Friday, 19 May 2017

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 5.3)

Following the previous headline stories from inside Brazil via the 'Rio Times', this portion of the web-log summarises the Financial Times' recent Special Report titled 'Reinventing Brazil' (16.05.2017).

Such reports are typically produced when new positive sentiment towards a region has become apparent in the wider world after a turnaround in capital markets dynamics, local investment project plans, B2B and B2C sentiment. Yet such 'pull-outs' will also be produced when the tipping-point of a new era appears, such as with the recent similar report on South Africa and its political retuning.

The beginnings of such 'good news stories' are in turn promoted by substantial advertising by national government (seeking FDI), industry and trade bodies (looking to promote new or regenerated sectors), and tourist boards (to attract foreign currency and create commercial opportunity).

The FT's articles then provide a good momentary further snapshot to the previous post, and importantly provides insights from vitally positioned political leaders, business luminaries and entrepreneurs.

Hereafter are condensed summaries of the articles provided :

Item 1:
“Reforms end three years of turmoil and recession”

- New 'buzz' on Avenida Faria Lima (Brazil's Wall St).
- Sao Paulo bourse sees marked shift in new IPO numbers
(3 so far in 2017, with 10 – 15 others expected)
- Sentiment driven by Temer's steadfastness on required Reforms
- Beyond exported commodities, industrial powerhouses emerging
- Scandals seen to reflect strong anti-corruption arms of the law
- New middle class expect better 'democratisation' of public assets and services
- Rousseff's budgetary machinations replaced with Temer's better 'mechanisation'
- Newly imposed budget ceiling necessitate major systematic overhauls.
- State asset divestment toward domestic and (critically) foreign investors
- Airports, Highways and Oil and Gas increasing levels of private ownership
- Apparent successful return of inflation target management
- Reduction of BNDES (national development bank) lending...which...
- * relieves Treasury
- * disconnects its from the low rates inducing 'high inflation spiral'
- * reduces prevalence of politico-business 'connections'
- * Temer... “I am not disposed to fiscal popularism”...when real change is needed.

Item 2:
“Finance minister reins in profligate spending”

- Minister Henrique Meirelles...”need to down-size government proportion of GDP”
- Background in US-Latam banking and as Brazil's previous Central Bank Governor
- Expected that the mass populace's approval will return as results of Reforms appear
- Government expenditures cost 20% GDP today, to be 15% in a decade
- “This is now a constitutional requirement” (so driving the imperative)
- “Need to treat public sector and private sector social entitlements similarly”
- “For Brazil to create (future) jobs it must have pension reform”
- “This to also ensure pension system remains solvent”
- “The 1st part of labour reform regards (domestic and foreign) Outs-Sourcing passed...
- ...this eliminates a lot of rigidity in the system”
- “The 2nd part of labour reform – yet to be passed – concentrates on the over-generous laws regards workers' rights (which presently deters domestic and FDI investment)
- “New measures to simplify bureaucracy and the tax system (to encourage commerce)
- Presently Brazil one of the worst countries in the world to initiate a new business.
- Need to change historical trends of major sentiment driven inflows and outflows of investment.

Item 3:
“Development Bank overhauls lending”

- The role and methods of BNDES to evolve and modernise
- From yesteryear's 3rd/2nd World idiom toward a more laissez faire 1st World character
- Responding to criticism about perpetuating the 'Patron System'
- This being the advantageous funding terms (below market rates) to the Brazilian elite
- To reduce subsidised lending
- Apply stricter criteria for financing
- Achieve a steep increase in benchmark interest rates, closer to market rates.
- The Sao Paulo business lobbyist 'FIESP' objecting to seemingly radical change
- Past has seen mismatch between BNDES and Central Bank aims = systemic friction
- BNDES responds saying the outcome would be a broad gain for all by reducing inflation
pressures on the Central Bank and so allow for reduction in base rate, so raising lending levels.
- BNDES to increasingly distance itself from the Treasury
- It will increasingly look to local and international markets for wholesale borrowing
- But over next 5 years low-cost loans to be available for specific projects
- Those with greater social benefit: Education, Health, Sanitation, Solar Energy, Urban Mobility, Waterways, Railways, Transportation/Distribution of Gas and Bio-Fuels, Public Administration, Small Businesses.
- These projects to be presented as Public-Private ventures so attracting local capital.

