Brazil ‘on way to becoming 5th-largest economy’

2010/06/20 by The Information Company

More than one million jobs were created in Brazil last year

According to an article published on Herald staff journal, Brazil is one of the big boys now and its self-dependent economy is a powerhouse, not only regionally but globally, there’s no disputing that. Ever since former president Fernando Henrique Cardoso privatised companies such as Telebras between 1995 and 2002, he was laying valuable groundwork for current left-wing President Luiz Inácio da Silva who picked up where Cardoso left off so that Brazil could continue to develop its infrastructure and economy.

Deceptively self-reliant, just 10 percent of Brazil’s GDP comes from exports, and not just from commodities. More than one million jobs were created in Brazil last year, although a mere 0.2 percent of those were in the mining sector which is the country’s largest commodity-export sector.

And confidence is contagious. Speaking from Johannesburg on Wednesday, Brazil’s Tourism Minister Luiz Barretto Filho said: “We are on our way to being the world’s fifth-largest economy,” adding that the country is expecting around 500 million foreign tourists in 2014 when it hosts the World Cup.

“We hope to get between four percent and 4.5 percent of GDP (by 2014),” said Barretto Filho, referring to the World Cup. Ambitious? Perhaps, but what’s wrong with aiming high when your stock exchange is Latin America’s most important and the world’s third-largest, plus your national football side was 5/1 on to bring back the World Cup for a sixth time yesterday? (Incidentally, Argentina is 7/1 on, according to UK online gambling website Betfair, which provided both odds.)

In fact, Brazil, which saw 17.4 percent year-on-year industrial production growth in April 2010, has been in the economic limelight for some time. Nine years ago, the investment bank Goldman Sachs suggested Brazil’s economy, combined with those of Russia, India and China, could outperform the world’s current richest nations by 2050. This 2001 report referred to these four developing nations as BRICs, and although this informal group has never got so far as proposing free trade agreements as per Mercosur or the European Union, there is a definite feeling of a private members’ club between the four, which led to their first official summit in 2009 in Yekaterinburg, Russia.

Just this month, Goldman Sachs, which coined the BRICs acronym, released an updated report which confirmed not only BRICs’ importance in the global economy but also Brazil’s. “The last decade saw the BRICs make their mark on the global economic landscape. Over the past 10 years they have contributed over a third of world GDP growth, 36.3 percent, and grown from one-sixth of the world economy to almost a quarter (in purchasing power parity — PPP — terms). Looking forward to the coming decade, we expect this trend to continue and become even more pronounced,” said the bank. It added: “Brazil’s economy will be larger than Italy’s by 2020.”

So what exactly is Brazil’s position, which is the only one of these four nations that doesn’t have nuclear weapons, according to political-scientist Professor Luiz Alberto de Vianna Moniz Bandeira, within this tiny gang of powerful developing nations? In a Herald interview with the global investment research department at Goldman Sachs in Sao Paulo, the bank said the main issue contributing to the BRICs’ continued strength is the growth of the middle class as salaries increase.

“Russia started out advanced after the fall of communism but a continued harsh political framework has hindered its growth, as has its dependency on European commodities,” said the global investment research department in Sao Paulo.

“Although China has seen the most growth (within BRICs) in the past few years, with regards to incomes there, they are lower than in Latin America. Regardless, China’s story is still intact.”

And looking at Brazil, whose BN&FBovespa Stock Exchange saw equity outperformance of 294 percent from January 1, 2001 up to May 20 this year, its long-term outlook up to 2050 is just as positive as China’s, given Brazil’s performance when the global crisis hit.

“Although the late-2008 global credit freezes paralysed Brazilian credit spontaneously for a few months, when it became clear that the real Brazil/global linkages were weak, Brazilian banks and companies resumed business almost as if nothing had happened. When Brazil’s economy stabilised for the first time, that proved it was robust. With regards to the recent economic crisis, the feeling in Brazil is that if we can get through this, then we can get through anything.”

“Despite the high tax burden that Lula has imposed for a developing country which doesn’t invest much in itself, Brazil’s public accounts are in order, consumer and business confidence is at a record high and it is now a creditor rather than a debtor,” added the research department.

The latest Goldman Sachs report reiterated the view on the rise of the middle class. “In the coming decade, the more striking story will be the rise of the new BRICs middle class. In the last decade alone, the number of people with incomes greater than US$6,000 and less than US$30,000 has grown by hundreds of millions, and this number is set to rise even further in the next 10 years. Growth in the middle class will be led by China, where we expect the number of people entering the middle class to peak during this next decade. These trends imply an acceleration in demand potential that will affect the types of products the BRICs import: the import share of low value-added goods is likely to fall and imports of high value- added goods, such as cars, office equipment and technology, will rise.”

And Brazil may even take middle-class growth up an extra notch, according to Goldman Sachs. “The other BRICs (besides China and India and other emerging markets) will also see a rising middle class in the next decade, and should also see a rising “upper class” (incomes higher than US$30,000).”

Although a presidential election takes place this October, foreign investors are unlikely to be put off by either centre-left candidate, the ruling party’s Dilma Rousseff or PSDB’s José Serra, according to the bank. And with consumer and business confidence at a record high, who knows where the biggest boy of Latin America may end up. Watch this pace…

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