Brazil has caught popular imagination … is the country of the future really taking off ?

How big is Brazil’s economy? ..Brazil is the big game in Latin America

Brazil 2009 GDP US$2,080,490 mil

Venezuela 6.3x smaller Argentina 6.8x smaller

Colombia 9.0x smaller

..and it’s all clustered in the southeast

Growth has finally reached emerging market rates.

2nd largest FDI destination after China. Why?

Brazil is mainly an extractive economy. Petrobras (oil), Vale (iron ore) are among the companies that caught the emerging market commodity boom.

Exports by company (2009, US$mil) Imports by company (2009, US$mil)

12,307

10,826

4,053

4,344

2,770

1,873

1,461 2,336

1,234

1,479

12,555

2,580

2,105

414

1320

967

1478

153

1,234

1,313

Alberto Pasqualini - REFAP

Source: Secretaria do Comercio Exterior

A little bit of economic history that matters… It started with sugar, then coffee, then food…

Three lost decades … is there a second chance? 1901-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-00 2001-10

4.3% annual avg 5.4 times in 40 years

7% annual avg 15 times in 40 years

2.7% annual avg 2 times in 30 years

4.4 4.3 4.6 4.5

6.0

7.4

6.2

8.7

1.7 2.7 3.4

Make money from WWII

Let’s spend it on building a new capital in the desert. And airlift

every brick there.

2,750,000,000,000,000% devaluation! Stabilized in 1994 real plan.

1942 Real 1.000 Let’s start

1942 Cruzeiro CR1.00 Divide by 1000

1967 Cruzeiro Novo NCr1.00 Divide by 1000

1970 Cruzeiro Cr 1.00 No change

1986 Cruzado Cz 1.00 Divide by 1000

1989 Cruzado Novo NCz 1.00 Divide by 1000

1990 Cruzeiro Cr 1.00 No change

1993 Cruzeiro Real Cr 1.00 Divide by 1000

1994 Real R 1.00 Divide by 2750

So far, so good.

Inflation is seared into living memory… savings is low,

which leads to ‘bad’ balance sheets … high external deficits, high public deficits, excessive dependence on

leverage to drive growth…

Industrial policy is inward looking… And is shown up in tax, trade agreements,

manpower etc

Hiring is hard, firing is also hard…

92% companies face difficulties in hiring.

81% can’t find qualified professionals.

46% can’t find technicians…. “Can’t find welders for building stadiums!”

80% additional legal costs over salary benefits (13th salary, 30 days vacation + allowance..)

50% retirement fund, vacation, 13th salary etc when firing

Tax is a real burden…

Corporate 15%

+ surchage

10%

+ WH tax 15-25%

+ manufact

ured product

x%

+ financial transactn

tax y%

+ domestic state tax

7-33%

+ services tax 2-5%

Import duty

0-35%

Export duty

0-30%

Social contribut

on income 9-15%

Profit sharing 1.65-0.65%

Social Security 7.6-3%

Ovs remittce

10%

Others x%

Start here

‘Self-reliance’ industrial policy during military rule funded world class technology prowess in aviation, ag and energy.

These are legacy investments, who are the new ‘chaebols’?

80% R&D is publicly funded. Aspiration to achieve Korea’s 20-80 ratio. Curious fact: ‘67 IMF-directed Korea came to Brazil to learn their modernisation pgm … chaebols anyone?

…leading to Bel-India … a Europe elite class (Belgium) in an India economy

22% functional illiteracy.

50% can’t read a page of text.

50% employment is in the informal economy.

7.2years of schooling average.

7%unemployment, hard to find qualified people.

65%expansion of domestic credit

…but social transfers are creating a middle class, and as long as the commodity boom continues, this new middle class will grow.

Why China grows … and Brazil doesn’t Follow the TFP

What makes Brazil Brazil? Or why is the Brazil story so hot?

… Oops, it’s inflation.. Hot money chasing 11% interest.

What does the future hold for Brazil?

Excitement over presalt findings that will vault Brazil into major energy exporter (to emerging Asia) …

… South-South (China) trade will boom…. Source: PWC Future of World Trade 2030

Brazil’s energy and commodities sector loves China, but the manufacturing sector is less enamored.

A wave of tariffs and talk of currency war is first reaction. This will be an interesting relationship to follow.

40out of 81 anti-dumping measures taken by Brazil are against Chinese products.

Blackouts in the future

Blackout along Paulista Ave, Sao Paulo and Latam’s financial center tests Brazil’s readiness for World Cup and Olympic Games.

No mass job creation, no boom to fuel social transfers, Europe-India schism lives on.

Paraisópolis, São Paulo, Brazil.

.. It might end up with debris of energy boom and bust, a repeat of coffee’s 1930s boom and bust