... and always has been.” Brazil is a country of highs and lows. It is enormous. Brazil and Mexico make up half of South America’s total GDP. Brazil is blessed with natural resources, abundant rivers, a dynamic manufacturing base and a growing middle class.
Unfortunately Brazil has always been able to snatch defeat from the jaws of victory. Five years ago it looked like Brazil had beaten the odds and was on its way to consistent growth. The Workers Party of Lula Da Silva had threaded the needle by balancing government led development policies with a thriving free economy. Commodities were moving in the right direction, China was snapping up all the Brazilian iron ore and soybeans it could and sugar and coffee were moving in the right direction.
Then came Dilma Rousseff, Lula’s handpicked successor as President. Since then everything has moved in the opposite direction. Commodity prices have come down and China has cut back on its massive purchases. The prices of sugar, coffee and soybeans have plunged and even the rivers are not running like they used to. Brazil’s recent drought has cut hydro power which generates almost two thirds of the country’s electricity.
The President’s leadership has also not helped. Government central planning and bureaucratic mandates have hurt the private sector and the recent bribery scandal at state run oil company, Petrobras, has not only cut into Rousseff’s approval ratings but also put on hold any development of Brazil’s enormous offshore oil reserves.
But all is not negative here. The stock market has gone nowhere the past five years (see chart above) while the Dow in America is up 70%. This means Brazil’s stock valuations are more reasonable today and with the currency down against the dollar, Brazil could be a turnaround. Rousseff, to her credit, has made some good appointments recently, including a new head at the Ministry of Finance and the Central Bank. Market stifling mandates are being rolled back and the Central Bank is attacking high inflation (see charts below).
All this is constructive. We are not aggressively buying Brazil yet but this is one of the big three in the emerging world (China and India are the other two) and we are keeping a close eye on the giant of South America. Don’t count out “the country of the next twenty years.”