the Public Administration to enhance the Business Environment,
slashing layers of bureaucracy, red-taped stream-lined or removed.
All aimed at Import or Export, Open or Close a business, via the
automation of registration processes, computerising Tax and Customs
procedures. After all, an entrepreneurs time is too valuable to be
spent in queues, or government service counters.
4. Rationality -
Investors now find a
Brazil with a legal framework that recognises that the state operatus
cannot and should not do everything, adopting a realistic model
conceptions and privatisations with a safe regulatory framework. In a
year and a half we have tendered 75 projects to the private sector,
with a further 75 likewise in 2018.
These include: Ports,
Airports, Highways, Railways, Power Transmission Lines, Gas and Oil
Deposits, which all offer opportunity to both international and
domestic investment companies. Also strengthened the autonomy of
Regulatory Agencies, whilst acting on a strong technical and
independent basis.
A new Bill passed per
SOEs and their professional management, objective rules per the Oil
and Gas sector. Therefor releasing the state from obligation with
Petrobras in specific operations.
5. Openness -
We live in a world
where isolationist trends are gaining ground, yet also know that
protectionism is not a solution. When closed, we are closed to new
technologies, new ideas, new possibilities, and effective solutions
to our shared problems. We are further opening Brazil to the global
economy and positioning the country within that scene. By working
with Mercosaur partners we have restored the Bloc's original intent
for truly free markets, identifying trade barriers and seeking to
remove them, investment agreements and even government procurement.
We've drawn closer ties with Pacific-Alliance countries, and new
trade agreements with Canada, S.Korea, Singapore and after 20 years
the potential of a Mercosaur-EU trade agreement – wide ranging and
properly balanced.
Brazil has applied to
the OECD to formalise what appear aligned institutional and national
standards. At the multilateral level, we support a rules based
system, as set out by the WTO and the aspirations of the Paris Summit
on Climate Change with ratification at the UN. A country like Brazil,
with the world's largest forest and cleanest energy mixes and is an
agricultural powerhouse whilst using less than 9% of territory.
This is the New
Brazil....one of: Responsibility not Popularism, Dialogue not
Intransigence, Efficiency not Red Tape, Rationality not Unrealism,
Openness not Isolationism.
The international
community will be asking itself if indeed this path will be followed,
given the upcoming elections. I say “yes” we shall complete our
agenda, voters know reforms provide growth an jobs and economic
gains. All economic players agree that there is no alternative to the
reforms currently being promoted and put in place. The 'set-back'
potential is virtually none-existent.
After the reforms, the
next step is brining the social security system into order.
Brazilians have come to recognise that the current system is unfair
and unsustainable, hence the push upon Congress to pass the Reform
Bill....the latest of those so far passed by Parliament.
Beyond this a
stream-lining of the Tax System, to facilitate life for Business,
Workers and Citizens at large.
Brazil has come back,
back on the Development Track and during this period of Global
Re-growth, able to provide Contribution and Input.
Hence....'Brazil is
back in Business'... and we invite you all to take part in this new
chapter in our history.
To re-iterate the scale
of the Brazilian turn-around the chairman Professor Scwab
congratulated President Temer on actions to date and the path forward
given the complexity of aligning the myriad of Brazilian
stakeholders.
To Summise -
The World Economic
Forum has in the past been vilified as the elite's
self-congratulatory squawk-box, positioned literally from on high,
illustrating the difference between the notional uber-wealthy and the
rest of the world.
Yet, as relayed, the
efforts by Brazilian economists to better re-orientate their homeland
toward another high-potential era within the expanding global economy
– largely thanks to the trading mutuality of BRICs and Next 11 -
actually illustrates fairly managed socio-economic flexibility for
the mid and long-term gain of the many, not just the few.
President Temer's
administration fulfils the national idiom : “Ordem e Progresso”
