Brazil, great opportunities and manageable risks, with or without Donald Trump’s protectionist threat.
With the approaching end of the political turmoil that plunged Brazil into an economic recession, the country is now starting to re-establish the conditions for the return of confidence, first of the domestic and then of international investors. The largest economy in Latin America will be back on track in the second half of 2017 and this is a sign of relief for everyone, but also a warning to the shareholders of some companies that didn’t do their homework during the recession, letting some less experienced managers lead their local operations, using the economic crisis and recession as the sole excuse for the bad results. Well, starting in 2017, this excuse will no longer convince.
It is necessary, however, to understand the local cultural characteristics and peculiar foundations of the Brazilian economy, which will result in the country quickly reentering the global economic game, maintaining its position as one of the five most attractive markets in the world for investments in manufacturing, logistics and service operations.
China has driven the global economy in the last decade and in the early years of this decade, and Brazil has benefited as the largest supplier of agricultural commodities and minerals in a period in which the international prices for these products reached their highest levels in history. In 2001, only 3% of Brazilian exports were bound to China. By 2014, the Asian giant already accounted for almost 20% of Brazilian foreign trade. In the opposite direction, the US bought 25% of everything Brazil exported in 2001, but only 12% in 2014. With stable inflation, social inclusion, availability of credit and a domestic market eager to consume everything from appliances to cars and machines, all sectors of the Brazilian economy expanded between 2003 and 2013. Among these, the automotive sector was the thermometer best representing this situation. Brazilian international reserves jumped from US$35 billion in 2001 to US$370 billion in 2016, one of the eight largest reserves in the world and the third largest among emerging countries. Even with the domestic crisis of the last three years, international reserves in Brazil have continued to expand.
Despite the recent corruption scandals involving a large portion of the political and business world, democratic institutions and the judiciary remain solid in Brazil. The Federal Police currently enjoys its highest levels of credibility with the public, i.e., there is an awareness in the population that ethical and moral values should prevail in the conduct of private and public business.
Brazil recently lost its investment grade from the rating agencies – which it had received in 2008, but this makes little difference for strategic FDI decisions. Investing in Brazil is a great opportunity due to the size of its market and privileged location in South America. That is, most investments in manufacturing and logistics operations do not depend on risk ratings for the financial speculation by mutual and pension funds, including those by the “old ladies of California,” as in 2008.
As soon as China gives a sign of economic recovery, the great agricultural producer and iron ore supplier from Latin America will enter a new cycle of economic expansion that will be as fast as the one that occurred in the second half of the last decade. 0nly this time, Brazil enters the new game with solid international reserves and a new government that is much friendlier regarding international trade agreements. As such, Donald Trump’s protectionist threats should not affect economic recovery in Brazil.
China should resume growth soon under Xi Jinping’s new economic matrix, which this time will promote consumption, services and credit, ushering in the second wave of Chinese growth, starting with international reserves exceeding US$3.2 trillion, almost ten times higher than at the beginning of the last decade.
To the international investors who missed the right time to invest in Brazil between 2006 and 2010 because of poor market intelligence and limited information, or those who lamented the fact that their manufacturing plants only became ready for SOP after this period, now a second golden chance arises to not miss out on the same opportunity twice. But remember that despite all this optimism, Brazil is not a country for amateurs. It requires specialized advice from professionals who understand the local business environment, its laws and its customers’ behavior.
In the same way and for this reason, choosing local managers and work teams with experience and maturity in each sector could mean a competitive advantage now. An advantage that will substantially expedite the recovery of market position and provide a rationale for all the investments made in the country. This is not the time for new laboratory management experiences, but is the best moment to consolidate strategies and plan another golden wave in Brazil and in some countries in South America.
Orlando Merluzzi – Nov, 2016