In my last commentary, I presented some basic evidence that suggested that Brazil’s long-term record of capital investment is not particularly impressive. Specifically, Brazil’s rate of “fixed capital formation” (a measure of gross capital investment across the economy) was cumulatively 16.9% of gross domestic product (GDP) over the past two decades. This is the lowest rate among the vaunted “BRIICS” emerging markets (Brazil, Russia, India, Indonesia, China, South Africa); it also falls below that of the U.S. at 18.2%. In my view, this figure is both surprising and disappointing. It’s surprising because a developing country such as Brazil should have great scope for productive investment – the “low base effect” should ensure that marginal investment enjoys a healthy return. It’s disappointing because, as discussed previously, I believe a lackluster rate of investment in a developing economy is a structural impediment to sustained growth.
The good news is that, as my Brazilian friend recently pointed out to me, real change is afoot. Capital investment is still below 20% of GDP; however, except for 2009 – a year impacted by the global financial crisis – the pace of investment has been on a rising trend since 2003. That year was something of a nadir for confidence in the economy – a major political transition had unsettled markets, and investors were then jittery over the prospect of another major currency devaluation. Instead Brazil kept its fiscal house largely in order, confidence recovered, and the country climbed steadily out of that period.
Alongside this positive “macro” trend, there is growing “micro” evidence that Brazilian investment is gathering pace. A cursory scan of recent headlines offers a sense of scale:
- Next year, the Brazilian government plans to invest upwards of $100 billion on airports, ports, highways and the power grid, all in preparation to host the World Cup soccer tournament;
- General Electric plans to pump $3 billion into the country’s oil and gas sector, on the heels of a record year for M&A in the energy industry;
- OGX Petroleo e Gas Participacoes SA, one of Brazil’s oil majors, is attracting substantial investment to develop a project in the Campos Basin;
- Quiznos sandwich chain plans 200 locations in the country over the next seven to ten years, while Burger King Holdings plans 900 additional restaurants over the next five years;
- The Carlyle group has raised a $1 billion fund targeted on Latin America, with an emphasis on Brazil, and Goldman has geared up its private equity efforts in the country;
- Mitsubishi Motors has pledged to invest $632 million over five years in the Brazilian state of Goias, while Hyundai plans a $380 million investment in the same state;
- Most recently, two French firms have been locked in a multi-billion dollar, on-again / off-again contest to control Pao de Acucar, the largest retailer in the country.1
These transactions are important not only for their scale, but also because most have a substantial foreign component. Historically, the Brazilian economy has not been particularly open to overseas investment, with formal and informal barriers to entry. As a consequence, inbound foreign direct investment (FDI) has not been particularly strong. However, the events above suggest that the tide may be turning, which is no small feat. My experience in Asia suggests that many developing countries are far more restricted to foreign entry than they might appear on paper; thus Brazil’s ability to foster such investment from abroad – indeed, to allow for the foreign takeover of its largest supermarket chain – is impressive. I believe strongly that such openness is a precursor to stronger competitiveness, broader markets, and ultimately more sustainable growth.
It’s imperative that such investment continues, as the Brazilian economy needs it urgently. Pricing pressures continue to escalate, with inflation running ahead of forecast; the latest reading for inflation indicates prices were up 6.7% versus the year prior, which is outside the Banco Central do Brazil’s target range. Persistent inflation, tight labor markets, and outdated infrastructure are now a drag on growth: the central bank estimates that the economy will expand only 4% this year versus over 7% in 2010.2 If Brazil follows through on this sort of investment – and in the process, it opens itself to foreign capital and competition – the economy’s current struggles can be resolved over time. Brazil has a chance to separate itself from the “boom-overheating-bust” cycle of its past, and embark on a steadier path towards development and progress.Andrew Foster
Seafarer had no economic interest in the securities mentioned in this commentary as of the date of its publication. View the Seafarer Overseas Growth and Income Fund’s Top 10 Holdings. Holdings are subject to change.
The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect the writer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.
- Bloomberg News, various reports.
- Bloomberg News, “Brazil Growth Held Back by Inflation, Currency as BlackRock Stays Bullish,” 14 July 2011.