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Business Climate: Brazil Remains Laggard

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Despite its success attracting foreign investment, Brazil remains a laggard when it comes to overall business climate.


BY JOACHIM BAMRUD


RIO DE JANEIRO – Despite its success at attracting foreign direct investment, Brazil remains a laggard when it comes to overall business climate.

 

The country’s economy last year grew by 7.5 percent, its best result in 24 years and a strong enough result to replace Italy as the seventh-largest economy in the world. Meanwhile, FDI reached a record $48.5 billion last year, an 86.8 percent increase from 2009.

 

North American, European and Asian companies are rushing in to get their piece of the fast-growing economy, setting up new operations or expanding existing ones.


Yet
Brazil only has the 11th best business climate in Latin America, according to the latest Latin Business Index from Latin Business Chronicle.

The index broadly measures the climate for business in 18 countries in
Latin America looking at macro environment, corporate environment, globalization and competitiveness, infrastructure level and political environment.

 

While Brazil ranks fourth in political environment, it only ranks in seventh place in macro environment and infrastructure level. Even worse: it has the fifth-worst corporate environment in Latin America and also ranks low when it comes to globalization/competitiveness.

 

Despite the strong economic growth the past two years, its overall macro score lags other countries like Panama and Peru due to overall lower growth and higher inflation. Brazil’s inflation last year reached 5 percent. Meanwhile, Peru – which saw its economy grow at a much faster rate of 8.8 percent – only posted an inflation of 1.5 percent.

 

While its overall infrastructure (including technology, water and electricity) ranks as the seventh-best, its transport infrastructure ranks as the seventh-worst in Latin America.


Its corporate environment is impacted by poor showings in tax and labor environments. According to the Latin Tax Index from Latin Business Chronicle – one of the subfactors used in the Latin Business Index –
Brazil has Latin America’s worst tax climate and the world’s highest number of hours required to comply with tax regulations.

 

Meanwhile, Brazil has Latin America’s fourth-worst labor environment, according to the Latin Labor Index from Latin Business Chronicle, another subfactors used in the Latin Business Index.

 

The Labor Index looks at 18 factors that determine overall labor conditions in 18 countries in Latin America, including contract flexibility, minimum wage, regulations and payments for redundancy, flexibility of wage determination, cooperation in labor-employer relations and brain drain. It also

looks at education data (mean and expected years of schooling) and a health factor such as life expectancy at birth.

SIZE MATTERS

Yet, for all its problems, investors are still lured by the potential return
Brazil offers. “Size matters,” João Carlos Ferraz, a director of Brazilian development bank BNDES, told a Bravo Council organized here by the Latin Trade Group. The meeting included nearly 40 key executives gathering at the World Economic Forum Latin America.

 

Ferraz made his comments after seeing the results of the Latin Business Index. He didn’t dispute the poor showing of Brazil on the index, but pointed out the size of Brazil’s economy as a key factor drawing investors.

 

Meanwhile, Woods Staton – the CEO of Argentina-based Arcos Dorados – expressed surprise at Brazil’s lower rank compared with countries like Guatemala.

 

Staton expressed optimism for doing business in Latin America overall. Arcos Dorados, which held an IPO that raised $1.25 billion last month, operates more than 1,600 restaurants throughout most of Latin America.

 

“I’ve been working in Latin America for more than 25 years,” he said. “I’ve never felt more positive than I do today. There’s a lot going on, starting with the governments [which] are more fiscally responsible [and] [showing more respect for the] rule of law. That’s great.”

 

The commodity-driven economies will falter if China falters, Staton believes. China, in turn, will falter if the United States falters. “We don’t think the US will falter,” he said.

 

Apart from Brazil, Staton singled out Colombia, Panama and Peru as strong growth economies, although like other investors he is cautious about the outlook in the latter country due to political uncertainties surrounding next month’s presidential elections. Leading all polls is Ollanta Humala, a radical politician pledging to increase mining royalties, redistribute wealth and change the constitution.

 

Meanwhile, Staton expressed hope that the United States will approve the five-year old US-Colombia free trade agreement.

 

In terms of key challenges, education stands out, he said. “One of the key challenges we have in Latin America is education,” Staton said. Arcos Dorados, the world’s largest McDonald’s franchisee, employs more than 100,000 people in Latin America, making it the ninth-largest employer in the region, according to a ranking from Latin Business Chronicle. Arcos Dorados trains more than 10,000 people each year, he pointed out.

 

Frank Holder, chairman for Latin America for FTI Consulting, agreed with Staton in terms of the positive outlook for Brazil, Colombia, Panama and Peru and also added Costa Rica among the “hottest” economies in Latin America. In many other countries, however, investors have been deterred by investments not being adequately protected.  Meanwhile, corruption remains a major challenge throughout Latin America, he pointed out. “We could grow much faster if not for those problems,” Holder said.

 

He also shared Staton’s optimism about Latin America’s economic outlook. “It would be very hard to imagine a scenario with a crisis like we had in the past,” he said.

For
FTI itself, Latin America represents its fastest-growing region worldwide.

 

Marcos Molina, CEO of Brazilian meat packer Marfrig Alimentos SA, said his greatest challenge was the weak US dollar. Marfrig operates in 22 countries on five continents. The dollar has dropped 40 percent compared to the Brazilian real the past two years.

 

Those kind of rates have led a restaurant in Sao Paulo to be declared the most expensive in the world, he pointed out.

 

Oscar Rojas, Latin America president for US-based wireless distributor Brightstar, cited the strong growth in his sector in Latin America as evidence of the opportunities: 40-50 percent annual growth in recent years.
 

 © Copyright Latin Trade Group 

 

 

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