Brazil unbound how investors see brazil and brazil sees the world

Brazil’s economic resilience over recent years has captured the world’s attention.. As part of our global Cultural Exchange programme, Festival Brazil provides insight into one of the w

in Latin America; 20% were based in Asia-Pacific, 15% in North America, and 12% in Western Europe

Over two-fifths (41%) of companies had annual global revenues of $500m

or less, and 22% had annual revenues above $10bn In terms of seniority, 58% of respondents were C-suite or board members

Brazil’s economic resilience over recent years has captured the

world’s attention All eyes have been on its growth, as it distanced itself from the political and economic uncertainty of the 1980s.

With growth set to continue, it has been forecast that by 2025 Brazil will become the world’s fifth largest economy, overtaking Britain and France, while São Paulo will rank higher than Paris and Shanghai as the world’s sixth wealthiest city

In 2010, HSBC celebrates the vibrancy and excitement of modern Brazil with a series of international events and activities across ten markets from the UK and Brazil to North America, South Africa, the Middle East and China This programme

of activity is centred around our sponsorship of Festival Brazil, a four-month summer celebration of the country’s cultural offerings at London’s Southbank Centre

Working in 88 countries, we see the understanding of different cultures as an essential part of building international relationships and business expertise As part of our global Cultural Exchange programme, Festival Brazil provides insight into one of the world’s most prominent economies

Bringing together the views and opinions of the global business community, this Economist Intelligence Unit report identifies and explores the challenges that now face this dynamic country I hope that, whether you are already

experienced in working with Brazil or are just starting to explore its opportunities, this report will prove valuable to your business

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Brazil has never been so popular among investors as it is now Interest has risen steadily over the past 15 years as the country has managed to overcome one political, macroeconomic and business challenge after another Privatisation,

liberalisation, a new stable currency, the smooth handover of political power, to name but a few achievements, coupled with a boom in global demand for Brazil’s copious supplies of commodities, have boosted foreign currency earnings and fired up consumer spending Brazil has been transformed from “country of tomorrow” to “once-in-a-lifetime opportunity” The transition is, of course, far from over: education, bureaucracy, corruption, infrastructure and fractious politics, to list just

a few deep-seated problems, will take years to address But its new-found economic and political stability – which helped the economy withstand recent global financial shocks – allows policymakers to make a serious start on addressing these issues Moreover, the country’s natural riches in agriculture and mining – and potentially offshore oil too – will, if used wisely, provide the cash needed for vital investments for years to come

no progress on that score over the next three years Yet almost half (49%) of survey respondents describe the capacity of Brazilian-based businesses to integrate the latest international technology into their operations as either “very good” or “excellent”, and only 6% say it is

“poor” This indicates that better education, improved infrastructure, greater investment in R&D and closer relations between companies and universities would have a disproportionately positive impact on innovation That said, business has broken new ground in environmental and agricultural technologies, which are being exported worldwide.

Co-operationwithuniversitiesworkswell.

One way to promote innovation is through business co-operation with academic institutions Experience seems relatively limited, but positive

Of survey respondents whose Brazil-based operations already work with local universities, 60% say the relationship has been “positive” and 12%

“very positive”, compared with less than one quarter (23%) who say that such co-operation “failed to live up to expectations” or was “very unsuccessful” (5%) Brazilian-based companies would appear to get the rough end of such deals (or perhaps are too optimistic about their potential), as almost one third (32%) report that such co-operation

“failed to live up to expectations”

Brazilfocuseson“South-South”traderelations,especially withChina.

As part of a general policy of trade diversification, one of the biggest changes in Brazilian trade policy under President Lula has been the expansion of trade and investment with China China has become Brazil’s largest export and import partner, and provides investment and finance

to secure supplies of key minerals Brazil has also expanded its share of trade with the rest of Latin America, other Asian countries, the Middle East and Africa, especially in agriculture

Brazilianfirmsstillsufferfrompoorbrandrecognitionabroad.

