While it is a long way off, and therefore very difficult to predict, this report from PwC published in February 2017 provides interesting reading.
Some key facts / predictions about Brazil:
Brazil’s economy is predicted to expand from US$2.3 trillion in 2013 to US$3.8 trillion by 2030.
Over this period the population is expected to increase by 10% according to RICS CEO Sean Thompson although this looks like an underestimate given the annual number of births and deaths and the expected increase in average life expectancy from 74.8 years to 78.6 over the same period (this alone is 5%). The Brazilian institute for geography and statistics (IBGE) actually predicts an increase of 10.75% between December 2013 and December 2030 (17 years). This compares to an actual increase of 7% between December 2006 and December 2013, and 0.9% in 2013 alone.
Here are a few ‘take aways’ with some comments:
Alexander Ellis, British Ambassador to Brazil, commented that ‘the time of big cities has arrived’. This is an interesting question: as the world gets more and more connected, as transport improves between cities and as Sao Paulo gets increasingly more congested, now may be the time of big cities, but the future may be more about many smaller cities with good infrastructure, intercommunicating well with each other.
Maílson da Nóbrega, the ex ‘Ministro da Fazenda’ (more or less equivalent to our Chancellor of the Exchequer) gave a punchy and highly structured speech.
On the one hand, he believes that Brazil has ‘lost dynamism’, that consumer confidence is dropping, that inflation is higher than desirable (c 6% compared to 4.5% – not really a big issue), and that the present government (of which he is clearly not the world’s biggest fan) has lost credibility when it comes to fiscal policy (creative accounting caused the downgrade in S+P’s rating earlier last week to one notch above junk). He believes that intervention by the current government has caused various problems including interest rates being manipulated downwards at the wrong time causing inflation. With a conciliatory tone, he accepted that President Dilma now realises that the Brazil Central Bank should have more automony. The government intervened in the energy market and now ‘we’re hoping on rain to stave off power cuts’ (a reference to fact that more than 75% of Brazil’s energy is hydro-electric ). He disagrees with protectionism (import taxes can be 50% of the value of the product).
These problems are however all relatively short term. On the other hand, he believes Brazil is a good long term bet because it has sound institutions: Brazil is a democracy, it has an independent judiciary, it has a free press and there is market discipline. He also believes that as Brazil has US$ 375 in foreign reserves it is able to weather economic shocks.
Mr Nóbrega believes Brazil is not on the brink of crisis but currently is in a ‘low growth’ crisis – growth is predicted to be about 2% this year, but this disguises huge regional variation.
He thinks Brazil has one of the most powerful markets in the world when it comes to housing. Housing credit according to him amounts to 20% of GDP compared to 70% in the USA. He sees huge room for expansion. He also believes there are safeguards in place to prevent a real estate bubble: Brazilians have to make a downpayment of up to 30% of the value of the property and there is a limit to how many mortgages one Brazilian can have.
He sees 5 sectors for expansion:
Banks / financial institutions
Mr Nóbrega says that Brazil is ‘part of a new Latin America’ which includes Chile Mexico, Colombia and Peru and is typified by a capacity to detect and correct errors. He contrasts this with the ‘old Latin America’ which has a populist approach and includes Argentina, Bolivia, Equador and Nicaragua.
He sees the characteristics of the new Latin America as having a strong state, rule of law (respect for agreements and a right to property) and accountability (note that Brazil has convicted many politicians recently on corruption charges).
He believes that Brazil has crossed the Rubicon: there is ‘permanent stability in politics and economics’ and the country is in the antechamber of the ‘rich country club’. He sees the risks as lost opportunities and lower growth.
Following Mr Nóbrega’s gripping talk, came various other speakers.
Amanda Clack, a partner in PwC’s infrastructure team gave a very interesting talk. Infrastructure is clearly a key requirement to support the growing economy. She reported that there are 500 infrastructure projects in Brazil worth around US$420 billion but that 60% of these are in the very early phases.
She believes that Brazil should create a 50 year plan and devolve responsibility for infrastructure projects to an ‘infrastructure strategic board’ so that political change every 4 years is able to interfere less.
She identified three aspects to administering infrastructure projects: investment, testing and changing commuter patterns.
Amanda Clack believes that there is huge potential in Brazil to use the water resources both coastal and inland to move freight.
She sees the difficulties as bureaucracy, the legal system, complexity, the bidding and infrastructure process and the lack of know how. Coincidentally last week several companies involved with the Sao Paulo metro system including Alstom and Siemens were being investigated for forming a cartel in supplying the local government.
Ms Clack notes that Brazil ranks 104th out of 140 countries in the WEF’s assessment of infrastructure quality and that this drags GDP down.
She believes that between 2009 and 2030 air travel within Brazil will grow by a 5.65% pa: from 111 million to 352 million passengers. There is clearly investment potential there, and several people seem to have realised it judging by what has happened to Gol’s share price over the past couple of weeks: Gol’s share price is up 10% in a month and 31% since it’s low point on 14th March. Gol is either the biggest or second biggest carrier in terms of passengers carried within Brazil.
She believes that it is ‘crunch time’ for Brazilian infrastructure: only 12% of the road system is paved and this needs to improve, there are different rail gauges which makes intercommunication more difficult.
She reported that CEOs say infrastructure is very important and that well-developed infrastructure drives competitiveness.
During the afternoon session, there were several talks by investors and the key theme that came out of this was that now or soon is likely to be a buying opportunity in Brazil. Jules ‘Jay’ Marling IV made the point, in Portuguese, that Brazil is no longer an emerging market: it has already emerged.
