The recent S.Korean
Winter Olympics, buoyed by the ground-breaking move toward apparent
entente cordiale across the South-North Korean border, dims the
positive memory of the previous Brazilian Olympics and Paralympics
from 19 months ago.
The old adage is that
any host nation pays twice over: once regards the enormous
infrastructural costs, then by way of negative economic aftermath
soon following the event. But likewise the theory is that such heavy
spending creates new economic possibilities in terms of transport,
housing and improved 'sports economy'.
[NB as regards
advancement toward a more unified Korea, the progress made by the
previous metamorphosis of parts of the DMZ (de-militarised zone)
toward the current existence of the specific 'commercialisation-zone'
would bode very well for major aspects of S.Korean industry. As any
initial 'free-port' ideology would in time seemingly extend toward
major public works and replay the beginnings of Chinese-style shift
from Communism to increasingly mixed-economy Socialism].
During the 2016 event
Brazil itself was already suffering in the midst of global economic
problems, those tsunami waves not of its own doing but obviously
having impact. (Though far lesser than compared to the West, for all
the contraction data sets; given its central place in the burgeoning
21st century global growth story.
Nonetheless, to
overcome a 'top-heavy' socio-economic model, remedial action was and
continues to be necessary. President Temer's attempts to re-shape
Brazilian industry, commerce and society with a rational and fair new
model template seeking to re-orientate Brazil's increasingly
recognised reduced competitive global position.
[NB full details
illustrated in the previous web-log].
Those Reforms creating
the new super-structure to the macro-economic foundations that have
and are being laid.
So to expand the
Brazilian perspective, and highlight the efforts already made, it is
worth looking at 3 other pertinent aspects of the economy that may
(beyond the centrality of Brazilian economists and western/worldwide
investment bankers) may have over-looked given the North American and
Asianic focus of recent times.
The Base Rate and
Inflation Rate -
The Central Bank of
Brazil has seemingly worked wonders in the stabilisation and decline
of the key metric that is the (Overnight Interbank lending) 'Selic'
Rate. At the turn of the century with distrust abound it stood in
1998 for a short time at an eye-watering 42%.
[This illustrated the
damage wrought by both poor policy, seemingly unlimited
money-printing (with various previous fiscal and monetary experiments
and resurgence of rabid investment expansion even after the earlier
Latin American Debt Crisis, itself fuelled by the same aspects of
crony-capitalism that previously led to the ASEAN Tiger Crash a year
earlier].
Since that unfortunate
monumental high the Banco Central do Brasil has gained much rightful
international respect by using the economic rewards of the previous
Brazilian growth story very well, steering that transformation via
its institutional dynamic levers, so as to 'about-turn' the previous
short-term skepticism of domestic and international lenders and
investors toward increasing long-term trust.
Major reforms in 1999
saw the SELIC Rate drop precipitously from 45% to 20% over that year,
then to see trend-line decline – though in a much wavering
oscillatory pattern – until the previous low in Q4 2012 and Q1 2013
of 8%. An upturn to 15% caused by Olympics spending in 2015/16 (and
arguably some 'hot money' from China and elsewhere) has since been
quashed; primarily via the sharp felt retraction of constructional
spending and exports contraction, to the now historical SELIC low of
6.75% (set most recently on 07.02.2018).
That feat was the
latest of eleven straight rate reductions by the COPUM Steering
Group, taking the SELIC to a level even below the previously set
target inflation rate. Given the emergent rebound of consumer
spending and retail price inflation of near 3% in December 2017,
mostly driven by non-disposable fixed-expenses through housing and
transport rises; so upping what had been a more sluggish general
Consumer Price Inflation over the previous 4 months, but more than
broadly amenable to all given the previous 6.29% a year earlier.
Ordinarily, when
climbing out of a recessionary period such costs would have an effect
on more discretionary expenditure, typically brought about for a
period because of the spending gap between static personal incomes
and increased personal costs of basics; so potentially affecting
sectors such as FMCG and Leisure.
However, mirroring the
Chinese effort, there has been effort by Brasilia's economists to
create B2B and B2C demand-pull, doing so via the much improved health
of national credit markets and so availability to business and
consumers.
This seen in two
specific areas: the massive upward growth in new car sales (as
exemplified by Volkswagen's 45% YoY rise), presumably to SME's and
wealthier individuals, and the success of the relatively newly
established e-retail realm that reaches nearly all levels of
digitally connected consumer.
Hence overall there has
been positive inflationary traction across two of the three types of
inflation: Cost-Push and Demand-Pull, with expected absence of
Wage-Push until possibly the long term, that economic gain stemming
from the planned Labour Reforms that would overcome the stubbornly
'inelastic' labour capacity that had become a defective aspect of the
system.
