The Central Bank of Brazil predicts a 7% annual growth rate over the next few years.
Full steam ahead?
As the successful years of President Luiz Inácio Lula da Silva draw to a close, Brazil is readying itself for a new era that should look reassuringly like the old.
Although the movers will soon arrive at the Palácio da Alvorada, both left and right seem more convinced than ever that the two-note samba of prudent government finance and limited state economic participation is the right tune for Brazil’s development.
President-elect Dilma Rousseff is expected to continue Lula’s playbook of a strong state combined with market-friendly practices.
Despite domestic optimism, global macroeconomic fears seem to have made Brazilian executives more cautious now than they were in the spring. The emphasis on maintaining cash flow and liquidity was far higher in October 2010 than in April 2010.
But it’s a testimony to the growing strength of the country that global concerns do not seem to be leading to paralysis in Brazil’s executive suites. There are a number of reasons for this optimism:
- Brazil’s economy shrank -0.2% in 2009 during the recession, but has since rebounded strongly. Goldman Sachs forecasts 7.8% GDP expansion for the country in 2010. The Central Bank of Brazil predicts a 7% annual growth rate over the next few years.
- Foreign investors will be attracted by factors such as the 2014 World Cup and the 2016 Olympic Games, as well as the increased spending power of a burgeoning middle class and the future investments in the recently discovered deepwater oil reserves.
- Brazil is much less reliant on the US than in the past. In 2009, only 10.2% of Brazil’s exports came from the US, according to government figures. In particular, the growth of demand from its new number-one trading partner, China, has served to diversify its export risk.
- Foreign direct investment (FDI) in Brazil has nearly doubled in the past four years, going from US$19b in 2006 to US$37b in 2010. FDI in Brazil is expected to reach nearly US$40b next year, according to Brazil’s Central Bank.
- Two key sectors that are appearing on investors’ radar screens are energy and infrastructure. Since Petrobras announced in 2008 that it had found a new oil deposit that could contain more than 50 billion barrels of oil, several more finds have emerged.
- Oil exploration potential offshore Brazil is a huge opportunity. The underwater petroleum discovery – the largest in the country’s history – will lead to around US$560b being spent on technological processes and drilling in the Santos Basin, according to a study by the Getulio Vargas Foundation (FGV).
- As phase two of Brazil’s Growth Acceleration Program (PAC 2), the government has announced US$526b in public and private investments over 2011-2014. These will focus on logistics, energy and social development. The plan has a special focus on developing Brazil’s infrastructure.
In recent months, Brazil’s infrastructure spending needs have stepped up to another level thanks to successful bids to host the 2014 World Cup and the 2016 Olympics.
Brazil’s need for hotels, stadiums, airports and supportive transport routes just scratch the surface of coming infrastructure demand. Some analysts estimate that up to US$85b will need to be spent on Brazilian infrastructure in the next three years.
- Brazilian companies could be on the crest of a wave of economic growth generated by these opportunities. Companies not only in the oil and gas industry but also those in civil construction, mining and iron and steel works stand to gain great benefit.
- Brazil’s private equity industry is attracting growing interest from international and local funds, with infrastructure heading the list of investment opportunities, along with retail and education.
Ernst & Young’s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world. In this report, we take look at these recent survey results across the following topics:
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