Brasilians Cut Back As Downturn Hits Home

May 29, 2015 5:03 pm

Brazilians cut back as downturn hits home

Samantha Pearson in São Paulo

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Brazilian families have cut spending on a yearly basis for the first time in more than a decade as a toxic combination of high inflation and rising unemployment begins to hit at the heart of Brazil’s economy.

Household consumption fell 0.9 per cent in the first quarter from the same period of 2014 — the first annual decline since the third quarter of 2003, according to gross domestic product figures from Brazil’s national statistics office (IBGE) on Friday. It was the worst quarter-on-quarter decline since the depths of the global financial crisis in 2008.

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Brazil’s consumers have driven economic growth ever since President Dilma Rousseff’s Workers’ Party (PT) took power in 2003, turning the country into one of the world’s most desirable emerging markets among investors and helping to keep the PT in power ever since.

However, this consumption-led model of growth has neared exhaustion over recent years, with Friday’s data providing the most convincing evidence yet of the need to shift Brazil’s focus to investment and structural reforms, analysts said.

Overall, Brazil’s economy contracted 0.2 per cent in the first quarter from the previous one — a better than expected headline number, but largely because of a 4.7 per cent growth in agriculture and higher exports, aided by a weaker currency.

“The report is definitely much, much weaker than the headline suggests,” said Alberto Ramos, economist with Goldman Sachs. “All the main components of domestic demand recorded annualised rates of contraction,” he said.

Brazil’s services sector declined 1.2 per cent in the first quarter from the previous year, while industry, which has long suffered from poor infrastructure and growing state interventionism under the PT, fell 3 per cent on a yearly basis.

However, after winning re-election by one of the narrowest margins on record in last October’s presidential elections, Ms Rousseff has backed a series of measures to put the economy on a path to more sustainable growth.

The battle of Brazil’s budget is far from won

It has been a big week in the battle of Brazil’s budget. Three strategically important cost-cutting measures were approved in Congress which should go some way to achieving a primary budget surplus equal to 1.2 per cent of GDP. Nevertheless, finance minister Joaquim Levy faces a tough campaign in which success is far from guaranteed.

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Joaquim Levy, Brazil’s new market-friendly finance minister, led efforts to pass three major cost-cutting measures this week in Congress to help restore the country’s public finances, restricting unemployment and pension benefits and raising taxes on imported goods.

Meanwhile, the central bank has lifted interest rates to the highest level in six years to tackle inflation that has climbed above 8 per cent.

The return to more orthodox economic policies has pleased investors and raised hopes for a better 2016. However, gross domestic product is still expected to contract over 1.2 per cent this year as the austerity measures hit Brazil’s already stagnant economy, marking the country’s deepest recession since 1990, according to World Bank figures.

This week Brazil’s planning ministry estimated this year’s GDP at about $1.8tn — a contraction of almost one quarter in dollar terms from last year, also as a result of Brazil’s plunging currency.

Rising unemployment is expected to put further pressure on household spending in the months ahead, hurting Ms Rousseff’s already low approval ratings and testing her resolve to continue with the austerity programme.

Data last week showed Brazil’s economy lost jobs in April for the first time for that month since records began in 1992, while the country’s unemployment rate reached 6.4 per cent — its highest level in four years.

Brasil's Economy To Contract Nearly One Quarter In US Dollar Terms In 2015

May 25, 2015 12:40 pm

Brazil economy to contract nearly one-quarter this year in dollar terms

By Joe Leahy in São Paulo

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Brazil’s economy is expected to contract by nearly one-quarter this year in dollar terms due to a depreciating currency and a deepening recession, according to government figures.

Brazil’s planning ministry revealed in a budget presentation that gross domestic product was expected to be $1,812bn this year, down 23 per cent from $2,353bn a year earlier, as President Dilma Rousseff tries to unwind a multiyear stimulus programme that has left government finances bleeding red.

