Brazil may be “o maior do mundo,” but at the current pace it is headed for an unnecessary explosion.
BY WALTER T MOLANO
Nothing is ever done on a small scale in Brazil. With among the biggest rivers, rain forests and soccer stadiums on the planet, it is no wonder that Brazilian egos tend to be colossal. Other than tragic fate, little seems to check the Amazonian ambitions of the new entrepreneurs who are reshaping the county’s destiny. World class fortunes are being erected on the back of energy, finance and construction. At the same time, an intricate network of politicians, corporate titans and bankers are incubating a new version of statist capitalism. Given the size and scope of the country’s population and geography, things are naturally bigger. Brazil is in the midst of building Belo Monte, the second largest hydroelectric-generating complex in the world. Just north of Rio de Janeiro, Eike Batista’s LLX is constructing the Acu Superport that will accommodate the largest ocean-going vessels in the world. The almost simultaneous hosting of the 2014 World Cup and 2016 Summer Olympics reflects the country’s boundless bravado. Its quest to gain a permanent seat on the U.N. Security Council confirms its enormous self-confidence. Of course, given the insular nature of the Brazilian economy, the government’s generous subsidies and assistance programs, through vehicles such as BNDES, Caixa Economica and Petrobras, creates a fertile incubator to develop global titans. However, these characteristics are also mixing a dangerous cocktail that could spell challenges for the country’s economic and social stability.
One of the problems with Brazil’s economic model is that the government’s efforts to create national champions are producing an enormous concentration of power and wealth in the hands of a few institutions. On one hand, this is allowing Brazilian firms to dominate sectors on a global scale. Several Brazilian companies are at the forefront of strategic sectors and technologies, such as protein production, beverages, mining and deep water drilling. But, on the other hand, it is also creating problems at home. Brazil is a country of oligopolies, where a handful of firms dominate economic sectors. This is clearly the case in construction, banking, energy, agriculture and telecommunications. As a result, these firms can provide whatever goods and services, at whatever quantity and quality they deem. In other words, they enjoy an unprecedented amount of pricing power that makes Brazil one of the most expensive countries in the world. Besides the fact that a dinner in Sao Paulo will probably cost twice to three times as much as a comparable meal in New York or London; or that an official football jersey will fetch US$180 at the airport, Brazil’s cost of production are among the highest in the world. Countless bottlenecks in transportation, logistics and infrastructure make it virtually impossible to provide any economic elasticity. This is the reason why many economists were projecting consumer price to rise almost 7.5 percent by the end of the year. Some extraordinary government measures were subsequently introduced to cool the economy, thus allowing analysts to reduce their inflationary expectations. The new measures included tighter monetary policy, restrictions on credit expansion, reductions in government expenditures and several price controls. Nevertheless, Brazilian households continue to consume unabatedly, and inflation could become a serious social problem.
Unfortunately, consumer credit is the main driver behind the frenzy of economic activity. Brazilian households are now addicted to credit, in the same way that their North American brethren were just a decade ago. Recent government measures to restrict credit were mainly focused on the small and medium-sized banking institutions. However, there has been an explosion of shadow-banking activities that are providing new credit opportunities for households. Retailers are using securitization and receivables funds, known as FDICs, to provide “zero-interest rate” credit cards to boost sales. The problem is that these loans are outside the purview of the central bank and financial regulators. Therefore, this is the reason why consumption continues to soar ahead, despite the government’s attempt to temper the level of economic activity. Things are so tight that consumers complain endlessly about the lack of available goods and services. There are waiting lists for all sorts of durable goods and automobiles. Airline flights are oversold and hospitals are running at full capacity. Nevertheless, the government’s policy of concentrating power in the hands of a few players only creates obstacles at promoting competition and efficiency. The structural conditions driving consumer prices higher, while reducing income equality, are well known ingredients for social unrest. Brazil may be “o maior do mundo,” but at the current pace it is headed for an unnecessary explosion.
Walter Molano is head of research at BCP Securities.