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Shop Till

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Brazil is one of the world’s boom nations

– but the current spending frenzy may be

masking underlying economic problems

which could yet bring the spree to a

crashing halt, says Brian Caplen.

Brazil’s new status as one of the world’s major economic

powers is reflected in the decisions to award it both the 2014

football World Cup and the 2016 Olympics. There is a new

confidence in the country, but also a growing realisation by

politicians, bankers and business leaders that success brings

its own policy dilemmas.

There is, for example, an unhappy combination of the

world’s highest interest rates (12 per cent), an overvalued

currency (by 30-40 per cent) and inflation (6 per cent). The

central bank should be raising rates to counter inflation –

but is moving cautiously for fear of pushing the Brazilian

currency, the Real, even higher against the US dollar and so

jeopardising manufactured exports.

Instead the Banco Central do Brasil, under the leadership

of Alexandre Tombini, is experimenting with macroprudential measures to slow down hot

money inflows and

to cool off the country’s burgeoning consumer credit boom.

Not everyone is convinced. Economists are divided on

how successful increases in bank reserve requirements,

higher bank capital allocations for consumer lending and

taxes on loans will be in slowing things down. Nor do they

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agree on whether failure to get things under control will

cause short-term problems or lead to a more deep-seated

malaise.

In the meantime Brazilians are embarking on a shopping

spree that dwarfs anything that has gone before. The

memories of past hyperinflation have created a culture in

which saving is for fools and spending your entire salary

– right now this minute – is smart. Wealthy Brazilians are

travelling to Florida to buy a complete house of furniture

and shipping it back in a container – with the Real so strong

and the dollar so weak they are still ahead even after the

shipping costs.

Not that Brazilians seem to mind paying for things – there

is one aspect of the local shopping culture that veers towards

buying the most expensive of two items, even when they

Brazil’s new status as one of the world’s major economic

powers is reflected in the decisions to award it both the 2014

football World Cup and the 2016 Olympics. There is a new

confidence in the country, but also a growing realisation by

politicians, bankers and business leaders that success brings

its own policy dilemmas.

There is, for example, an unhappy combination of the

world’s highest interest rates (12 per cent), an overvalued

currency (by 30-40 per cent) and inflation (6 per cent). The

central bank should be raising rates to counter inflation –

but is moving cautiously for fear of pushing the Brazilian

currency, the Real, even higher against the US dollar and so

7/29/2019 Shop Till


jeopardising manufactured exports.

Instead the Banco Central do Brasil, under the leadership

of Alexandre Tombini, is experimenting with macroprudential measures to slow down hot

money inflows and

to cool off the country’s burgeoning consumer credit boom.

Not everyone is convinced. Economists are divided on

Comment

zQuantum - Finance In Perspective - Issue 15 63

are broadly the same, just to be sure of not doing anything

by halves.

One story goes that there is a restaurant owner who has

two identical businesses – one in Sao Paulo, one in Madrid.

Costs are more or less the same, but he can charge 20 per

cent more in Brazil just because Brazilians like to pay more.

They are certainly getting the chance at the moment with

prices for most goods and services in Sao Paulo and Rio de

Janeiro creeping higher than their equivalents in New York

and London.

There is a key difference between this shopping boom

and previous ones. In this case 30 million Brazilians have

been lifted out of poverty into the lower and middle classes.

They are buying their first car, their first laptop and their

first high definition TV – and all of it is being paid for on

credit.

The collective impact of this consumer credit boom

is firing economic debate in Brazil. Paul Marshall, chief

investment officer at hedge fund Marshall Wace, and Amit

Rajpal, portfolio manager of MW Global Financial Funds,

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argue that while total credit to GDP in Brazil is relatively

low at 46 per cent, the debt service burden has risen to 24

per cent of disposable income and is set to rise further. By

contrast the US subprime crisis erupted when the debt

service burden hit a mere 14 per cent of disposable income.

That view is, though, rejected by most Brazilian

economists and bankers. In their view the country is catching

up. Gustavo Marin, Citibank’s chief executive in Brazil, says:

“Social mobility here has created a new type of consumer

with 30 million moving out of poverty into the middle class.

There are a lot of questions about whether it is a bubble, but

this consumption has a real economic basis as a result of

repressed consumption in the past. There will be a problem

only if the economy stops growing.”

