Presentation at FIM

On May 11th we visited FIM where Mikko Ripati gave us an interesting presentation on Brazilian economy. Mr. Ripatti has lived in Brazil and currently manages FIM’s Brazil fund so he had really interesting insights. Here is a an introduction to Brazilian economy and its history based on Mr. Ripatti’s presentation.

From 1980 to 1994 the inflation rate in Brazil was on average 730 %. During the same period the country had six different currencies and over ten different finance ministers. All this meant that companies couldn’t do any long term planning. Brazil was therefore referred to as the “Land of opportunities, which can’t be exploited.” Much of the problems were caused by the lack of competition and too large a public sector. Brazil used to impose very heavy restrictions on foreign businesses to support the countries own companies. Unfortunately this lead to inefficiencies in the economy so economical growth was hardly achievable. This combined with the obese public sector ate out all the potential growth gains.

In 1994 Brazil managed to execute ‘Plano real’, a program which was aimed at cutting the public sector and inefficiencies in the economy. The actions lead to a huge decrease in the inflation rate and investing in businesses became finally possible. In recent years the inflation rate in Brazil has been on average 7 % which is above the central bank’s target of 4,5 %. However, Brazil’s economy has grown substantially and real growth has been positive. In the year 2010 Brazil’s GDP grew 7,5 %.

Brazil’s large home market gives the country an advantage when compared to Finland. Approximately 40 % of Finland’s GDP comes from exports, as for Brazil the amount is 10 %. This means that the financial crisis of 2008 effected Brazil’s economy relatively little as domestic demand cushioned the shock. Brazil was also the last country to be affected by the crisis and the first to get back on growth track, which proves that Brazil’s economy is on solid basis. The structure of Brazil’s banking sector also inhibits large financial crisis. Because the bank managers are with all their personal assets accountable for their banking actions, they are unlikely to take unnecessary or foolhardy risks. This prevents overly inflation of asset prices and consequent financial disasters.

Interest rates in Brazil have been high for over a decade as the inflation rates of the 1980’s and 1990’s had made banks prudent in their lending. The central bank’s interest rate is still 12 %, but it has been steadily decreasing over the years. The high interest rates have brought lots of foreign in to the country and the Brazilian Real has appreciated. Consequently foreign investments are taxed to prevent the further appreciation of the Real. In the long term the interest rates are expected to decrease to boost the economy and balance the currency rates.

Public spending has been increased in recent years. Investing in infrastructure is used to keep the economy growing. Also, Brazilian investments are only 20 % of GDP while it could be 40 %. This means that further investments are still needed.

The unemployment rate in Brazil is currently 5-6 %. As 3-4 % of Brazilian people have no education, this means that basically everyone with an education has a job. While the economy has grown, differences in income have decreased. Relatively the poorest have gained the highest increases in income. This means that in Brazil a new middle class has been formed, while 32 million consumers have entered the market.

Brazil is on its way to become a big oil producer. The country has the potential to be the 5th biggest oil producer in the world. The investment plan of the national oil company Petrobras involves investments worth USD 250 billion. All in all 50 new rigs, USD 1,5 billion, will be needed. Finnish companies are also interested in participating in these programs as even a small portion would mean large income. Certain Finnish companies also have the expertise needed in the projects.

Brazil’s newly elected president Dilma Rousseff is the successor of Brazil’s popular president Lula. Dilma Rousseff aims to keep developing the countries economy. The current challenges are low saving rate and the need for long-term finance. The infrastructure is also still unable to support large economic growth. The public sector is still too large and the social security system is inefficient. Furthermore the tax rates are relatively high, but because of the public sector much of the tax money is spent on wrong targets. Poor education is still a problem, but this has been countered with programs, where the family receives governmental subsidies, if their children go to school.

All in all Brazil is a land of great opportunities, but it still has a long way to go in becoming an economic giant. Yet, if the plans will succeed and predictions prove to be right, companies investing in Brazil now are among the future winners.