Brazil: Latin America’s Superpower
30th March 2011

Brazilian President Dilma Rousseff

Brazil comes into its own. Despite a wide range of challenges, local and foreign executives are bullish about the country’s business outlook. And new President Dilma Rousseff is getting high marks thus far.

When Luiz Inácio Lula da Silva left Brazil’s presidency in January he did so with a record 83 percent approval rating. His eight-year administration had generally received high marks from local and foreign investors.
His successor, Dilma Rousseff, may become even more popular among business executives. “President Rousseff has demonstrated, in her short period in office, that she will be undertaking some complex and somewhat unpopular reforms to support Brazil´s continuous growth,” said Pablo Di Si, CFO of Fiat Auto Latin America.
Inflation appears to be a top priority, while Rousseff is also working to limit the minimum wage to 545 reais ($326) per month and to cut 50 billion reais ($30 billion) from the federal budget, he points out. “These decisions are a clear shift in policy making, compared to her predecessor, President Lula, and a means to start reducing inflationary pressures and improve the quality of government spending,” Di Si argued.
Rodrigo Abreu, Brazil country manager for U.S.-based Cisco Systems (the world’s largest provider of networking equipment), is also cheering. “First signs are encouraging,” he said. “It should not be taken [lightly] that the president, on the first day of [her] mandate, announced that the passenger infrastructure at major airports will likely be privatized. One would probably not [have expected] that in the past, and it is a clear sign of change and understanding that some things need the speed and agility and entrepreneurial capacity of the private sector, in collaboration with policy and regulatory support from the public sector.”
Some skeptics are less leery. “I’m not as worried as I was [before Rousseff assumed office in January],” said John Welch, New York-based Emerging Markets Strategist and Managing Director at Australian investment bank Macquarie Capital. He praises Rousseff’s budget cuts and the plans to privatize some airport operations. “I’m still skeptical but encouraged by the little steps we’re seeing.”
Welch believes the new president will move toward more deregulation, despite opposition within the ruling Workers Party (PT). “There’s a romanticism of the 1970s’ [protectionist policies] that PT has even though it’s a failed model,” he said.
He praises some of Rousseff’s key appointments, such as Alexandre Tombini as Brazil’s central bank president. “He’s tough [and] a very competent guy,” he said. He singles out Antonio Palocci, who served as Lula’s first finance minister, for the key role he plays as chief of staff. Palocci had been a highly regarded minister until he was forced to resign in a corruption scandal.
There is also growing hope that Rousseff will reform Brazil’s infamous tax system. “I firmly believe that economic policy will be maintained and that President [Rousseff] will make the necessary corrections so far not implemented [such as] the tax reform,” said Miguel Dau, the chief operating officer of Azul Linhas Aéreas Brasileiras, the national low-cost carrier formed in 2008 by JetBlue founder David Neeleman. “I also [believe] the current government will be more committed to the necessary measures to maintain growth, controlling inflation and reducing poverty in our country. We will have a government that will focus on results.”
Welch is also changing his tune on prospects for tax reform, which he had seen as unlikely before Rousseff became president. Now he says: “She may do it.”