This brings the debate back to macroeconomic policy, and

particularly whether the new government under president

Comment64 Quantum - Finance In Perspective - Issue 15

Dilma Rousseff will accept lower growth (the rate was 7.5

per cent last year) as the price for bringing inflation down.

Opinion in Sao Paulo is deeply divided. Eduardo Camara

Lopes, chief executive of the investment company Ashmore

Brasil, feels that politically the government may opt for

higher growth and tolerate the subsequent higher inflation;

and the danger of this approach will be that the central bank

could lose its hard earned reputation for enforcing a tough

monetary policy.

In contrast, one of Brazil’s leading investment bankers

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Andre Esteves – whose firm BTG Pactual has just sold an 18

per cent equity stake to a range of sovereign wealth funds and

individuals including Abu Dhabi Investment Council, China

Investment Corporation and Government of Singapore

Investment Corporation – is more relaxed.

He says that Brazilian inflation, while high, compares

well with rates among its fellow BRICs – Russia (9 per

cent), India (8 per cent) and China (5 per cent) – and argues

that, as long there is an easy monetary policy in the US and

Europe, global inflation is inevitable.

There is more consensus on the currency. Lopes says:

“It is a question of the dollar tanking, not the Brazilian

Real being too strong. If you look at the terms of trade of

Brazilian exports, they are broadly tracking the currency

movements.”

Esteves says that Brazil is going through a transformation

of its economy from emerging to developed, and currency

appreciation is inevitable – the same was true in other major

economies such as Japan and the US during similar periods

of development.

But the Brazilian finance minister Guido Mantega has

accused other countries of provoking “a global currency

war” by keeping interest rates and their currencies too low.

His remarks are thought to refer to both the US dollar and

the Chinese renminbi.

The transformation in the past two decades has been

extraordinary. Brazil is now a strong and stable economy,

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there is an independent central bank and billions of dollars

are being invested in key growth sectors. These include

agriculture, which uses the latest technology, enabling Brazil,

which barely a decade ago was a net importer of food, to

become a world-class exporter of crops such as soya.

Employment opportunities and welfare programmes have

helped to lift millions out of poverty.

But bankers and business leaders are still worried about

the amount that still has to be done. Brazil has some of the

world’s most archaic labour laws, a hideously complicated

tax system, and a sprawling government that huge sections

of the population rely on for wages and pensions but which

gets in the way of private enterprise.

A huge challenge will be for companies to complete

the infrastructure needed to host the World Cup and

the Olympics while working around the red tape and the

bureaucracy. At the World Economic Forum meeting

on Latin America held in Rio, one foreign businessman

operating in this area complained that smaller taxes and

bureaucratic processes were preventing his company from

getting its work completed.

Frederico Fleury Curado, the chief executive of Brazilian

aircraft manufacturer Embraer, acknowledges that this is a

legitimate complaint. “We (Brazil) are late with these projects

and it is very challenging. There is a lot of bureaucracy,

a lot of licences to obtain, and they are not necessarily

straightforward. So if we do not simplify the whole system

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it’s going to be tough to get the investment,” he says.

Brazil’s legalistic and labyrinthine system applies to

everyone from big companies to individuals. One foreign

executive working in Sao Paulo says that he has been taken

to court by two different maids working in his home, both

unhappy about having their employment terminated. He lost

on both occasions.

The dilemma is even more acute in the public sector. It

is almost impossible to sack anyone from a public sector job.

Yet shrinking the state and improving public finances would

have considerable benefits, making interest rate reductions

easier, a move which would in turn facilitate growth and

investment.

But what is economically beneficial is almost certainly

not politically possible in the current climate. A Brazilian

government that tried to remove privileges from public

sector workers (the system has been described by some

commentators as ‘socialism for the middle class’) can expect

to lose ground in elections fairly rapidly.

All this means that for achieving things on a day to day

level it is necessary adopt the Brazilian approach of “dar um

jeito”, literally to give a throw, or be flexible and find a way

around the complications.

At the macro level the Brazilian situation is certainly a

conundrum – a country’s currency cannot stay overvalued

for too long without causing damage. As long as commodity

prices keep increasing, the machine will keep going. But, if

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there is a slowdown, the country may regret not carrying out

reforms in the good times, and taking tough decisions on

government spending and inflation, when it had the chance.

As for those shoppers, they are not saving even one Real for

the day when the party stops. Q

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