Beyond the charmed circle of a few high-profile companies, Brazilian brands still lack the global draw of their Western counterparts This is reflected in our survey, in which 84% of respondents say that Brazilian brand names are not well recognised or not highly regarded abroad Only 3% of US-based respondents believe that Brazilian brands are both recognised and highly regarded However, the perception of Brazilian brands changes somewhat among China-based executives, with almost one quarter of those respondents (24%) giving a warm reception to Brazilian products

Overall,whatdoyouconsidertobethemainimage todayofBrazilintheworld?

(% of respondents)

A young, fast-growing market opportunity on

a par with China, India or Russia.

An emerging player on the international stage.

A market with high potential but held back its

poor business environment.

A supplier of key commodities

to the world.

Principally known for extremes of wealth and

poverty.

Retains its stereotypical image associated

with culture and sport.

This report is divided into two parts Part one looks at the political, macroeconomic, industry and infrastructure foundations that have enabled the country to soar ahead Part two draws on the views of business executives both

in the country and worldwide and identifies three key aspects of business on which Brazil’s future depends: its development of skills, its capacity to innovate, and the country’s role in the world – and evaluates why the optimism is justified

Designed by the world famous architect Oscar Niemeyer

of the upheavals caused by the 1997-98 Asian and Russian crisis – remain sacrosanct These policy anchors were vital

in enabling Brazil in 2008 to withstand (to the surprise of many) a series of external economic shocks that in the past would have triggered major instability Although some large companies, such as Aracruz, a pulp and paper group, suffered from poor derivatives deals, the country’s con-servatively-managed banks were not exposed to the risky assets that felled counterparts in the US and Europe A

$30bn swap deal with the Federal Reserve Board (the US central bank) increased trust in the Brazilian banking sector and underpinned strong growth of deposits in recent years Indeed, during the global financial crisis, many Brazilians overseas switched their assets out of US banks to Brazilian banks, as they were perceived to be safer

Notwithstanding all these positive political developments, Brazil’s political environment remains a drag on

implementing reforms needed to sustain more dynamic GDP growth Although four parties typically account for around 70% of seats in the chamber of deputies and over half those in the senate, a total of 18 political parties are represented in Congress and governing coalitions are typically unwieldy affairs On account of the lax rules governing party allegiances, congressional representatives tend to be extremely provincial, showing greater loyalty

to interest groups than to either party or policy Moreover, the president is critically dependent on the support of state governors, who typically have considerable influence over their states’ delegations in Congress Switching party allegiances in pursuit of career advancement is common among politicians and contributes to the fractious nature of the political system

Aneweconomicera

Brazil’s is a diversified economy with strong corporate and financial sectors, a low external debt burden and highly diversified export industries and markets These factors put Brazil in a position to emerge relatively quickly from the global downturn The country’s recession was brief and shallow: the economy contracted by a mere 0.2% in 2009 – with the help of some credit expansion, and some support from the government’s flagship infrastructure development programme, the Programa de Aceleração do Crescimento (PAC), growth acceleration programme launched in early 2007 In contrast to Russia, seen by many as the

The current account could also deteriorate rapidly Six consecutive years of surplus ended in 2008 Last year, the deficit amounted to 1.5% of GDP, and the Economist Intelligence Unit forecasts a deficit of 2.7% in 2010 Officials hope that the local currency, the Real, will devalue accordingly, but this readjustment may not be smooth, especially in a difficult external financing environment.

2009, 88% of new sales were flex-fuel vehicles Flex-fuel cars can run both on petrol and sugarcane ethanol, allowing drivers to choose the cheapest option These developments have gone hand in hand with a local car industry that has held up well in the global crisis, thanks in large part to tax breaks and a good supply of credit, helping to make Brazil the world’s the sixth-largest manufacturer and fourth-largest and fastest-growing market for light vehicles

Shakyinfrastructure

Car makers may rejoice, but it is the millions of drivers that have to negotiate the dangerously unpaved roads that prevail everywhere except the main routes – and even many of these are potholed or need resurfacing Poor infrastructure is one major reason that Brazil scores low in the Economist Intelligence Unit’s business environment rankings (based on 12 key business operating criteria), which places Brazil 40th out of 82 countries despite the expectation of some mild improvements in coming years The World Bank Doing Business report and other international rankings tell a similar story High and complex taxation, excessive bureaucracy, complex customs rules, corruption, a sluggish judiciary, and rigid labour markets are further legitimate investor grievances