For decades, Brazil was often nicknamed “Belindia” — a phrase coined by economist Edmar Bacha in the 1970s to describe a country that had an upper class similar in size to that of Belgium and a poor mass similar to that of India.
Bacha thinks the term is outdated and supports a new phrase by another local economist, Delfim Netto: “Ingana” — a country with the taxes of the United Kingdom (“Inglaterra” in Portuguese) and the public services of Ghana (“Gana” in Portuguese).
Independent of whether you call it Belindia, Ingana or Brazil, the South American country has seen enormous progress over the past decade and is now not only Latin America’s undisputed economic superpower but also a global powerhouse.
The $1.9 trillion economy accounts for 41 percent of Latin America’s total GDP. It surpassed Mexico’s economy in 2005 (after lagging for four years). But while Brazil’s economy was just 4.8 percent larger that Mexico’s in 2005, it was twice as big — 101.5 percent — last year.
Brazil replaced France as the world’s fifth-largest economy, as measured by GDP in 2010, according to the investment banking firm Goldman Sachs.
PricewaterhouseCoopers (PwC) predicts that Brazil’s GDP, expressed in terms of purchasing power parity, will pass that of Germany in 2025 and Japan in 2039. By 2050, the advisory and consulting firm calculates that Brazil will be the fourth-largest economy in the world, behind China, India and the United States.
PwC also projects that São Paulo —Brazil’s top business hub — will become the sixth-largest city economy in 2025 behind Tokyo, New York, Los Angeles, London and Chicago. That compares with its rank as the 10th-largest in 2008.
Gone are the days of missed opportunities and jokes about being the country of the future. “I think we always dreamed about it,” said Rodolpho Cardenuto, a Brazilian native who runs the Latin America division of Germany-based SAP, the world’s largest business-software company. “We always said Brazil was the country of the future, but the future never came.”
Local business executives and economists credit the reforms and policies implemented by former presidents Lula (2003-2011) and Fernando Henrique Cardoso (1995-2003). In fact, some trace the start of Brazil’s recent success to the 1994 Real Plan introduced by Cardoso in 1994 when he was finance minister. The plan, which counts the economist Bracha as one of its architects, managed to successfully reduce high inflation — an issue for years — with stable and low rates through restrictive fiscal and monetary policies and the introduction of a new currency, the real.
“I was not surprised by the good result of the economy over the last decade,” airline executive Dau said. “The success of the last decade was made possible by maintaining an economic policy adopted in 1994, when the ‘Plano Real’ was implemented.”
Cisco System’s Abreu agrees. “Brazil moved away from having successes based on conjunctures, to enter a development phase based on structural conditions, in a process that started in fact some 15 or 16 years back, when we achieved economic stability to begin with,” he said.
Cardoso implemented further economic reforms, including liberalization of the economy and major privatizations, like of mining company CVRD, now Vale, and the telecom sector. Lula subsequently added several social programs, such as Bolsa Familia, which provides financial aid to poor families if their children attend school and are vaccinated.
“Former President Lula instituted wise government programs combined with real wage gains for most social classes, which led to strong GDP growth among all business sectors,” Fiat’s Di Si said. “Additionally, the increased availability of credit has allowed new consumers to enjoy financed products such as housing and longer-term automobile credit.”
Last year, Brazil’s economy grew by 7.5 percent, its best result in 25 years. During Lula’s eight years in office, the economy grew an average of 4.1 percent annually. That compares with an annual average of 2.3 percent the previous eight years, according to a Latin Trade analysis of International Monetary Fund data.
Meanwhile, foreign direct investment exploded.  Last year it reached a record $48.5 billion, an 86.8 percent increase from 2009, which was marred by the global crisis. Even when 2009 is included in a five-year overview, the results are impressive. From 2005 through 2010, Brazil received a yearly average of $34.6 billion in FDI. That’s almost twice as much as the $19.2 billion average in the previous five-year period, according to data from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).
In addition to impressive economic growth, Brazil has succeeded at significantly reducing poverty and expanding its middle class.
“If you think about the number of people who were economically included in our middle class in the last five years, we are talking about the emergence of a consumer group the size of Spain, over 40 million people,” said Abreu, of Cisco Systems. “These people are starting to consume goods and services which were unthinkable to them before — consumer durables, varied foods, entertainment, communications, you name it. We are not yet at the end of this process, and likely there is more to come.”
The emergence of that middle class — referred to as Class “C” in Brazil — has been responsible for the current growth of the economy and allowed Brazil to overcome the recent financial crisis, Dau argues. “It is a reality in our country, [but] many companies [still] do not know how to deal with it,” he said.
While the global economy shrank by 0.6 percent in 2009, Brazil’s GDP fell by 0.2 percent. “[When] we had the debacle of the financial crisis in 2008 and 2009, with Lehman Brothers and the domino effect, what happened in Brazil? Nothing,” said Cardenuto, of SAP. “You had a strong financial system.”
In 2009 Brazil became a net lender to the IMF, contributing $10 billion in a move partly aimed at boosting its influence.  That marked a stark contrast to 1999 and 2002, when the IMF provided massive credits to the South American nation.
Lula also successfully lobbied for the 2016 Olympics, which will be held in Rio de Janeiro, marking the first Olympics for South America and only the second in Latin America since Mexico City hosted the 1968 games.
Brazil recorded a series of other milestones in recent years, including the $70 billion sale of shares (the world’s largest stock sale ever) in state oil company Petrobras in September 2010 and massive oil discoveries in the Tupi area offshore (the biggest discovery of oil reserves in the Western hemisphere in 30 years).

