Brazil's New Look

A sounder economy is emerging

Chief Executive Americo Emilio Romi Neto strides through the sprawling factory of his family-owned company, Industrias Romi. Located in Santa Barbara d'Oeste, a town set amid lush fields 160 kilometers north of Sao Paulo, Romi has been turning out machine tools since 1943. For years, the company mostly served Brazil's sheltered market. Now, it churns out computerized lathes for customers in Europe as well as in the U.S., where it is building a factory. Profits soared to $51.8 million last year, up 30%, on sales of $159 million. "The whole business climate in Brazil is different now," says Romi, 42. "If you sell only in one market, it's hard to survive."

Romi is just one of hundreds of companies that epitomize the new shape of Brazil's $800 billion economy, the world's eighth-largest. Businesses are thriving in the environment created by Brazil's successful clampdown on inflation in the mid-1990s, after the country opened its market to the outside world. From banks to poultry processors, companies are ratcheting up productivity as the economy shifts from its old boom-and-bust cycles to steadier, longer-term growth.

Some, such as Banco Itau, Brazil's No.2 commercial bank, and steelmaker Usiminas, are also expanding beyond Brazil's own wide borders and becoming major South American players. Foreign investment is pouring in, too. This year, Brazil is expected to attract a record $20 billion in direct investments from abroad, such as the $1.6 billion it received for cellular-phone licenses in April from groups including Bell Canada, Motorola, Telecom Italia, and Japan's DDI. The oil industry, once a sacred cow, is being opened to foreigners. And portfolio managers worldwide are snapping up Brazilian stocks, especially the already traded minority shares of state companies on the privatization block, such as telecom giant Telebras.

This Brazil is not the gaudy highflier it was back in the 1970s and 1980s, when its fast growth was undermined by runaway inflation and the volatility of short-lived currencies. Today, Brazilians believe they can focus more on structural problems such as widespread poverty and inadequate schools. For the first time, many workers are able to buy refrigerators and TV sets--as well as bare necessities--out of wages that inflation used to devour. Businesspeople, too, are starting to believe that hard work and enterprise count for more than beating the system.

Instead of juggling short-term funds, as they did when inflation was 40% a month, executives are pumping more into investments such as technology and worker training. Some companies send promising employees to study in MBA programs in the U.S. Thanks to the government's sell-off of state banks and industrial companies--as well as its effort to slash red tape--corruption is gradually diminishing. "Brazil is going through a big cultural change," says Roberto Setubal, president of Banco Itau. "There is a concern with productivity and efficiency that didn't exist before."

HANDS-OFF POLICY. Oddly enough, the Asian financial turmoil that threatened to trigger a run on Brazil's currency last fall has instead put Latin America's largest market in a more favorable light. The government's goal of moderate, steady growth that businesses once griped about is now considered a virtue by many. Democratic openness and accountability are seen as sources of stability, despite drawbacks such as the slowness of Brazil's fractious Congress in enacting reforms. President Fernando Henrique Cardoso's hands-off policy toward business is also seen as a breath of fresh air, compared with the way Asian rulers meddled in their economies. With Asia unsettled, Brazil's market of 160 million people looks more inviting to multinationals seeking high returns. "If investors analyze three basic factors--size of market, economic stability, and political stability--Brazil now becomes more attractive than Asia," says Jose Luiz Saicali, a partner at KPMG Peat Marwick in Sao Paulo.

Brazil could still be vulnerable to another outside shock because its currency, the real, is considered at least 10% overvalued. But Cardoso's handling of the economy in the tense days after Asia's crash served as an emerging-market lesson on how to turn a crisis to advantage. Shunning a quick-fix devaluation, Brazil's Central Bank doubled the basic interest rate, to 43%, to discourage speculation against the real (chart, page 22). Then, Cardoso prodded Congress to act on reforms that will help trim the budget deficit, and he pushed through $18 billion worth of spending cuts and tax hikes.

Although growth of gross domestic product will slow to 1.5% this year, down from 3% in 1997, Cardoso's decisive response is enabling Brazil to start recovering sooner than expected. Interest rates have fallen back to 23.3%, close to their pre-Asia level of 21%, and GDP growth could rebound to a solid 3%-4% next year. Currency reserves, after a dip, rebounded to a record $70 billion by Apr. 21, $10 billion more than before the crisis.

COUNTERWEIGHT. Cardoso, a former socialist who took office as President in January, 1995, will still face thorny problems if he wins a second four-year term in October. The economic slowdown and corporate firings have pushed joblessness to 7.4%, up from 5.5% a year ago, and millions barely subsist in the informal economy. Government spending will have to be cut sharply to reduce the budget deficit, which was a worrisome 5.9% of GDP last year. Even if Congress approves social security reform, as expected, it needs to go further to set up a Chilean-style private pension-fund system to raise Brazil's paltry savings rate of 16% of GDP.

Nevertheless, Brazil's steady performance is reinforcing its clout as Latin America's biggest power and strengthening its position as a counterweight to U.S. dominance in the region. This role was dramatized at the Apr. 18-19 Summit of the Americas, a gathering of 34 Presidents and Prime Ministers, including President Clinton, in Santiago, Chile. The summit agreed to launch negotiations in September for a Free Trade Area of the Americas, which would go into effect in 2005. But as leader of Mercosur--a trade bloc that includes Argentina, Paraguay, and Uruguay, with a combined GDP of $1.1 trillion--Brazil is the dominant force in other free trade initiatives happening in South America right now.

Brazil "speaks with more backing" from other Latin countries since opening its economy and setting it on a stable course, says Alexandre Barros, a political analyst in Brasilia. By asserting more leadership in trade and diplomacy, Barros says, Brazil can "extract better trade terms from the U.S."--for itself and its Latin partners.

