Smitten with Brazil

July 22, 2009

NEW YORK, July 22 (Reuters) – Brazil has had a very different experience of the financial crisis than most. While other nations have seen their credibility crumble, Brazil has been showered with accolades.

Its currency, the once feeble real, has been among the best performers against the dollar this year, along with the rand. An expected upgrade from Moody’s Investors Service would give the country a clean sweep of investment grade ratings from the three leading ratings agencies.
And most crucially, financial markets have allowed Brazil to run counter-cyclical economic policies for the first time.

Yet for all the macroeconomic achievements of recent years, Brazil remains one of the hardest places to do business in the world. Exuberant investors should bear this in mind as they continue to plough money into the country.

It is easy to see why investors might get carried away with Brazil. Far from being the Chavez-clone that markets feared before his election in 2002, President Lula has proved a cautious manager of the nation’s finances. The government maintained a solid primary budget surplus, and by the time the financial crisis hit, Brazil had amassed $200 billion in foreign exchange reserves.

The transformation of Brazil’s monetary policy has been no less dramatic. By keeping rates high last year to prevent overheating the central bank displayed unusual self control. This has given Brazil the latitude to cut rates once the crisis hit.

Last month the benchmark rate fell below 10 percent for the first time since the 1960s. Interest rates after inflation are now just a third of the level that Lula inherited. Larry Brainard, chief economist at Trusted Sources, has even proposed the real as a potential reserve currency for central banks looking to diversify. For an economy that had an inflation rate of 2,000 percent as recently as 1994, this is quite a vote of confidence. (http://r.reuters.com/syr29c )

Sadly, giant macroeconomic strides have been accompanied by structural baby steps. Brazil still ranks a dismal 125th on the World Bank’s Doing Business survey — scoring worse than the other BRICs. Even Bhutan and Lesotho place fewer burdens on companies.

Brazil’s tax authorities are world record holders at spinning red tape. It takes 2,600 hours for the average medium sized business to prepare its tax forms each year, more than six times the average for the region.
Payroll taxes tower above other developing countries and it takes about 150 days to set up a new business. Brazil has a rich country level of taxation with third world public services and infrastructure.
In short, Brazil has long been operating with one hand tied behind its back. On these microeconomic impediments, Lula has made only minor inroads.

With GDP per capita still just 15 percent of that in the United States, according to Capital Economics, this is no time for Brazil to be resting on its laurels. Reform should not have to wait until after Lula’s departure. His immense popularity makes him better placed than anyone else to convince the left to accept greater labor market flexibility.

Investors smitten with Brazil should realize that without tax, labor and social security reform the nation will never match the growth rates of India and China.

One comment

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I don’t agree with must the Polition in Brasil or it’s past economic history but I would say you could be wrong, Brazil is a Blessing from God ! just wait and you will see that’s all the changes needed will be done , on it’s time!

I,m Fsinatra.me From Brasil