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“We know that in a populist model you have a fake sense of prosperity in the short term,” said Alberto Ramos, economist with Goldman Sachs. “So after populism comes the adjustment and the adjustment is basically just giving back all these fake gains.”

Brazil’s economy is facing a hangover with the end of the commodities supercycle and government efforts to prolong a consumption and credit-led boom.

Much of the expected fall in Brazil’s economy in dollar terms this year is due to a projected depreciation of about 21 per cent in the real against the dollar from R$2.66 at the end of 2014 to an estimated R$3.22 by the end of 2015, according to the planning ministry.

But the extent of the depreciation shows the challenges facing Brazil as it seeks to stabilise its contracting economy.

Brazil`s real was the worst performing significant emerging market currency after Turkey’s lira against the dollar so far this year with a 10.7 per cent decline against the dollar, according to an index compiled by JPMorgan.

The planning ministry estimated Brazil’s economy would contract 1.2 per cent this year in local currency terms compared with a year earlier, which would be its worst performance in 25 years.

Brazil lost jobs in April for the first time for that month since records began in 1992, according to data from the labour ministry on Friday. The country shed almost 98,000 formal job posts last month, surprising analysts who had forecast the creation of close to 50,000 positions.

The figures came a day after data from Brazil’s national statistics office (IBGE) showed the country’s unemployment rate reached 6.4 per cent during April, its highest level in four years.

The central bank, meanwhile, is increasing interest rates to try to quell inflation, which has breached the top of its range of 4.5 per cent, plus or minus 2 percentage points. The planning ministry estimates inflation will end the year at 8.26 per cent.

To try to restore sinking investor confidence, the government has announced an austerity or “adjustment” plan to return its finances to an even footing after Brazil last year reported its first primary budget deficit – the balance before interest payments — in more than a decade.

It said on Friday it would freeze R$69.9bn in discretionary expenditures – administrative and investment costs – and raise taxes on banks and brokerages among other measures. It is seeking a primary fiscal surplus of 1.2 per cent of GDP while many economists believe it will manage less than 1 per cent.

“This is part of a big fiscal effort by the government to meet its primary target,” said Nelson Barbosa, planning minister.

But economists worry that even if the government`s efforts to generate a primary fiscal surplus this year are successful, economic growth will not bounce back strongly enough in 2016 to ease the impact of the austerity drive.

Brazil will need to deliver reforms to encourage investment if it is to return to higher growth, they said.

“It is a big challenge to deliver better fiscal numbers under such a weak economic environment,” said David Beker, economist with Bank of America Merrill Lynch.

Additional reporting by Samantha Pearson in São Paulo

Marco Galperin Founder of Latin America's eBay

May 19, 2015 2:19 pm

Marcos Galperín: founder of ‘Latin America’s eBay’

Benedict Mander

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Free to grow: 'The more inefficient retail is, the more value we can provide to a society,' says Marcos Galperín

Much has changed in Marcos Galperín’s life since 1999, when he and a colleague set up what would become the eBay of Latin America. But the 43-year-old Argentine dotcom entrepreneur has lost none of the youthful vigour that drove him to set up MercadoLibre, the region’s most visited ecommerce website.

“I feel exactly the same way as I did 15 years ago. I feel a desperation that there is so much to do, that this is just starting,” says MercadoLibre’s chief executive, explaining that although his online shopping site has become the undisputed leader of ecommerce in Latin America, the sector is still in its infancy.

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He looks much the same too. In a hooded top, slouching on a sofa, with his feet up and a laptop on his knees as he awaits the FT, Mr Galperín could be just another employee at MercadoLibre’s buzzing designer offices in Buenos Aires. They fill three floors at the top of a glistening tower that peers down over the muddy waters of the river Plate.

It is a long way from the garage of his family’s leather business, where the operations of MercadoLibre — “free market” — began.

It was just before the dotcom bubble burst in 2000, which could have spelt doom for the fledgling enterprise. However, Mr Galperín knew a thing or two about raising money, having work­ed at JPMorgan and in the finance dep­art­ment of Argentina’s largest oil company, YPF; MercadoLibre’s strong financial support helped it survive the crash.