From Santa Catarina state in Brazil's prosperous south to Salvador in the poor northeast, and from the well-to-do to the working class, Brazilians' growing self-confidence is visible. In Sao Paulo's trendy outdoor Bar des Arts cafe, bankers and executives in Italian suits discuss deals over coffee or a caipirinha, Brazil's distinctive rum-based cocktail. Along Sao Paulo's Pinheiros River, on a Sunday morning, prospective first-time car owners kick the tires of used autos being offered on stable credit terms, which didn't exist just a few years ago. And every month, an additional 100,000 technology-hungry Brazilians join their 1 million compatriots who are already plugged into the Internet to explore local Web pages promoting businesses from banks to supermarkets.

All this is the payoff from the anti-inflationary Real Plan launched by Cardoso as Finance Minister in 1994. It combined measures to stabilize the real with other free-market reforms and is expected to hold inflation to just 3.5% this year, down from 940% in 1994. "The major change in Brazil in the last few years is [economic] management," says Jair Ribeiro da Silva Neto, managing director of Patrimonio, a Sao Paulo investment bank affiliated with Salomon Smith Barney.

Economic confidence is spurring a new wave of corporate restructuring and investment even by traditionally hidebound family-run conglomerates. For example, Votorantim Group, a cement-and-paper producer with $4.2 billion in annual sales, is investing $430 million this year in software to integrate business systems and tighten control of stocks and costs. Last year, investors snapped up Eurobond issues of $150 million each by cement maker Votorantim Cimentos and publicly traded paper producer Votorantim Celulose e Papel (VCP), after VCP restructured to centralize purchasing and make public more financial data. VCP turned a $16.1 million profit on sales of $633 million, after a $21.8 million loss in 1996. Looking abroad, in February the group bought a stake in Brazilian steelmaker Usiminas, which is part-owner of other steelmakers in Argentina and Venezuela. "With globalization, you need to have scale and regional bases of operation," says Jose Ermirio de Moraes Neto, a member of the controlling de Moraes family and the head of the cement company.

Itausa, a conglomerate that includes a major bank and a computer hardware maker, is also remaking its businesses. Banco Itau is pushing to become the retail bank of Mercosur and has opened 24 branches in Argentina since 1995. Itausa's bathroom-fixtures and wood-products manufacturer, Duratex, cut its workforce in half, sent 50 managers to study top companies in Japan, and reorganized decision-making to reduce by 50% the time needed to get new products to the market. "Companies used to produce what they wanted whenever they wanted, and the public had no choice," says CEO Plinio do Amaral Pinheiro. "If you do that now, you can't survive."

BORDERLESS. While conglomerates reshape themselves, more and more entrepreneurs are carving out high-tech niches. Marco Aurelio Garib, now 36, and Paulo Cesar Breim, 44, started software company EverSystems Informatica in 1992, at a time when computer imports were banned under tough protectionist rules. But the computer market exploded after the lifting of restrictions later that year, and demand for their banking software surged. Now, EverSystems not only writes software for local banks but also provides programs for Citibank in eight Latin countries, Canada, and Japan. Sales this year should reach $12 million, up from $8.5 million in 1997. EverSystems expects sales will really expand as it begins to sell software for smart cards issued by credit-card companies. "Our objective is to expand our business abroad," Garib says. "Borders don't matter anymore."

Meantime, foreign companies are piling into Brazil and making it the main platform for their South American operations. Ford Motor Co., with Brazilian sales that soared 52% last year, to 280,000 cars, announced in March that it would invest a further $1 billion in Brazil by 2000--on top of $2.5 billion already planned--to build two new models. Swiss-Swedish electrical giant Asea Brown Boveri is also expanding its output of heavy equipment--from hydro generators to deepwater oil production equipment--that it produces in Brazil, complemented by products it makes in Argentine and Chilean factories. "Brazil is very important as an export base for all of Latin America," says D. Howard Pierce, ABB's executive vice-president in charge of the Americas.

Rising unemployment is a major worry, though, as privatizations and corporate makeovers accelerate. Just ask Edmilson Marques de Oliveira, 38, who was dismissed last October from his $2,300-a-month midlevel management job at Rio de Janeiro state bank Banerj after it was bought by Banco Itau. Marques de Oliveira, who started in banks as an apprentice when he was just 15, fears he lacks the skills needed for a career shift. "I feel completely unprepared for a new life and profession," says Marques de Oliveira, who is taking English and computer courses in hopes of improving his job prospects.

GAINING GROUND. Still, the working poor are among the greatest believers in the changes that Brazil has seen in the past four years. The reason is that inflation, which long ate up their wages, has been brought under control. As a result, an estimated 30 million people have entered the consumer class for the first time. One of them is Severino Joaquim da Silva, who earns $550 a month working behind the counter of a bakery in Sao Paulo's middle-class Vila Mariana section. Before the Real Plan, "you left most of your salary in the supermarket," he says--over samba music blaring from a radio in the bustling bakery.

But in the past few years, he has bought a used car, stereo, TV, refrigerator, and furniture on payment plans of up to 15 months. Despite steep interest rates, da Silva manages to keep his payments to about $90 monthly. Next year, he plans to splurge and take his wife and two children to visit their native Pernambuco, 2,600 kilometers north, for the first time since they moved to Sao Paulo a dozen years ago.

Da Silva is emblematic of the Brazilians' new outlook. He's determined and willing to work hard because he believes he's on course toward a better life. For da Silva and many other Brazilians, there's no looking back.