Regular readers will recall a prediction I made in January this year that “Brazil will lead the global emerging markets out of the current doldrums to be the top performing emerging market in 2009”.
I suggested that there were three reasons to be optimistic about Brazil’s economy in 2009:
- Self-sustaining domestic growth, led by consumer spending
- Massive infrastructure investment
- Increasing trade between the BRIC countries and other emerging markets
So, what’s been happening in the last five months?
Firstly, Brazil’s Bovespa stock index has already climbed 33% this year (following a record 41% decline in 2008) and the economy is growing again after a short-lived recession. The Government predicts GDP growth of 1% this year and Brazil’s economy now stands at $1.31 trillion, the 10th largest in the world. The unemployment rate in Brazil’s six largest metropolitan areas fell to 8.9% in April, the first decline in four months, and the Brazilian real will steady around 2 per US dollar having weakened to 2.51 per dollar in December from a high of 1.56 in August last year.
Self-sustaining domestic growth, led by consumer spending
In order to counter the slowdown in exports, the Brazilian government has cut taxes on cars, home appliances and construction materials, injected about $90 billion into banking and money markets and increased public spending. The central bank has cut interest rates three times since January to a record low of 10.25% and retail sales are rising slowly. According to Brazil’s Finance minister, Guido Mantega, the economy will improve further in the second quarter and the pace of growth in the last quarter of this year may reach as high as 5%. Sales rose 0.3% in March from the previous month, after a 1.5% gain in February. These are encouraging signs for the growth of much-needed domestic consumption.
Massive infrastructure investment
Whilst Brazil’s construction industry has been hit by the global slowdown, the Government’s Growth Acceleration Program (launched in 2007) is committed to supporting investment in infrastructure projects. With Brazil’s large fiscal stimulus package (US$254bn, representing a significant 19% of GDP) there is widespread activity across many infrastructure projects including road, rail, power and the construction of low income housing. In addition, housing, commercial and tourism construction is also set to get a sizeable boost from the preparations for the 2014 World Cup, which is estimated to inject a further US$43bn into the infrastructure sector.
Increasing trade between the BRIC countries and other emerging markets
“Intra-BRIC” trade and investment is one of the key indicators to watch in evaluating the prospects for growth in the global economy in 2009 and beyond, and there have been many deals signed between two or more BRIC leaders in the early months of this year. The latest follows a very successful state visit to China by President Lula de Silva in which he signed 13 agreements with Chinese President Hu Jintao (both pictured above) covering science, space, law, ports and farm products.
In the most significant of these agreements, the China Development Bank agreed to lend US$10 billion to Brazil's Petrobras in return for a guaranteed supply of 200,000 barrels of oil per day to China's state oil firm Sinopec for the next 10 years. The agreement for Brazil to supply China with oil was largely negotiated in February, along with a memorandum of understanding on long-term financing for Petrobras which needs funds to help extract massive, newly-found oil reserves. Petrobras and Sinopec also signed a memorandum of understanding on exploration, refining and petrochemicals. This deal came hot on the heels of a similar agreement under which Russia has agreed to supply China with oil for 20 years in exchange for loans to Russian state firms.
For the first time, China displaced the United States as Brazil's top trading partner in April, a trend that is expected to continue as China looks to secure energy resources from its BRIC trading partners. According to President Lula de Silva, "In 2009, China became Brazil's first trading partner. Now we still face the challenge of exploring the full potential of investments that our economies can offer to each other." Brazilian exports to China have grown by 65% from January to April 2009 compared with the same period one year ago.
Next BRIC Summit
The next official meeting of the BRIC leaders is scheduled for 15th and 16th June in Yekaterinburg, Russia. This will be the first international appearance of Prime Minister Manmohan Singh of India since being re-elected earlier this month (a sign of the times that he has chosen Yekaterinburg over Washington for his first overseas trip!)
According to Chinese Foreign Ministry spokesman, Ma Zhaoxu, when confirming China's involvement in the next BRIC Summit: “The BRIC countries, namely Brazil, Russia, India and China, are all important emerging nations and driving forces for the world's common development. They share the same or similar opinions on many international issues and all have the political desire for further cooperation and communication. In recent years, the four countries have exchanged views on world economic and developing issues of common concern through various channels. The dialogue and co-operation among the four countries is transparent and open and is not aimed at any other country."
Watch out for more news on the changing dynamics of the global economy and what this means for you as investors and businesses.
Best wishes
David Thomas