Presently the CBoB
states that it will maintain an 'accommodatory' monetary policy, with
interest rates below the 'structural norm'. This policy eased as the
broad economy grows as forecast at approximately 2.75% per annum (the
'averaged consensus' of polled economists), so as to reach a broad
relationship equation between overall inflation and interest rates.
Whilst those economists also expect the SELIC to remain flat at 6.75%
throughout the remainder of 2018; presuming the CBoB will maintain a
reduced structural differential vs creeping inflation.
The Unemployment Rate -
The Unemployment Rate
fell 0.2% between Q3 and Q4 2017, to 11.8%. Some observers expected
greater decline, however undoubtedly this appears to indicate the
cautiousness of still tentative business community regards new
recruitment; awaiting instigation of what would be very beneficial
Reform change regards recruitment bureaucracy, obligations and labour
availability.
At 11.8% this is the
lowest rate in 17 months and illustrates that the previous peak of
13.5% is well behind, but given the present attitudinal stance of
business, it may be assumed that the present “aroundabout 12%”
unemployment rate may be the 'static floor' until those critical
Reforms are enacted.
The Political Slant -
Finance Minister
Henrique Meirelles remarked on 27.02.18 that overall 2018 growth
would be higher that the 2.75-2.80% estimated by economists, also
believing that the 2017 measure of 1.0% may have to be revised
(upward 10%) to 1.1%.
Exactly how Meirelles
reached this conclusion is vague, but it appears obvious that the
Temer administration is trying to enthuse both business people, the
national populace and foreign investors and governments, by
maximising the good news story.
This enthusiasm
balanced by conjecture of “above 2.5%” for 2019.
Obviously seeking to
manage expectations over the short and medium terms, with knowledge
that the economic metamorphosis sought should allow for provision of
a well-managed steep growth climb from 2020 onward. Hence his desire
to buoy the here and now and beat the forecast beyond the next few
years.
Debt to Gross Domestic
Product -
Key for Brazil is the
vital need to manage its national liabilities, the most prolific of
which is its ageing workforce and the enormous burden of overly
generous (early) pension availability and costs, with other issues
pertaining to level of remaining state control of industry and
commerce which itself because of Socialist past is equally mired in
financial burden and inevitable operational inefficiency and
under-investment.
Some commentators will
relate the 'liability issue' to Brazil's notionally high Debt:GDP
ratio at 74%, markedly above its previous lowest of 51%.
Compared to many
'top-heavy' Triad nations this appears mild. Presently we see Japan:
250%, Greece: 179%, Italy: 131%, Portugal: 126%, USA: 105%, France:
96%, Canada 92%, UK: 89%, EU Area: 89%....Germany: 68% the well
managed exception (thanks to its education system, its level of high
'added-value' and its worldwide export-base as the enabler of other
nations).
Hence Brazil seemingly
sits comfortably here, but this is to compare “apples with pears”
given the differing stages of economic progress between the advanced
EM and arguably post-peak AM examples..
Compared to the
measures of its truer counterparts in the BRIC, MINTS / CIVETS and a
very different picture can be seen. Russia: 12%, India: 69%, China:
46%.
Hence seemingly
metrically upon par with India, and with similar younger
population-pyrimid. But critically India has enormous room for
expansion thanks to population size of 1.34bn vs Brazil's 211m; thus
Brazil sits in a comparatively negative position (simplistically by a
factor of six). And whilst there is periodic western talk of China's
own demographic crisis resulting from an ageing population and the
effects of the previous one-child policy, its own pyramid is
relatively balanced across the generations, it has 1.38bn people and
it enjoys a substantially lower Debt:GDP ratio. Russia sits
numerically in the apparent best position, but only because of the
disparity between its enormous Oil and Gas income, under-investment
in education and economic diversification and lacklustre
public-spending programmes.
As per the MINTS and
CIVETS: Mexico: 48% with 130m people, Indonesia: 28% with 263m,
Nigeria: 18% with 192m, Turkey: 28% and 80m, with Colombia: 47% and
49m, Vietnam: 62% and 95m, Egypt: 92% and 95m, South Africa: 51% and
64m
Thus we see that
presently Brazil sits in a precarious competitive position if its
Reforms are not implemented. Specifically regards India and China
over the near and medium term, and in the longer term Indonesia
(given ASEAN: Japanese, Chinese and Australian interests), and
possibly Nigeria (given Chinese, British and European interests),
with a new era American soft-power influencing much of the remaining
nations previously viewed as Pioneer regions.
In Summary -
The apparently
improving relationship between S. Korea and N.Korea seen at the
Winter Olympics (literally watched by the American Vice-President)
well illustrates the seeming intentional renewal and expansion of a
long distant Asia-pact ideology in its own form; something not seen
for centuries. The China sponsored 'New Belt and Road' scheme
encompassing a new growth stratagem centred upon the Far East, Indian
Sub-Continent, Central Asia and the Near East.