Cardenuto, who lives in the United States, is impressed by the changes in his home country over the past decade. But what has most made an impression is not the economic boom but the change in the business environment.
“The things we are doing with Vale, Petrobras, Pão de Açúcar, Votorantim,” he said, mentioning some of Brazil’s top companies. Vale is the world’s largest iron-ore producer, while Petrobras ranks as Latin America’s largest company in terms of revenues, profits and market capitalization.
And much of the growth today is spearheaded by Brazilian executives. Before, “we had to import people to run the companies,” Cardenuto said. “Now I talk to these companies, I visit these companies, and every single company [has] Brazilians running all divisions.”
Today, Brazilians are also running global companies such as Belgium-based AB InBev, the world’s largest brewer, and U.S.-based Burger King, the world’s second-largest fast-food chain.
Brazil has also become a leading global market for everything from cars to wireless phones and PCs. Brazil ranks as the fourth-largest market worldwide for auto sales. The market will likely grow from 3 million vehicles in 2009 to 4.4 million by 2018, according to Oliver Harmann, chief financial officer of the VW Group Latin America. The German auto giant is investing 2.3 billion euros ($3.1 billion) during the next four years to expand production capacity in the South American country.
Brazil currently ranks as the sixth-largest PC market but will likely reach fourth place in the next two years, according to Roberto Palmaka, a Brazilian native who is senior finance director for Latin America for U.S.-based Microsoft.
In terms of wireless phones, it now ranks among the top six markets worldwide.

Brazil’s main attraction for foreign companies, of course, is its sheer size.  But Brazilian executives emphasize that Brazil offers many other advantages.
“We have some strengths that are unique to Brazil, [and] once we start leveraging those strengths, we can start growing at China-like [rates],” Cardenuto said.
In addition to the large GDP and population, Brazil offers improving GDP per capita, relatively low external dependency and a large internal consumer market, a large landmass, vast natural resources, energy self-sufficiency, ample renewable energy sources, good demographics (young and active and almost 90 percent urban), political stability, macro-economic stability, good foreign reserves, no territorial or religious conflicts and a multicultural society, Abreu said. “Wow,” he said. “Talk about positive structural conditions.”
Brazil’s political environment is in many ways less divisive than the United States, with a large centrist consensus on the need for some government role in the economy, Cardenuto points out. “Brazil is much less polarized than the United States [and] less dogmatic,” he said.
Brazil’s car industry is 100 percent hybrid. “Any car in Brazil can run on ethanol and gasoline,” Cardenuto said. “They have today the most green and recyclable fleet in the world.”


