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Tuesday, February 7, 2017

Business Bets On Brasil Economic Rally

 

Business bets on Brazil economic rally

Foreign direct investment hits $15.4bn record high for month amid reform hopes
When Hanno Kirner, executive director of strategy at Jaguar Land Rover, visited São Paulo for the city’s recent motor show, he brushed aside concerns about the Brazilian economy
Even though Latin America’s biggest country is suffering from its worst recession in more than a century, leading to a 20 per cent fall in car sales across the industry last year, the luxury carmaker is ramping up a new £240m factory it opened in Rio de Janeiro state last year. 
“[Brazil] is a strong economy and once it shakes off its troubles it will go back to having an economic rally again,” Mr Kirner said. “It has got resources, it has got a young dynamic population. It has got everything in the long term.” 
Jaguar Land Rover is not alone. Even as Brazil’s economy contracted for the second year running in 2016, foreign direct investment in December hit $15.4bn, a record high for that month, the central bank said. That brought total foreign direct investment for the year to $78.9bn, up 6 per cent on 2015. 
This comes in spite of a dismal economic performance. A survey of economists by the central bank at the end of 2016 forecast the economy to have contracted by 3.49 per cent during the year. 
Economists say long-term investors continue to be interested because, as one of the world’s biggest emerging market economies, Brazil is too big to ignore. Investors are also hopeful about a new reform drive, underlined by President Michel Temer in an interview with the FT last week, to address long-term structural issues, they say. 
“Although the Brazilian economy is not doing that well, it is such a big economy that companies cannot afford to be outside of it,” said David Beker, economist with Merrill Lynch. 
Brazil’s FDI data can be tricky. Large single investments, such as a steel plant, can suddenly distort a month’s data. A big component of FDI in Brazil is also intercompany loans between companies onshore and their offshore affiliates. Some analysts suspect some of this money is parked in Brazil to take advantage of the country’s high real interest rates of about 6-7 per cent. 
But on the whole, FDI remained surprisingly solid, analysts said, helping to strengthen Brazil’s currency, the real, against the dollar by about 23 per cent over the past 12 months. 
“Last year was very big for FDI and the current account improved significantly,” said Mr Beker. 
Economists say one reason long-term investors are prepared to look through bad GDP numbers and keep putting money into Brazil is that they view the downturn as cyclical rather than a structural collapse. 
Political developments have helped turn the outlook more positive for this year. Following the impeachment of leftist former president Dilma Rousseff last year, the pro-business government of her successor Michel Temer has pushed ahead with ambitious reforms. 
One of these, a law seeking to limit real increases in budgetary spending to zero, has already passed through congress. The other tougher reform, a bill to make spending on pensions sustainable, faces a battle in congress this year but is making headway. 
The economy should also receive a short-term boost from low industry inventories, which have hit rock bottom and will need to be refreshed this year. In addition, the central bank has begun an aggressive interest rate easing cycle as inflation has fallen from its highs under Ms Rousseff’s government to within the central bank’s target range. 
“We are past worst of the cycle,” said Marcos Casarin of Oxford Economics. 
Mr Casarin is forecasting 0.4 per cent growth for 2017 as the economy casts off the hangover of the long recession, strengthening further in 2018. 
The optimism over Brazil’s long-term future is also shared by strategic investors other than JLR. Late last year, Shell chief executive Ben van Beurden held an analyst meeting in Brazil to showcase the company’s investments in ultra-deepwater oil discoveries off the coast of Rio. 
Meanwhile, Chinese electricity company State Grid has snapped up control of its largest counterpart in Brazil’s private sector, CPFL Energia, for R$17.4bn. And state-owned oil company Petrobras has been shedding assets and selling them to international investors. 
The positive sentiment in São Paulo could be disrupted when congress returns from recess next month and the Supreme Court begins processing a pile of investigations into sitting politicians related to corruption at Petrobras. Many of these politicians are from Mr Temer’s ruling Brazilian Democratic Movement party, which will fuel political uncertainty. But FDI is expected to weather the storm again this year. 
“Brazil is always going to be volatile — the difference is from 2011 to last year, we were volatile in a downward trend. From now on, we will be volatile in an upward trend,” said Mr Casarin.