With tie-in to the
present ASEAN trade-bloc the stage is being set for a re-balancing of
the global economic order. Even if progress appears slow to date, the
promise of greater autonomy and socio-economic strength for many
presently insignificant countries that once were vital to the
over-land trading of yesteryear's 'Silk Road' (which ran Beijing to
Venice) is undeniable. So much so that the modernisation plans and
implementation seen in small-scale urban planning precedes
expectations of economic planning and the previous post-ponement of
the 'Economic Miracle' dream seen elsewhere; Brazil a shining example
in the 1950s/60s and 1990s/2000s.
With an increasingly
defensive and possibly insular USA (its metals manufacture
protectionism hurting Brazilian exports) and a slowly growing but
realistically North-South fractured Europe (echoing much of the 20th
century experience), Brazil must more than ever look beyond its
ethnographic roots and historical trading template associated with
nominally titled AM nations, and better connect to its BRIC
counterparts, the MINT nations, those of the CIVETS and indeed even
further afield in Africa and vitally act with renewed vigour in Latin
American leadership.
Brazil then must not
only re-organise itself across its Foreign Relations front – this
much improved over the last 20 years – but ensure its internal
re-organisation via the raft of socio-economic Reforms are
implemented as envisioned.
Any short-fall in
making Brazil more globally aware, fit-for-business, better educated,
entrepreneurial and so internationally competitive, would be to fall
short of its massive potential as an EM leader across a myriad of
fields which impact upon prosperity and ecology, from green-power
generation to smart-cities and satellite-towns, to new nation-wide
planning formulas to lightweight standard and autonomous vehicles to
end-of-life recycling and ethical disposability.
Just as China has
become the industrial powerhouse of the world, India the IT
consulting hub and Russia still the eponymous lowest-cost
fossil-based Energy centre, so Brazil must intelligently deploy its
enviable spread of human, industrial/commercial and natural
resources; doing so in a unified way that truly convinces, both at
home and internationally across 2nd, 3rd and
4th Tier countries.
Brazil's central bank
has long undertaken what was initially an onerous task to much
improve domestic and international confidence in both the its
currency, base rates and interest rates, the former previously
massively affected by the extremely damaging historical syncronicity
of the latter two, that unhealthy co-dependent relationship now
essentially defunct with what might be deemed and broad 'structural
normality' at amenable levels now in place.
The foundations of the
economy then have been put in place over a long period. Precisely
because the high costs, disfunctionality and so volatility as output
of yesteryear's Socialistic Statist mantra has – and continues to
be – recognised as inevitably inefficient and so dismantled.
Yet as illustrated by
worldwide metrics, even though a beneficiary of late 20th
and early 21st century global capitalism, the costs of
this ongoing transformation have been costly as the expenditure
public infrastructure projects of whatever colour and ideology still
weigh heavy on the national balance sheet; even the gain of realised
assets vs accumulated projects' debts.
Without addressing this
paper-based imbalance, by exporting more products and services and
importing more FDI and expertise and labour to better 'sweat' those
physical assets, Brazil looks to be caught in the classic
'middle-income trap' – effectively the reluctance to improve its
mid-level cost-base, which in fact appears overtly high to other
up-coming nations who themselves seek the assistance of lead EMs for
their own growth toward prosperity.
To this end, beyond
Temer's vitally important raft of competitively transformational
Reforms, the business community – historically led by the Sao Paulo
Chamber of Commerce – must continue to deepen and expand its
offering to both the nation and the world at large. New expansions of
incumbent companies such as: Troller (specialist vehicles), Marcopolo
(Coach and Bus), Avibras (military products), Klabin (recycled paper
goods) and the rise of all-new entities from within industry and
academia and indeed from the supported energies of the young, to
befit a myriad of today's and tomorrow's needs, wants and
desires...[and so brightly shine above the previous dark clouds
associated with Petrobras, Odebrecht and JBS].
The Latin American
adjunct to Davos 2018 takes place very shortly in Sao Paulo (13th
to 15th March at the Grand Hyatt), with special note of
the intersect between Brazil's upcoming elections, the need for
Reform, the trade pipeline and springboard that is the increasingly
important Mercosur-Pacific Alliance, and the continued unfolding of
the digitally enabled '4th Industrial Revolution'.
Perhaps as never before
have the eyes and minds of Latin American leaders been so avidly focused in 'Shaping the New
Narrative' across a plethora of socio-eco-techno-commercial arenas.
If Brazilian business
both old and young can acquit itself upon the worldwide stage as well
as the former Olympic showcase, there is good reason for an
increasingly synchronised EM-AM world led by fair capitalism and centrist moralities to be optimistic.