However, for all its progress, Brazil still is hurt by a number of factors that curtail economic growth, both business executives and economists argue.
“Inflation, a high tax burden and an appreciated currency are some of the factors that need to be addressed appropriately to maintain the country’s strong GDP growth of 4 to 5 percent per year and its strong manufacturer industrial base,” Di Si said.
Brazil’s tax environment is the worst in Latin America, according to the Latin Tax Index from Latin Business Chronicle. The index measures the overall tax climate in a country by looking at four factors: corporate tax rates, tax rates as a percent of profits and the number of payments and hours spent to pay taxes yearly. Brazil requires a whopping 2,600 hours (or 108 days) to pay taxes per year, according to The World Bank. That’s the highest number in Latin America (six times higher than the regional average) and the worst among 149 countries worldwide analyzed by Latin Business Chronicle.
“One of the main challenges is the different states have different tax regulations,” said Nabil Malouli, Regional Trade Lane Manager for Latin America-North Asia Pacific for German logistics provider DHL. The process has complexities inherent to the country’s bureaucratic processes and diverse regional regulations, he said.
“We have seen in the market that this complexity represents a roadblock for some companies at the time they plan an expansion to enter the Brazilian market,” Malouli said.  “One of our customers who bought a company in the northeast of Brazil is facing [the] challenge [of] understanding the different tax regulation [processes] as they are operating in different states.”
The appreciation of the real and rising inflation have helped propel living costs. São Paulo is now the most expensive city in the Americas for multinational executives, according to the latest cost of living survey from Mercer. São Paulo is more expensive than New York and cities like Rome; Bern, Switzerland; Sydney; and Vienna, Austria.
Education and public-sector efficiency are also major challenges.  “I see the key issues we still have to face in the long term as being the improvement of our education system, being more efficient in both the private and mainly the public sector and all of its services,” Abreu said.
Another major concern among foreign investors is that Brazil is still seen as a closed economy when it comes to promoting two-way trade.  “It’s still a very protectionist economy,” said Welch, of Macquarie Capital.
Unlike Mexico, which started opening up its economy in the 1990s as part of the North American Free Trade Agreement, Brazil typically punishes imports to promote local manufacturing. “It means Brazilians pay 40 percent more for cars than most others,” Welch said.
Despite recent years’ growth in two-way trade, especially in exports to China, Brazil still lags Mexico when it comes to overall commerce. Despite having a GDP twice the size of Mexico’s, Brazil’s total trade is 30 percent lower, according to a Latin Trade analysis of trade data for 2008 and 2009.
In fact, when measured as a percent of its total GDP, Brazil has the lowest trade rates in Latin America. Its exports are the equivalent of only 12.8 percent of its economy, while imports account for 13.3 percent, according to 2009 data. As a result, Brazil ranks as the second-least globalized economy in Latin America after Venezuela, according to the 2010 Latin Globalization Index from Latin Business Chronicle.
There has also been some growing concern about the state role in the economy. During Lula’s second term as president, officials increased their push for a greater state role in the economy and talked about reviving Telebras, the state telecom that was privatized by Cardoso in 1998. Meanwhile, the government boosted its stake in Petrobras from 40 to 48 percent as part of the company’s share sale last fall — a move that some analysts like Welch call a “behind-the-scenes renationalization.”
“The expansion of the size of the government … has definitely crowded a bigger private-sector role,” Welch said.
Recent legislation, such as the “Buy Brazil Act,” mandates a preference for Brazilian firms or goods produced in Brazil in government procurement, according to Marcus Freitas, a professor of law and international relations at Fundação Armando Alvares Penteado in São Paulo and expert advisor to consultancy Frontier Strategy Group. The Federal Administration expects foreign companies interested in the Brazilian public-procurement market to establish a presence and invest directly in the country, he points out.

Brazil’s GDP will likely expand by 6.5 percent this year, estimates U.S.-based investment bank BCP Securities. FDI will likely reach $45 billion, Brazil’s Central Bank estimates.
“Brazil has established itself as a serious political and economic reality,” Fiat’s Di Si said. “Credit availability, upward movement of social classes and infrastructure projects already under way will be strong drivers in the future growth of the economy. “
Brazil’s economy is expected to grow an average of 4.2 percent in the five-year period of 2011-15, according to a Latin Trade analysis of IMF projections. That compares with 2.8 percent in the United States and 1.7 percent in the Euro area.
Said SAP’s Cardenuto: “I am strongly optimistic about the future of Brazil.”

click for larger image

Photo courtesy of Fernando Bizerra Jr/EFE/Newscom

Joachim Bamrud
Joachim Bamrud is the executive editor of the Latin Trade Group and a former editor-in-chief of Latin Business Chronicle and Latin Trade magazine.
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