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Brazil to lead the BRIC economies in 2009

Let me start 2009 with a prediction - Brazil will lead the global emerging markets out of the current doldrums to be the top performing emerging market in 2009.

Firstly, let's not forget that Brazilians have known terrible times. Military dictatorship and economic stagnation are recent memories for even the most prosperous, and there are still tens of millions of Brazilians who live on less than $1 a day. The horrible handling of money affairs put Brazil under the microscope of the International Monetary Fund who, in order to ensure repayment of loans issued by the World Bank, sent experts to Brazil, imposed austerity in public spending, tackled inflation by limiting wage increases, and confronted labour unions and non-governmental organisations.

In 1995 Brazil came under the massive stress of the Mexican devaluation, the so-called "Tequila effect," which ricocheted around the world, and caught Brazil in a much weaker position than it is in today - higher levels of debt, low reserves, a fiscal sector that needed huge reform, and a much lower capacity for exports. Brazil dealt with this massive stress effectively and went to work on each one of its weaknesses over the next 13 years.

While having the temptation and the perfect excuse for debt defaults and more borrowings, Brazil proved its seriousness back then by taking the hard, but certain road to progress, keeping its international commitments and gradually introducing strong structural reforms. Since then, it has become a net creditor to the world; it controlled inflation, and avoided an overheating of its economy with tight fiscal and monetary policies during the recent run-up in commodity prices.

This is all paying off strongly today. The Brazilian Government, is now run by a sophisticated technocracy of top economists and international bankers, many of whom held top positions in leading international banks, and has allowed Brazil to move forward with confidence and GDP growth projections of between 4% and 5% for 2009. To quote Brazilian President Luiz Inacio Lula da Silva during the G20 talks at the end of last year: "Important banks - very important banks - that spent their lives giving advice about Brazil and what we should or shouldn't do are now broke. Brazil is more prepared than any country in the world to deal with the new global economic landscape, and has been preparing for some time to become a solid economy."

Here are three reasons to be optimistic about Brazil's prospects in 2009:

1. Self-sustaining domestic growth, led by consumer spending

As with all of the BRIC countries, future economic growth depends on strong local domestic consumption, as opposed to exports to the developed world, and the Brazilian Government has recently announced measures to boost domestic spending via lower interest rates, an easing of capital requirements to Brazil's banking system (designed to stimulate housing and car loans) and reducing unemployment via a range of spending initiatives. Brazil's population of over 181 million is:

the 6th largest in the world (and the largest in Latin America) growing at approx. 1.3% per year.
relatively young, with 42% under 20 years of age
80% Urban - approximately 30% live in the ten principal metropolitan areas, including São Paulo and Rio de Janeiro which have populations of around 19 million and 12 million respectively. Some 14 other metropolitan areas have populations of more than 1 million.
experiencing a rapid rise in the "middle classes" which is growing by over 8% per annum
keen to spend rather than save, as evidenced by the large numbers of new shopping malls, outlets, hypermarkets, supermarkets and convenience stores offering the usual wide range of services (restaurants, coffee shops, fitness centres, beauty parlours, shoe repairs, post offices, bank services and dry-cleaners) and providing entertainment with cinemas, cyber-cafés and play areas for children.

All the evidence suggests that, provided Brazil can maintain economic growth at its current rate, the domestic consumption story will continue to offer excellent prospects for both foreign retailers and investors in 2009.

2. Massive infrastructure investment

In January 2007, the Brazilian Government launched its "Growth Acceleration Program" to fund housing, education, public health, transportation and energy projects over the next 3 years and allocated 475 billion reals (US$190 billion) for this purpose. Last month, in response to the global financial crisis, this amount was increased by 34% to 636 billion reals (US$254 billion) and was promised to be spent by 2010.

Insufficient infrastructure investment has long been a constraint to Brazil's economic growth, but with a committed program of investment into highways, railways, ports, electricity and housing projects, Brazil will be transformed into a massive construction site over the next two years, creating millions of jobs and supporting the country's ambitious economic growth plans.

Whilst many of the major and most visible infrastructure projects will be funded from Government sources, many opportunities for foreign investors, particularly in property, electricity and roads, are already being snapped up by institutions and foreign investors.

3. Increasing trade between the BRIC countries and other emerging markets

One of the casualties of the global financial crisis, and the cause of why the BRIC and other global emerging markets have been so badly savaged in recent months, is the "decoupling" theory (at least "market decoupling" if not "economic decoupling") which was the subject of much debate and speculation in late 2007 and early 2008.

While economic growth in emerging countries has dropped only slightly, their securities and currency markets have fallen drastically. Presumably, many investors think that the American economic downturn will lead to a dramatic drop in U.S. orders of emerging-market products, which will cause those economies to experience an economic downturn themselves.

But this ignores the fact that Brazilian exports, for example, account for only 13% of GDP, meaning that some contraction in U.S. and European orders can be counterbalanced by domestic fiscal and monetary stimulus. And a new phenomenon that is cushioning the blow for emerging economies is "intra-emerging market trade" which is becoming increasingly important and prevalent, particularly amongst the BRIC countries who have emerged as a new "trading bloc" in their own right.

Increasingly, a growing proportion of the infrastructure needs of industrial goods being bought by some emerging economies are goods produced by other emerging economies. For example, iron ore from Brazil (and coal and oil from other emerging markets) is flowing into China to fuel their massive infrastructure developments and growing consumer demand. Trade between Latin America and China has increased by 13 times since 1995, from US$8.4 billion to US$100 billion.

Brazil is the world's largest exporter of commodities such as beef, iron ore, sugarcane ethanol, soybeans, wheat and alfalfa, all of which have, until recently, been trading near record levels and will continue to soak up strong demand from other emerging, if not developed, economies in 2009 and beyond.

Final thoughts

I should finish by saying that I am not the only person predicting that Brazil is the emerging market to watch in 2009. Since October last year, I have been tracking numerous comments, observations and recommendations from many different investment researchers, stockbrokers and economic commentators who have been arguing the case to invest in Brazil for many weeks now. In fact, the Brazil stockmarket shows better signs of having bottomed than the U.S - since late October, the iShares MSCI Brazil Index ETF (NYSE:EWZ) has gained over 8%, while the S&P 500 is down by nearly 2%. Don't take my word for it - do some googling yourself! You'll find plenty of evidence to support these arguments (and perhaps a few that offer a more gloomy assessment!)

Finally, please remember that the "BRICs dream" (as first conceived by Jim O'Neill of Goldman Sachs in 2001) was never a "2008 idea" or even a "20 year story". It was (and is) an "investment megatrend", a 100 year economic seismic shift that will see the BRIC countries become the largest and most influential economies in the world by the end of this century. To decide for yourself whether the thinking that led to the BRIC acronym remains intact, I urge you to watch Jim ONeill's original video made in 2003 which you can play by clicking on "Web Tour: The BRICs Dream" at this link. I'm sure your faith in the BRIC story, if it has been challenged in recent times, will be fully restored by this measured and prophetic analysis of the original BRICs dream!

Best wishes

David Thomas

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