Once an economic basket case, even by emerging market standards, Brazil has staged a remarkable recovery and now promises to become a major global power.By Stephen Foley
Friday, 2 May 2008
It was an incongruous sight. King Carl XVI Gustaf, bespectacled monarch of Sweden, and President Luiz Inácio Lula da Silva, the bush-bearded populist who has governed Brazil since 2003, riding a downtown bus in Stockholm last autumn. The reason the two men were there? A fleet of buses in the Swedish capital has been kitted out to run on ethanol, the biofuel that is fast becoming one of Brazil's most important exports, and the latest chapter in the country's remarkable economic "coming of age" story.
The Brazilian stock market, already buoyed by the boom in prices for the country's commodities and other exports, has surged to a record level this week on news that Standard & Poor's, the credit rating agency, has declared the country to be "investment grade". Specifically, that is a stamp of approval on Brazilian government debt, but it is also the culmination of Brazil's long slog away from financial crisis, hyper-inflation and democratic sclerosis. The country might finally be about to deliver on its promise as an economic power.
"Brazil is a success story and foreign investors believe in Brazil," said Rafael Amiel, an analyst at the research firm Global Insight. "There is economic stability, there is price stability, the public finances have shown a huge improvement and the economy is growing at a much more rapid pace than before."
The explosive growth of Brazil's ethanol production is typical of a country rich in natural resources and whose agricultural sector is regarded as one of the most efficient in the developing world. Brazil is the world's biggest producer of sugar and coffee, whose prices have been rising on global exchanges. It is also the world's biggest producer of iron ore, which is being greedily consumed by China and other developing nations.
And then there is oil. Two massive finds off Brazil's Atlantic coast have the potential to catapult the country into the world's top 10 producers over the next 10 years. Although the offshore fields will take time and money to develop, Petrobras, the state oil company, has already completed a series of promising test drills. Estimates of the exact size of the Tupi and Carioca fields vary, but the reserves have been acclaimed as the biggest oil finds for 30 years.
But Brazil's economic recovery from its financial crises of 1999 and 2002 – when it had to be bailed out by the International Monetary Fund – is based on more than just the boom in commodities prices. Manufactured goods account for 55 per cent of the country's exports. Companies such as Embraer, the aircraft maker, have emerged on to the world stage, showcasing an improving technological base in the country.
Lula's sales and marketing tour of Sweden is in keeping with his business-friendly leadership which, contrary to initial fears, maintained the gently reformist and fiscally responsible policies of his predecessor, Fernando Cardoso, and won praise from Standard & Poor's this week.
"Generally pragmatic and predictable policy and fairly transparent institutions have underpinned macroeconomic stability in Brazil," S&P analyst Lisa Schineller wrote. "This has facilitated a sounder foundation for economic growth and fiscal improvement over the past five years that should continue over the next several years."
Chief among the achievements of recent years is the taming of inflation. In 1993, it was 2,500 per cent. A new currency and an operationally independent central bank have kept it below 10 per cent for almost all of the past decade, and the central bank governor, Henrique Meirelles, has earned his credentials as an inflation-buster. His decision to hike interest rates last year in the face of rising food and fuel prices gave S&P confidence to upgrade Brazil's sovereign debt this week, much earlier than anyone had anticipated.
Global Insight's Mr Amiel praised the track record of Mr Meirelles. "In 2005, when the economy was slowing and inflation going up, the central bank was very aggressive in increasing interest rates – against all odds. It sent a clear signal that it would not allow high inflation any more. It said if the country goes into a recession, it goes into a recession. That meant that... little by little, prices stabilised."
With biofuels, investment in nuclear power and a sophisticated hydroelectricity programme, Brazil has achieved energy independence, while Lula's policy of paying families who keep their children in school has also helped blunt just a little of the social inequality. As a result foreign companies are pouring investment into the country. London-listed Eurasian Natural Resources, which yesterday paid $300m for the iron ore company Bahia Mineracao, is just the latest in a long line.
All of which has contributed to Brazil's ballooning reserves of foreign currency, which have grown to $200bn now from $85bn at the end of 2006 and $57bn at the end of 2005, when it finished paying off its IMF loans early. This cushion means the government can manage any short-term crisis very easily, if it were to come. The country is solid, and debt repayment capacity is not an issue.