But ask local businessmen with international ambitions about their greatest concern, and the parlous state of the infrastructure will almost certainly top the list In our survey, nearly one half of respondents (49%) point to

“low standard or costly infrastructure including telephones, transport networks and utilities” as the main operational

Meanwhile, Brazil’s great potential for river transport remains largely unexploited Waterways currently account for only 13% of haulage, even though Brazil has a 48,000

km network of navigable rivers

The logistical nightmare does not end when goods finally get to ports for export Although ports such as at Santos near São Paulo, which handles around one quarter

of the country’s foreign trade, have undergone some modernisation over the past 15 years, they are congested and expensive, especially at harvest times when trucks laden with grain arrive for loading It is a similar story with the country’s main airports, the result of soaring demand, and will surely become an important issue to be resolved before the flood of visitors pours in for the football World Cup and Olympics

Aside from the need for continuing investment, Mr Morgan sees problems in the lack of a big picture Freight operators all along the supply chain tend to see “low cost” as the key performance indicator No-one takes a strategic view of transport which would end up saving money He believes that if logistics operators focused at each stage on time rather than cost, this would produce the greatest efficiencies The problem is that no-one takes

“end-to-end” responsibility for the whole logistics journey And this extends to the final export destination He cites

an example of one company’s grain exports to Russia that ran into trouble because the Brazilian logistics manager was unaware of the different rail container sizes used in Russia Ultimately, the solution lies in better collaboration

between private sector operators and the state at various levels Where there is a big player, like Vale, it is possible

to negotiate with the state over transport needs and investment In a fragmented market, such as the food industry, substantial effort is required to get the right people around the table to discuss priorities, investment and responsibilities

Consumenow,paylater

Once seen as ‘Americans without credit’, Brazilians are starting to enjoy the rush of debt-induced purchasing power As access to credit has improved, and shops have facilitated even relatively small purchases such as shoes with installment-payments, household consumption

Low standard or costly infrastructure including,

telephones, transport networks, utilities.

Failure to honour contracts, bribery, corruption,

weak corporate governance.

Lack of key skills including management.

Poor quality control.

Rising wages/low productivity.

Underdeveloped retail and distribution systems.

Time and demographics are on Brazil’s side, at least over the medium term The share of the population aged 14 or under is around 28%, and this age group will still comprise

at least one in five Brazilians for another 20 years But ageing will set in thereafter: the country’s birth rate has declined from 2.39 per woman in 2000 to an expected 1.76

in 2010, according to Instituto Brasileiro de Geografia e Estatística (IBGE) It forecasts that the rate will stabilise at around 1.5 by the 2020s But for the next decade, at least, the country can count on a robust working-age population

to pay taxes and pension contributions (assuming growth in the formal sector), in marked contrast to many developed economies It is the nurturing of this younger generation, its education, training, jobs and skills, that holds the key to Brazil’s long-term growth and prosperity, as Part Two of this report explores

Brazil:Population,incomeandmarketsize

Population (m) 184.2 186.8 189.3 191.9 194.4 196.8 199.3 201.6 204.0 206.6GDP (US$ bn at 881.8 1,088.9 1,366.3 1,637.9 1,573.4 1,927.6 2,021.7 2,088.9 2,198.2 2,317.9 market exchange rates)

Private consumption 531.5 656.6 818.4 988.0 987.4 1,194.0 1,253.1 1,299.8 1,370.5 1,442.3 (US$ bn)

Private consumption 2,890 3,520 4,320 5,150 5,080 6,070 6,290 6,450 6,720 6,980 per head (US$)

GDP per head 8,610 9,110b 9,800b 10,390b 10,360 11,150 11,660 12,260 12,990 13,760(US$ at PPP)

Personal disposable 543.3 674.2b 841.7b 1,016.3b 1,127.6 1,270.8 1,252.8 1,240.3 1,240.5 1,256.9income (US$ bn)

Growth of real 2.5b 5.7b 6.2b 7.1b 15.5 -0.7 -1.8 0.2 -0.5 0.7disposable income (%)

Source: Economist Intelligence Unit.

The oldest university in Brazil, founded in 1912.