Item 4:
“Political uncertainty still drags on the economy”

- Public dissatisfaction protest of 2013 directed at costs of The Olympics
- Public malaise rising since given incurred debt vs public obligation
- This after 30m raised out of poverty by the PT Party (internal ideas of “turncoat public”)
- New promises made but little achieved besides 'plea bargains' to eradicate corruption
- Leading to the enormous Petrobras Scandal and others since (eg Odebrecht Construction).
- The enormity has tainted the elite (past and present governments and business leaders)
- Affected Temer's governments standing, with only 9% approval rating.
- Today Brazil stands at “the most vulnerable point in its 30 year democracy”
- With only 30% of Brazilians currently believing in Brazilian Democracy (-22% YoY)
- Supreme Court responds by dismantling the legal privileges of politicians
- The October 2018 election now “wide-open”
- Bolsonaro vs Doria (right-wing Congressman vs centrist Mayor of Sao Paulo)

Item 5:
“Views from the top on what Temer should do”
Panel of guests from the Brazilian business world

As per corruption :
- “What we see happening today (regards corruption) is not new, having happened in the US during the 1920s (cites 'The Robber Barons')”
[NB this suggests that such periods are inevitable as countries move higher up the economic ladder and portions of any elite maximise their gains as the economic system that previously protected their gains itself evolves to greater inclusion of the masses].
- “Such scandals will unleash a better Brazil into the future”
- “There is an enormous gap between what we are as a country and what we can be”

As per Labour Reforms :
- “We have operations in 80-90 countries, [Brazil] is the most complicated”
- (And as such) “Brazil is only 3-4% of our revenue”
- “We have a large number of claims (and outcomes) that make little sense”
As per Taxation Reforms :
- “the problem here is not just about size but complexity”
As per Public Administration Reforms :
- “The tendancy to over-regulate in many areas from consumer rights to telecoms”
- “In telecoms our obligations do not match real world use requirements”
- “We have a lot of obligations to the past, but very few to the future”
    - “Something that must change is the governmental belief that individuals are unwise (and so require 'Nanny State' protection).
    - “If you don't alter the welfare system how are we going to pay for longer lived pensioners?”“The world has changed, so much Brazil”
As per SOE Political Appointments :
- “We have no Ministers or Army on the Board [of Petrobras], when talking of 'Re-inventing Brazil' we need professionals”

As per FDI and Trade :
(Year to March saw record FDI of near $86bn)
- “Brazil has to have the export mindset, not just flavour of the month because of crisis”

As per Populism vs Economic Reform
- “Maybe the time has come for business to be more engaged in debate (re: Reform tensions)
- “Brazil (desperately) needs global leaders, modern laws and old values”
- “It needs people who can understand what is happening around the world”.

Item 6:
“Sao Paulo's talent for renewal is paying off”

- City expands beyond its trade and industrial heartland roots
- Newer higher value sectors in Services, IT and Retail
- Broadening of the 'Culture Industry' creates future economic value-streams
- Increasing 'info-tainment' correlation to the internet
- City planning to de-congest routeways (more bus-ways and cycle-ways)
- The “Beautiful City” campaign eradicates graffiti but is criticised for
also removing social commentary and 'artworks'
[NB The campaign's main aim to eradicate gangland 'tags' and improve aesthetics. Graffiti is low-order crime but recognised as gang allegiance stepping-stone to higher crimes and gang culture].
- Main issues of public transport and crime under central government control in Brasilia
[NB Strong police force but with less autonomy than believed ideal].
- The failures of the public system (eg medical) promotes opportunities for entrepreneurial new entrants able to deploy innovative or technology transfer IT
- Sao Paulo's market size (21m residents) and their aspiration and dissatisfaction provides a central 'growth point' for very varied new business possibilities.
- The city's role as Latin America's 'Financial Hub' means obvious self-serving economic eco-system as well as increasing presence of FinTech and small and large Venture Capital.