He remembers well the mo­ment he persuaded the first investor to back his project, when he was finishing his MBA at Stanford Graduate School of Business in California. He was driving financier John Muse, who had given a lecture, to the airport and seized the chance to pitch his idea. The co-founder of the Hicks Muse Tate private equity fund was persuaded by the time he boarded his private jet.

“I went back home and told my girlfriend: ‘You remember that trip we were going to do to Europe after graduation? Well it’s not going to happen,’” Mr Galperín says. He had already ditched dreams of sports stardom despite being selected to play for Argentina’s junior national rugby team.

Of as many as 40 rivals in Latin America at the time, only a handful could raise meaningful financing, says Mr Galperín, who also secured funds from JPMorgan, Goldman Sachs, GE Capital, Flatiron and Banco Santander. “We were the only ones that didn’t throw the money away doing mass media advertising. Instead, we focused on getting a team together and a good product. That’s what set us apart,” he says. His co-founder was Hernán Kazah, who was also at Stanford at the time and who left the company after 10 years.

By 2001 — when Argentina was plunging into a deep economic crisis — Mer­cadoLibre had already caught the eye of eBay, which acquired a 19.5 per cent stake in exchange for its Brazilian subsidiary. MercadoLibre maintains an unusual relationship with eBay — which as both a shareholder and a competitor, Mr Galperín says, is a “frenemy” — but crucially the US group pledged not to return to the region for at least five years. This cleared the way for MercadoLibre’s rapid expansion, just in time to raise more funds when it laun­ched on New York’s Nasdaq exchange in August 2007, the same day that economic historians now say marked the start of the global financial crisis.

The more inefficient retail is, the more value we can provide to a society

- Marcos Galperín

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Despite the economic problems, MercadoLibre has become a household name across Latin America. Now with a market capitalisation of some $6bn, last year it matched nearly 30m different buyers and sellers, about 5 per cent of the region’s population, of everything from computers to cars. Its gross annual merchandise value — the total cost of goods sold — was almost $8bn. Revenue is generated from transaction fees, online ads and MercadoPago, its own payment system.

Mr Galperín reckons the figures are “minuscule” compared to the growth he expects over the next 20 years, with just 5 per cent of Latin Americans engaged in ecommerce, compared to 15 per cent in the US. In the next five years alone, as more Latin Americans use the internet, analysts expect MercadoLibre’s gross merchandise value to double, despite gloomy prospects for the economies of some of its biggest markets, such as Brazil and Venezuela.

“The speed at which people are accessing the internet and doing ecommerce for the first time is on a different scale relative to consumption patterns. It’s not just faster, it’s in a different league,” says Mr Galperín, adding that broadband connections are about 2,000 times faster than in 1999.

Commuting from Uruguay

Shortly after setting up MercadoLibre’s headquarters in Argentina, Marcos Galperín decided to live in another country, imposing on himself one of the world’s more unlikely commutes.

In 2002, with Argentina in the thick of a tumultuous economic, political and social crisis, Mr Galperín moved with his wife and young child to Montevideo, the more tranquil capital of Uruguay. He says the journey is painless, a 30-minute flight and five minutes by car at each end. When he gets into a routine, which “doesn’t happen that often”, he flies to Buenos Aires early on Tuesday, returning home late on Thursday.

Still, he plans to move back to Buenos Aires next

In fact, MercadoLibre has done a roaring trade in some of the region’s worst-performing economies, such as Venezuela. Traditional retailers there are stifled by regulation, leading to empty shelves and the cash-strapped population is selling more of its possessions, while many are simply afraid to go shopping because of rampant crime.

“The more inefficient retail is, the more value we can provide to a society,” says Mr Galperín. But access to the internet, he says, means that consumers in isolated communities can buy the same goods at the same prices as those in big cities, while small businesses no longer have to sell through big retailers. “Just as Google democratised the ability of people to access information, and Facebook democratised the ability of people to organise themselves and voice their opinions, so we have democratised commerce,” he says.