Passeio das Águas Shopping was officially opened yesterday by the executive team of Sonae Sierra the developer, the vice-prefect of Goiânia and the governor of the state of Goiás.
It comprises c. 78,000 sq m of ABL (leaseable area) on a plot of 280,000 sq m.
Its wide curving avenues with comfortable wooden bench seating, green outlook / entrance, valet parking, children’s play area, and most notably the huge airy ‘praça de alimentação’ (eating area) with its 12m high ceiling and green vista combine to create a relaxing place to spend one’s leisure time, and money.
This is a hugely impressive development with a relaxed air which contrasts sharply with many other shopping centres where the praça de alimentação is canteen-like at the top of the building.
It will create / has created over 6,000 new jobs and represents the biggest stamp of confidence on Goiânia in many years.
Brazil needs to evolve to be more competitive on the global stage. Infrastructure, government efficiency, corruption in politics are cited as reasons for the deterioration from 48th place to 56th place (out of 148 places). Macroeconomic conditions are also cited as a reason together with Brazil’s protectionist approach to international trade.
Brazil is a few places above India (60th) and The Russian Federation (64th) but far below China at 29th place.
The UK slips 2 places to 10th, and Switzerland retains the top position.
There were no surprises at the IMF’s decision to maintain their growth estimate for 2013 at 2.5% today, but the decision to reduce the 2014 estimate from 3.2% to 2.5% took some by surprise.
The countrywide figure of 2.5% masks huge regional variation in Brazil. Agriculture has performed very strongly this year following the reduction in the value of the Real and regions where agriculture is one of the principal economic drivers – such as Goiás – are likely to show stronger growth than 2.5%.
At 2.5%, the growth estimate for 2014 is the lowest among key emerging economies, according to the IMF:
GDP growth estimates by IMF @ 8-Oct-13
Country 2013 2014
Brazil 2.5% 2.5%
India 3.8% 5.1%
China 7.6% 7.3%
Russia 1.5% 3.0%
Having started off at 5.4% in January 2013 this year, and risen steadily until it reached 6.0% in June 2013, the unemployment rate for the six principal metropolitan regions of Brazil fell to 5.6% in July and again to 5.3% in August according to the Instituto Brasileiro de Geografia e Estatística (IBGE).
The data for the PME (unemployment rate) is obtained from a probability sample of, approximately, 38,500 households located in the Metropolitan Areas of Recife, Salvador, Belo Horizonte, Rio de Janeiro, São Paulo and Porto Alegre.
Having got off to a false start amidst accusations of public money being filtered away from the intended destination, work resumed at Goiânia (Santa Genoveva) airport last Wednesday 18th September 2013 to conclude the first stage of the new passenger terminal.
The agreed date for completion is in March 2015 (18 months from now) and the work will cost R$246.2 million, around £69 million.
The governor of the state of Goiás, Marconi Perillo personally thanked Brazil’s president Dilma Rousseff for supporting the state’s petition to central government for funding to complete the works. The prefect of Goiânia (the city’s local government chief official) confirmed that the new airport will benefit the various sectors of the economy in the capital (Goiânia) and the entire state of Goiás.
The current capacity of the airport is 3.5 million passengers p.a.. This will increase in 2015 by 5.1 million to 8.6 million a huge increase of nearly 150%. The second stage (2020) will result in capacity increasing further to 10.6 million. The first stage of the new terminal will provide 34,100 sq m of space, dwarfing the present terminal which is 7,571 sq m.
The scene is being set for Goiânia to become increasingly easily connected with other parts of Brazil and, as a result, economic growth which may bring with it increased demand for real estate. There have been rumours over the years of international flights landing in Goiânia and time will tell.
To put it in context, Luton Airport in 2012 had a capacity of 10 million passengers p.a., although according to the FT, the new Spanish owners Aena plan to increase this to 18 million p.a..
Summary statistics (source: Infrero)
As the value of the Real has fallen against world currencies, particularly the US$, the cost of flights has gone up. As a consequence the Brazilian air travel market is suffering – this year more than 10% fewer flights are being taken by Brazilians – while the long distance bus companies are experiencing a mini boom: the number of long distance bus journeys this year is expected to increase by over 10% compared to 2012.
According to the Banco Central do Brazil’s latest economic forecasts, inflation is expected to be 5.83% in 2013 (market consensus) – average expectations were at 5.75% a month ago. A similar level of inflation is expected in 2014.
GDP growth (PIB) is expected to be 2.32% in 2013, up from 2.24% a month ago.
Expectations for economic growth in 2014 are on the decline – the average is currently 2.30% compared to 2.60% a month ago.
The Brazilian economy as a whole (PIB) increased by 2.8% over the year to the end of Q2 2013. In the second quarter of this year alone, the growth was 1.5% which surprised economists who were expecting more like 1%. This combined figure masks the disparity between the different sectors of “the economy of Brazil”; the components are: agriculture 3.9%; industry 2.0% and services 0.8%.
The weakening of the Real, combined with an undiminished world appetite for food, has proven a real boon for the agricultural sector. When the data comes out for the different regions of Brazil it is likely that the economy of the state of Goiás, and others where agriculture is a principal economic driver, will show stronger than average growth.
While the economy as a whole has grown, household consumption is reported to be weak and this has led to increased stock levels.
The expectation for Q3 2013 is for much weaker growth, of c. 0.5%, and the expectation for 2013 as a whole is for around 2.5% growth but that is looking conservative.