November 1, 2013 4:28 pm

Brazil may finally escape from the samba clichés

By John Paul Rathbone

A more realistic vision of the country may now emerge, writes John Paul Rathbone

A street market vendor counts money in Rio de Janeiro, Brazil

Black is a shade of brown. So is white, if you look,” John Updike once observed of the sun-burnished skin tones on Rio de Janeiro’s Copacabana beach. Sadly, however, not even in variegated Brazil is black a shade of red – and red is what investors saw this week after Eike Batista, Rio’s brashest businessman, declared bankruptcy by pulling the trigger on a $6bn default.

After Latin America’s biggest-ever corporate bust, some may wonder at Mr Batista’s exotic tale and conclude: so what? But his story is, in many ways, synonymous with Brazil’s rise and fall. Moreover, as Brazil is an emerging market archetype, it tells a global fable as well.

Only last year Mr Batista was the world’s seventh-richest man, boasting a self-made fortune that had grown to more than $30bn during the wonder years of Luiz Inácio Lula da Silva. Lula, as the charismatic former president is widely known, governed between 2002 and 2010 when Brazil, like Mr Batista, could seemingly do no wrong. Indeed, the two men were different sides of the same coin.

Lula was by almost any criterion the most successful politician of his time. Even nature seemed to smile on his rule, with the discovery in 2007 of huge deposits of deep sea oil. Helped by a commodity price boom, the trade union leader turned president lifted millions of Brazilians out of poverty, projected South American diplomacy internationally by putting the B into the Brics, and became symbolic of emerging countries’ success, a rise that promised to reconfigure the world.

Mr Batista, like so many of the emerging world’s new billionaires, was the feted entrepreneurial agent of that reconfiguration. (While Lula certainly helped the poor, capital prospered even more: during his two presidencies, the Brazilian stock market quadrupled.) Indeed, Mr Batista’s stated aim was to become the world’s wealthiest man, thanks to the commodity boom that also burnished Lula’s political halo.

Today Mr Batista is in disgrace after it turned out that a prospective oil well, the main source of funding for his leveraged empire, was dry. Similarly, Brazil has seemingly lost its way, just as many emerging markets are also losing their appeal against a shale gas revolution that promises to transform the US and a eurozone that may be over the worst.

Certainly, Brazil’s go-go years of the mid 2000s are over; last year the economy expanded at half of Japan’s rate. The fiscal buffers that allowed Brazil to treat the 2009 global financial crisis as though it was only uma marolinha, a “ripple” in Lula’s phrase, are exhausted. The role of continental locomotive has been taken up instead, to Brasilia’s chagrin, by the more reform-minded Pacific Alliance economies of Chile, Colombia, Mexico and Peru.

Investment potential is also being left unfulfilled, as seen in Petrobras, the state oil company that raised $70bn in 2010 in the world’s largest-ever share offering but has since registered a slide in its shares of 37 per cent. Brazil is now even a locus of general investor fright, as happened after the market’s “taper tantrum” in May, when millions of dollars fled the country believing the US Federal Reserve was about to raise rates.

It is not only the capitalists who are fed up. In June, 1m people took to the streets toprotest at government corruption and the millions being spent on new football stadiums for next year’s world cup (the circuses of Lula’s winning “bread and circuses” political formula) instead of better public services. Much of the “new middle class” remains, in reality, only a month’s wages away from poverty. After 11 years in power, and the likelihood of another four after next year’s election, Lula’s Workers party has also grown stale and complacent. Reforms are being left undone.

This is a depressing trajectory. Yet is it all bad? Disappointment may at least release Brazil from the prison of its many clichés (samba, beaches, money, fun!) that Lula and Mr Batista often played upon and into which the world so eagerly bought.

Exhibit one of a more realistic vision of Brazil: Mr Batista is atypical of a business class which, by dint of long experience, is conservative and underleveraged. So fallout from his bankruptcy is expected to be limited. Exhibit two: the $2tn economy, comparable to the UK’s, remains an important market for multinationals, especially telecoms and consumer goods companies, and has developed pockets of true excellence, especially in commodities and agro-industry.

Exhibit three: even if Brazil’s rainbow diplomacy has not lived up to its promise, the country has maintained stability in a difficult neighbourhood that includes socialist Venezuela, prickly Bolivia and capricious Argentina. If the US is castigated for not paying attention to the region, that is perhaps because it does not need to. As a regional hegemon Brazil does a fair job, and without exercising the neighbourly brutality of China, Russia or India.

Mr Batista – garish and overleveraged – went from boom to bust in less than a year. By contrast, giant countries such as Brazil need a longer view. Modern Brazil was born in the late 1980s following its transition to democracy. That was also when the emerging markets asset class was created. Since then, crises have come and gone, but emerging market returns – and progress – have plodded on, not always in a straight line but alongside a not-coincidental secular fall in US interest rates.

The big question now for Brazil – and indeed all emerging markets – is whether that progress will continue as US rates start to rise. No, if you believe the past 30 years have only been about financial liquidity. Yes, if you believe that enough good habits have embedded themselves in the meantime. Despite Mr Batista’s example, I wager the latter – although it may be a rough ride.

johnpaul.rathbone@ft.com

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ReportQuibono | November 2 11:23am | Permalink
Wow, Hank is bitter! maybe he was long OGX.
ReportHank_Chinaski | November 2 9:52am | Permalink
ricgf is full of baloney.

Embraer: sure, Embraer does great products but it will always be limited to under 130 seats planes. Prospects: dim. Jetblue just changed their orders from 195s to A321s by the way.