Small businesses caught on to MercadoLibre some time ago, and Mr Galperín expects big retailers to join in: those that do not will be left behind, he warns. “The traditional gatekeepers of commerce have realised they need to be where the consumers are,” says Mr Galperín. “We are trying to help them successfully navigate the transition to digital commerce. We don’t see traditional retailers as our competitors — actually most of them are our clients,” he adds, noting that 500 or so retailers including Walmart and Fravega have online stores on MercadoLibre.

Nevertheless, Mr Galperín is acutely aware that there are too many examples of companies “whose picture was great, but the movie ended terribly”. He points to the experience of eBay in China, which was muscled aside by Alibaba, and of many companies such as MySpace or BlackBerry. All were market leaders that stopped innovating and were overtaken. “That’s what makes my job so fascinating, and it’s why I come to the office every day,” he says perkily. “Winning is fun.”

Big Chinese Investments In Brasil Coming

May 18, 2015 4:59 am

China’s Li Keqiang seeks big deals in Brazil

Jamil Anderlini in Beijing

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Chinese Premier Li Keqiang arrives in Brazil on Monday for his first official trip to Latin America bearing tens of billions of dollars worth of trade and investment deals in the latest sign of China’s rising influence in the continent.

During his three-day visit, Mr Li is expected to witness the signing of at least $50bn in Chinese investments in Brazil’s infrastructure, a senior Brazilian official said last week.

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Brazil is trying to speed up the overhaul of its creaking infrastructure as it gears up for the Olympic Games next year amid a sharp economic slowdown exacerbated by slowing commodity demand in China.

Mr Li will then continue his eight-day South American tour with visits to Colombia, Peru and Chile.

The four countries account for 57 per cent of China’s booming trade with Latin America and Beijing is increasingly interested in boosting its direct investment in the region, particularly in the roads, bridges and railways it has already built across its own country.

A proposed agreement on a cross-Andes railway linking Brazil’s Atlantic coast to Peru’s Pacific coast is expected to be a centrepiece of this visit.

If built, it would allow China to increase direct imports of commodities such as soy and iron ore from Brazil and Argentina while avoiding the Panama Canal, which Beijing regards as a US-controlled strategic choke point.

China’s rising influence in a region once considered America’s “backyard” is seen by some as a challenge to the two-centuries-old “Monroe Doctrine”, which Washington established to discourage foreign, particularly European, influence in the region.

Some policy makers in Beijing have argued that China should ramp up its involvement in Latin America as a counterbalance to the continued enormous US diplomatic, military and economic presence in Asia.

In January, Chinese President Xi Jinping pledged $250bn of investment in Latin America over the next decade, highlighting China’s strong economic interest in the region.

By the end of last year, China’s direct investment in Latin America totalled $99bn, according to Chinese government figures.

Bilateral trade between China and Brazil increased 13-fold in value terms between 2001 and 2013, according to Brazilian statistics, and China has been Brazil’s biggest trading partner since 2009.

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But a pronounced slowdown in China, led by sliding construction and weakening demand for commodities, meant annual trade between China and Latin America as a whole increased by just 0.8 per cent in 2014 from a year earlier.

As a result of the slowdown at home, China’s enormous state-owned construction and infrastructure companies are looking overseas for opportunities to build the roads, ports, railways and airports that are overly ubiquitous in China.

Chinese loans to Latin America last year increased more than 70 per cent to $22bn, eclipsing the combined lending of institutions such as the Inter-American Development Bank and the World Bank, according to estimates from the Inter-American Dialogue, a think-tank.

Before heading to Brazil, Mr Li stopped on Sunday for an overnight “transit visit”–- rather than a formal state visit – in Ireland, where he met his Irish counterpart at a dairy farm in the town of Shannon.

“With great interest, Li visited the cow farm and enquired in detail about the various operations at the 107-hectare farm, such as cow-raising, agro-product processing and quality management and monitoring,” Chinese state media reported.