Raphael Kassin: is Brazil the country of the future?

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The concept of a country being an emerging market is simple to understand.

There is volatility and uncertainty in its economics and politics. There is also economic potential, which politicians should recognise and nurture by creating the proper environment for its fulfilment.

If all stars align properly, the country’s politicians will enact legislation to facilitate/improve trade, improve infrastructure conditions, provide a logical tax framework, provide good levels of education, reduce corruption and maintain a logical/stable currency value. As a result of these types of measures, one would expect the countryto graduate to a developed status.

Since I was a child, I often heard about Brazil being the country of the future. In my mind, that could only mean the country’s economy would ‘emerge’; shocks would cease to happen and its institutions would appear more similar to those of traditional developed markets.

During that period, many currencies came and went, the real was created, inflation dropped to realistic levels, a union worker with no formal education and a taste for strong liquor became president and was re-elected, a commodity rally helped create massive foreign currency reserves, rating agencies upgraded first and asked questions later and yields on Brazilian bonds in US dollars soon neared the incredible 5% mark.

At this stage, politicians who had promised that Brazil would become a developed economy declared their target reached.

But is Brazil really a developed economy, worthy of its credit rating and of the credibility foreigners now attach to it or is its economy in a bubble ready to burst?

Take a closer look

Financial reports are encouraging. I refer to my previous article in June for economic numbers. The economy continues to grow, despite a forecast 3% for 2011 potentially coming out lower, and foreign currency reserves remain high, providing comfort to bond holders, although yields on those bonds are meagre.

Negatively, the level of government continues to rise and government employee numbers explain why the Workers’ Party manages to be re-elected these days. Net-net, financial indicators point to a super tanker managing so far to avoid a global crisis.

Let’s now descend from our lofty tower to better observe the country’s reality today. Brazilian consumers have gone wild, debt levels continue to rise beyond belief, with those who have a normal job profiting from easy credit to jump up the social ladder via abominable levels of consumption.

To add insult to injury, those consumers are paying top prices for goods without really considering the value of what they buy, to the extent that it is cheaper to fly abroad to make purchases and still spend less when all costs are factored in.

Property prices in many areas have rallied to levels higher than New York or even London in comparable neighbourhoods, creating a potential bubble. High rentals further push prices of meals at ‘average’ restaurants.

Two questions come to my mind when considering this scenario for the common local folk: are inflation levels being properly reported and how long can this last?

An insider’s view of the problems

I descend further from our lofty economist tower and visit the state of Bahia, a well advertised tourist paradise. After a delayed domestic flight and a rude local taxi driver, who at least calmed down upon realising that I could speak his language and recognise his attempts to rip me off, I arrive at a nice boutique hotel created by educated Brazilians. The level of service and food was tops, as it should have been. So far, almost all so good. It was then that the adventure began.

I rented a car and drove to some of the area’s famous beaches. Without exception, the roads were so poor they were a danger to the car. Once at the famous beaches, it became known that the only safe place to stay was near the kiosks. Tourists venturing away should beware of armed crime. Food prices were above those found in major cities and often, seafood cost more than in Europe.

At that stage, I thought it would be safer to stay at a beach near my hotel, where most tourists chose to go.

After having left a friend on the sand to buy a drink, I was quickly summoned back because a local trinket seller had ‘politely’ asked for my friend’s mobile phone (of course to steal it).

Upon my questioning, he obviously denied any wrong doing and even suggested that my PhD-holding friend (fluent in Portuguese) had misunderstood his approach. Local police came up with an even more surreal comment: ‘You should not have given him the opportunity to rob you...we can’t do anything about it!’

Obstacles to progress

I return to civilization and ask a local entrepreneur what he plans to do in terms of business ventures. He answers that there is so much bureaucracy and corruption in the path to forming a legitimate business that he is on the sidelines for now. The only solution is to charge extremely high prices, which can be risky if the bubble bursts.

Need I delve deeper? Just one last time. After having become president due to the sole fact that her predecessor supported her, the current president has already been forced to ditch at least three ministers as a result of corruption allegations.

She is being seen as cleaning politics but wait...those involved were very close allies. Can one really say that corruption is not rampant at the top levels of government? Surprisingly, nobody is hung and life goes on.

Where from here? Foreign currency reserve levels can provide a cushion when economies weaken. Luckily, FX rates can also help stabilise economies and the real is doing that now (having moved from near 1.50 to 1.78).

But the real improvements needed such as proper infrastructure, logical taxes, nimble bureaucracy, street safety, fair and stable price levels and reduction in corruption, have been overlooked by analysts, investors, the rating agencies and the media. Is the future ever coming then?

This article was originally published in the December/January 2011 edition of Citywire Global.