The question for Brazil now turns from one of stability to one of growth. It is the B in the so-called Bric countries which promise super-size growth over the coming decades, but its 4.5 per cent rate lags Russia, India and China by some distance and it will continue to do so until it can haul its investment levels higher. Government debt remains high, at 44 per cent of GDP, and consumes significant sums in interest payments, with spending – particularly on pensions – continuing to worry economists. Only 16 per cent of Brazil's GDP is channeled into investment, compared with a Latin American average of 20 per cent and 40 per cent in China, but at least the percentage is creeping upwards.
The elevation to investment grade status should help matters, too, triggering a virtuous circle of lower sovereign debt interest costs and higher foreign investment. One of the reasons the Bovespa stock market index jumped on Wednesday was that a new cadre of overseas investors, barred from investing in sub-investment grade countries, can now buy into Brazilian companies.
Augusto de la Torre, the World Bank's chief economist for Latin America, said: "This formally opens the door to quite a bit of money in investors hands to support Brazil's development."
The timing of the S&P upgrade – in the midst of a global credit crisis and concerns over the economic outlook in North America – should be a big boost to private investor sentiment on Brazil, Mr de la Torre added.
A stable financial environment should also help Lula's government shift its focus to infrastructure investment – a key plank in Lula's re-election campaign in 2006 and vital if Brazil's economic growth rate is to be sustained. He is promising new roads, dams and railways, with tax incentives to help seal the deals.
"The country is vast and resourceful," said Global Insight's Mr Amiel. "It has plenty of natural resources and so much potential for expansion of its infrastructure and development. It has ample room to grow."
Lula is a reassuring figure
If you want to understand President Luiz Inacio Lula da Silva of Brazil – more popularly known simply as "Lula" – then think of him as a sort of South American version of Tony Blair, but with a better story. Lula believes as fervently as Bill Clinton or Blair ever did in the merits of the "third way", that half-forgotten piece of political philosophy that is about pragmatism, permanently triangulating conflict and a vaguely humanised form of capitalism.
Like Blair, Lula is there as a relatively reassuring figure to the international business community, a signal that Brazil is not hostile, and a welcome change form the statist military dictators who ran the country until the 1980s, and the Communists and Castro clones who occasionally crop up around Latin America.
"Before the Workers' Party came to power, people were afraid of us," Lula once said. "And they were right."
Lula has been reformist, partially privatising the public pensions system, creating an independent central bank and instituting a basic income for all poor families. As a result, Lula has succeeded where his more radical neighbour to the north in Venezuela, Hugo Chavez, has failed: in working with private companies to maximise his nation's economic potential.
Yet he has also strained to maintain good relation with President Chavez and with President Bush and tried to broker peace in the border conflict between Colombia and Venezuela.
As the leader of the Workers' Party of Brazil, possibly as misleading a label as "labour" became in the UK, Lula became President in 2002 with 61 per cent of the vote. His popularity has hardly waned since, and he was re-elected in 2006 in a similar landslide. Barring disaster, he will be around until 2011, but no longer, he says.
His personal story is an impressive, almost astonishing tale. He was brought up in poverty and began work as a shoe shiner at 12. Modern-day tourists in Rio and Sao Paulo encounter his successors, virtually begging for work from passers by, every day. His first wife died in childbirth in a run-down hospital and he lost a finger in an accident in a car parts factory. His rise in politics came via the trade union movement, and the foundation in 1980 of the Workers' Party. In 1986, he won a seat ion the Brazilian Congress, the start of his political career. Few world leaders can out-humble him.
Lula has overseen a rapidly growing economy, but one with an almost equally booming population, so growth in GDP per head has not been so impressive. Nonetheless this nation of almost 190 million, mainly younger people, and led by the charismatic Lula is laying claim to an increasing role as a leader of Latin America and of the wider developing world.
Corruption and splits are there, but a bigger voice in such bodies as the UN, the World Trade Organisation, the G7 and elsewhere for Brazil are bound to follow. We will be hearing a great deal more from Lula.
Sean O'Grady
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