Emerging Market Report
Brazil's Coming Rebound
Thanks to a new government program called My House, My Life, Rodrigues will soon own a two-bedroom apartment near São Paulo. He'll get a cash grant covering a quarter of the $52,000 price and a discounted 30-year mortgage, so he'll pay just $220 a month—half what a conventional loan would have cost. "This is an incredible opportunity," the 31-year-old says, smiling broadly as he hands in paperwork to seal the deal.
My House, My Life is just one of the stimulus measures that Brasilia has implemented to keep Latin America's biggest economy from stalling. As a result, Brazil will likely be one of the first countries to emerge from the slump: The economy may grow slightly this year and by as much as 4.5% in 2010, helping lift millions of Brazilians out of poverty. "Brazil is emerging from the crisis, and next year we are going to have surprising growth," President Luiz Inácio Lula da Silva said proudly in a July 28 speech.
Lula has reason to be proud. The former union activist, who never finished elementary school, has been a surprisingly careful steward of Brazil's economy. In a country long plagued by hyperinflation, devaluations, and defaults, Lula last year won investment-grade status for Brazil's sovereign debt. And he did it while expanding social programs that have dramatically reduced poverty rates and spurred expansion of the middle class.
Veteran Brazil watchers say the country's resilience is due to a combination of abundant natural resources, an embrace of globalization after decades of looking inward, and resilient businesspeople and policymakers who have learned to survive difficult times. So as soon as the economy started to contract last year, Brasilia trimmed income taxes and cut levies on key consumer goods, helping manufacturers boost sales and avoid layoffs. "Brazil has proved it can govern itself and keep the economy on track in very difficult times," says Riordan Roett, a professor at Johns Hopkins University's School of Advanced International Studies.
Although the economy fell into recession in the first quarter, consumer confidence and spending quickly rebounded owing to the stimulus and sound domestic finances. A comfortable $212 billion cushion of foreign reserves and a decade of budget surpluses have allowed the central bank to slash interest rates to a record low of 8.75% from 13.75% in seven months while pouring liquidity into the market to keep credit flowing. And private banks are well regulated and have healthy balance sheets. "Brazil's fundamentals are very strong—we don't have any of the problems that created the bubble in the U.S.," says central bank President Henrique Meirelles.
Just as important, though, is Brazil's huge domestic market. While outsiders focus on the country's shipments of iron ore, steel, and soy to China, exports are just 12% of Brazil's $1.5 trillion economy. It's the 190 million people and the fast-growing middle class—now more than half the population—that drive growth. In the past seven years a government program called Bolsa Família has helped nudge 24 million Brazilians above the poverty line. And 8 million jobs have been created since 2003, while the minimum wage has increased 45%.
That's not to say Brazil isn't still a tough place to do business. Its highways, railroads, ports, and electric grid are outdated and congested. The government collects 36% of gross domestic product in taxes, similar to Europe, but delivers Third World services. Political corruption and a nightmarish bureaucracy can hobble growth. And government spending is starting to rise in the runup to next year's elections, which will mark the end of Lula's eight-year presidency.
But there's mounting evidence that Brazil is really changing. Brazilians have long joked that theirs was the country of the future—and always would be because they invariably seemed to mess things up. Now they're imbued with a newfound optimism that they might finally have gotten things right.
State oil company Petrobras is a case in point. Last year the company discovered vast deepwater reserves that it is developing with a five-year, $174 billion investment program. The goal is to double Brazil's production, to 3.5 million barrels a day, by 2012, making the country a top oil exporter. "Our deepwater discoveries didn't just fall from the sky. They're the product of a very long-term development program going back 30 years," says Petrobras CEO José Sergio Gabrielli de Azevedo. "It's the Brazilian equivalent of sending a man to the moon."
The country's improving prospects create huge opportunities for entrepreneurs small and large. "Brazil has had so many crises over the years, people got used to them," says David Neeleman, the founder of JetBlue (JBLU), who last December started a low-cost Brazilian airline called Azul (Portuguese for "blue"). "I don't think they're at all fazed by this crisis—everyone seems to be focused on buying their first car, getting their first credit card."
A beauty salon in Rio de Janeiro highlights the new middle-class buying power. Despite its location in the posh Ipanema neighborhood, the clientele is mostly housemaids, hospital clerks, and other women from relatively modest circumstances. The salon is the creation of Heloisa Assis, known as Zica. One of 13 children, she grew up in a slum supported by her laundress mother. Like many Brazilians of African descent, she had brittle, kinky hair that she says hobbled her chances of getting a decent job. Zica tested homemade potions to tame her unruly Afro and finally came up with a formula that created flowing ringlets. She patented her discovery and in 1993 opened a salon, calling it Beleza Natural, or "Natural Beauty." She soon had customers lining up at 5 a.m.
