Guido Mantega (Photographer: Renzo Gostoli / Bloomberg )
Brazil 2011-2012: Vamos Lá!
Summary of the past year: Well, in summary, from soaring to just plain growing. Economists surveyed by the Central Bank expect GDP to grow 3.0% in 2011 (adjusted real terms) versus 7.5% in 2010. As a recent Reuters report on Brazil puts it: “…corporate leaders, investors and government officials already express nostalgia for the boom years. They will have to scale down their expectations…” A continued Eurozone crisis could hamper exports such as soy, iron ore, and coffee. Domestic air traffic was up 18.5% in the first 9 months of 2011, versus a 27.4% increase in the same period of 2010. Still, domestic demand remains stronger in Brazil than in many developed economies.
Most unexpected event: For me, it’s got to be the Faxina (“housecleaning”) that President Rousseff has embarked upon to oust corrupt government ministers. As discussed in my previous post, 5 of Dilma’s ministers have exited disgracefully since June. Under-fire Labor Minister Carlos Lupi may be the sixth. Lupi may offer a test to Dilma’s mettle – he said he would only quit if he were shot, “and it would have to be a big bullet, because I’m a big guy.”[1]
However, analysts believe Dilma is only ousting Ministers whose guilt has been made public, without tackling the system in which ministry control and government jobs are political currency. Dilma’s challenge is that her party needs allies in the Chamber of Deputies, and as the price for friendship, other parties want their slices of bacon. One argument says that because Dilma’s legislative priorities (education, health care, infrastructure) do not require congressional aid, Dilma could crack down harder on corruption. Alberto Almeida of the Instituto Análise notes that the faxina has made bribery of government officials a lot tougher. This may prompt smaller political parties to merge with bigger ones, a positive result if this makes government coalitions smaller.
Person of the year: A tough call, but I’m going to go with Finance Minister Guido Mantega. A recent report in Bloomberg suggests Dilma will retain Mantega during the pre-election Cabinet reshuffle next year.[2] In a sense, this is not surprising given Mantega’s handling of the post-crisis economy. After the Lehman crisis, Mantega handled tax restructuring and state-lending initiatives that fostered 7.5% GDP growth in 2010. However, news of Dilma retaining a Cabinet official deviates from the norm these days. Mantega was never seen as close to Dilma; he was appointed Finance Minister in 2006 by Lula. Brazilian inflation around 7% and threats to demand for exports provide ample pretexts for Dilma to replace Mantega, but Dilma has kept faith with him. Mantega’s skill will be put to the test in the next 6 months. Brazil GDP contracted in the third quarter and inflation remains high compared to its target range. The jobs market, though, remains healthy.[3]
Prediction: Hard to say where the economy will go, but economists expect real GDP growth of about 3% in 2012. This still beats the developing world. Investors in Brazil are hoping for a better year as well, and may well get it. The Ibovespa is currently down about 17% year-to-date (source: Cap IQ), though expected to appreciate next year. The real, on the other hand, may not be appreciating. As I type the real is at 1.87 versus the dollar, sky high compared to its post-Lehman low of 2.60. The real is seen by many as overvalued, especially given that Brazil’s trade balance is expected to decline.
On a sporting note, World Cup 2014 will also have a sharp effect on Brazil’s politics and economics. In the runup, Dilma’s government has disagreed with FIFA on issues such as cracking down on merchandise piracy, allowing beer sales inside venues, and ticket pricing. Hammering out these agreements along with completing infrastructure development could lead to a game of chicken between Dilma and FIFA. The risks are huge for both Brazilian taxpayers and anyone set to profit from the World Cup (players, sponsors, travel agencies). Also, I wouldn’t be surprised by the resignation of Ricardo Teixeira, President of the Brazil Football Confederation and 2014 World Cup Local Organizing Committee. Teixeira is facing money laundering and bribery allegations, and from what I understand, he and President Rousseff are not on speaking terms.