Vale: yes, great deal. Super "smart" to extract iron ore and ship it to China just so Brasil can import back crappy cars made with steel made from their iron ore.

Question: can iron ore lift 200 million people out of mediocrity? No.

Brazil lives in Bizarro World where everything is exactly the opposite of what it should be.

Brazil's government thinks it is oh so important and wow 6th biggest economy of the world (takes the UK 1/19 of the size and 1/3 of the population to do so by the way).

If Brazil was so important and so smart and desirable there would be a flock of companies competing for its privatizations. Not a single company is willing to operate the airport of Brazil's 3rd largest city.

Think about that for a while and what does it say about the system, values and beliefs of the country.

Basically it shows brasil (with small b) is morally bankrupt.

Batista is a crony capitalist like the best of them. The ironic part is that most of those who cheered him didnt realize it was their own money (among other suckers) who financed Eike's dream, through BNDES.

More baloney by ricgf:

" as the world's second largest Western democracy, it displays sufficient geopolitical leverage"

Democracy?

Not true.

If brazil was a Democracy Marina's party would be registered. If brazil was a Democracy mensalao would never have happened. If people in Congress sell their votes then their representation of "demos" is gone. Democracy my plump behind my friend.

Ricgf:
"- corruption in the justice: there are countless other countries way more corrupt than Brazil - check the latest Transparency International for more information."

The CLASSIC and FAVORITE approach of Brazilians when criticized: say "it's the same in other countries".

Ricgf, it's NOT the same: in any mildly civilized place corrupt politicians go to jail, in Brazil they go to the Senate.

If success if how close you get to your potential, Brazil is a joke, will always be.

PS: tell us about how Brazil "leads" South America when you can't even drink water from the tap there. Hint: you can in many other places, even in Bogota. Brazil is a joke in South America and elsewhere. The self-important mental midgets who think they own the building and have all this "emerging power".

NUNCA SERAO.
Reporteberger | November 2 12:58am | Permalink
It is not by chance that Brazil treats its neighbors kindly while it seems that US are "ignoring" South America. The yankees did not ignored South America, they were completely left out! In 1990, after the fall of Berlin Wall, a political articulation between Lula, just a party leader by then, and Fidel Castro was made in order to organize the Left in Latin America, this resulted in an organization called Forum of São Paulo(Foro de São Paulo)(The existence of this organization was strongly denied in 90's. Now, however, in the internet is even possible to watch a number of opening speeches of their meetings). They were little by little sweeping out all the Right out of the political stage, including the United States(who is held responsible for interventioning in the continent helping the rise of military dictatorships, this, in their point of view). Now the Left counts 16 presidencies in Latin America that were assisted by the Forum somehow. So, realizing its political rise allowed Forum of São Paulo even slow down its help to it´s now unusefull armed branch: FARC(The Revolutionary Armed Forces of Colombia), originally one of the early participants of the group, and now deadly weak.
A analysis of South America's conjuncture ignoring the role of Forum of São Paulo is grossly incomplete, it is the missing link that explain a whole bunch of dynamics in that continent.
ReportMatrox 918 | November 1 10:44pm | Permalink
Batista used to say, BP + Big Problem. LOLOL

What goes around comes around. Hope he loses all
ReportRTroutman 1780 | November 1 9:29pm | Permalink
Let it be known, that I knew something likethis was bound to happen. One, I was at the Seadrill office for a meeting in early setember 2012, with my paper in hand and reading Eike´s obnoxious decision to place his son as a Director of a holding and firing Directors left and right, hint hint bad decision making. Prior to that I was onboard a Statoil rig for a client meeting and one of the employees was scuffing about Eike´s and MMX bold statement of raising the bar for production, or to say the least he was laughing at em. So I put those pieces together and made a decision that saved me enough! It was an instinct move, I shall not lie but I use wisemen instincts into studying it more and I think of what would Buffet do. So I did, and saved a lot! A year later and look at it now!
Reportricgf | November 1 7:45pm | Permalink
@Col:

- Intervention in "critical" industries is what made South Korea successful, not to mention Brazil's own champions like Vale and Embraer. In case of doubt, you may google "infant industry" for more details;

- Public sector salaries have ALWAYS been high and disconnected from the private sector; nothing new, but at least the government is finally trying to limit public expenses given the recent deficits;

- corruption in the justice: there are countless other countries way more corrupt than Brazil - check the latest Transparency International for more information.
ReportCol | November 1 7:02pm | Permalink
BUT intervention in critical industries such as energy, oil and electricity, to control inflation, profligacy in public sector salaries and pensions allied to corruption in the Justice system will drag this country back from the great progress it made at the turn of the century.
Reportricgf | November 1 6:16pm | Permalink
Congrats for FINALLY coming up with a realistic article that does two main things:

- attempts at leaving aside those stupid stereotypes about Brazil;

- disregards the usual "mongrel dog complex" that unfortunately still plagues most of the Brazilians commenting on these pages.

Now for the facts:

- Brazil is already a regional power, the world's 6th largest economy and a gigantic domestic market for all kinds of companies;

- as the world's second largest Western democracy, it displays sufficient geopolitical leverage to take care of South America (and more broadly a good part of the Southern Hemisphere) on its own;

- It still has many problems just like any other emerging power - just stop ignoring its great virtues as well.

Once more, thank you for this sober and more neutral assessment of the country. I for one am tired of listening to the same old nonsense about "football, samba and Amazon"...there is a LOT more to the country than this.