Today, Zica has 1,080 employees, 10 salons, and plans to open 30 more shops in five years. Falling interest rates have allowed her to get bank loans to finance growth. Two years ago she brought in professional CEO Anthony Talbot, a veteran of Dunkin' Donuts and Young & Rubicam, who says sales hit $26 million in 2008 and should reach $45 million this year. The hair treatments aren't cheap: Most clients spend $60 a month—10% to 20% of their income—on salon visits and products. But, Zica says, "People nowadays have a little more money to buy the basics they need, with some left over."
"THE NEW NECESSITIES"Brazilians are also buying more food, clothing, and household goods. That's fueling sales at companies such as Grupo Pão de Açúcar, a chain of 597 supermarkets with $8.9 billion in revenues last year. To cash in on booming sales of fridges, washers, and the like, the company in June paid $422 million for Ponto Frio, an appliance retailer with 458 outlets. "Over the next five years, we'll see a doubling of sales of durable goods in Brazil," says José Roberto Tambasco, vice-president for operations at Pão de Açúcar.
In April the government reduced hefty taxes on construction materials, cars, and household appliances to stimulate consumption. That revived auto sales, which in June hit 300,000 vehicles—an all-time high. Even hapless General Motors is enjoying fat times in Brazil, where it's investing $1 billion through 2012 to develop a new small car. Whirlpool (WHR), which has a 40% share of Brazil's appliance market, has benefited, too. Sales jumped 20% in May and June compared with a year earlier. Even when the tax cut ends in October, sales should remain strong, says José A. Drummond Jr., president of Whirlpool Latin America. In wealthier cities, 55% of households have a washing machine, but in the poorer Northeast, less than a quarter do. "Think how many washers we can sell in this country," Drummond enthuses. "Washers and microwaves are the new necessities."
Many of those goods will be bought with credit cards. Purchases with plastic have been growing 22% a year during the past decade, and since fewer than half of Brazilians have cards, there's immense potential. Credit to the private sector is just 44% of GDP—up from 36% a year ago—but still well below the U.S. level. That explains why VisaNet, a Brazilian card processor affiliated with the global Visa (V) card network, on June 25 was able to raise $4.3 billion in Brazil's largest-ever initial public offering. More than half the shares were snapped up by international investors, who are starting to flock back to Brazil.
Many of them find their way to GP Investimentos. The São Paulo private equity shop manages more than $1.1 billion, much of that from foreigners. Oxford-educated co-CEO Antonio Bonchristiano worked in the City of London and on Wall Street before returning to his native Brazil in the early 1990s at the height of hyperinflation—not a time for the faint of heart, but he has no regrets. "People now realize that too much capital flowed to India and China" in recent years, he says. "Brazil is on much firmer footing now, and it makes sense to put funds here."
GP has invested in a dozen ventures, from barbecue restaurants to oil rigs to an outfit called BR Malls. When GP bought the shopping center manager in 2006, it was a family-run business with six malls valued at $287 million. Today, it has 34 malls, 1 billion square feet of retail space, and a market cap of $1.8 billion—growth fueled largely by the middle class. Those middle-class shoppers are often looking for furnishings for new apartments. Brasilia aims to get at least 1 million homes built by 2011 due to initiatives such as My House, My Life, launched in April. That plan "is going to completely transform the housing construction industry in Brazil," says Leonardo Guimarães Corrêa, chief financial officer of MRV, Brazil's largest low-income homebuilder. MRV saw $231 million in home sales in the first quarter and doubled that in the second quarter. It has 200 construction sites nationwide, and its stock price has quadrupled this year.
Does Brazil run the risk of a real estate bubble? During the long years of high inflation, mortgages were nonexistent, and today they represent just 2.5% of GDP, vs. 80% in the U.S. So few see much risk of the market overheating anytime soon. "There's so much pent-up demand," Corrêa says. "It's not like the U.S., where people got up to their ears in debt. We're talking about simple, affordable apartments."
Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkBrazil's Political FutureBrazil is likely to continue pursuing responsible macroeconomic policies even after President Luiz Inácio Lula da Silva leaves office in January 2011. That's largely because the fast-expanding middle class values stability and low inflation, Erasto Almeida writes on foreignpolicy.com. The main question is whether Lula's successor will continue his move toward a bigger role for the state in the economy, especially in key sectors such as oil and power.To read the article, go to http://bx.businessweek.com/brazil-business/reference/