Market Report: Brazil

From the September 2018 issue.

Both Brazilian football ace Neymar and the nation’s once-admired economy drew heat for excessive diving during the 2018 World Cup – and both of them will have a hard time regaining the public’s trust.

On 6 July 2018, with the clock slowly turning to midnight, the dream of Brazilian redemption on the global football stage disbanded among the ecstatic chanting of a crowd awash in red, yellow and black.

Representing a population smaller than that of metropolitan São Paulo, the Belgian national team had just managed to beat the five-time World Champion in a thrilling 96-minute showdown.

With the humiliating 7:1 loss to Germany at the previous World Cup still fresh on the public’s mind, the Seleção had not just missed an opportunity to re-establish itself in the top echelon of global football, but also failed to make up for a lengthy period of lacklustre performances that continue to weight heavy on Brazil’s national identity.

In the wake of the game, celebrity craque* Neymar – widely tipped to lead Brazil to new World Cup glory – found himself at the centre of public controversy. Not because he didn’t play well, but because he made headlines for his on-field theatrics and constant diving instead of inspiring genuine change.

Only weeks before that fateful night in southwest Russia, the very same criticism had been directed at Brazil’s promising, yet underperforming ‘zombie economy’, as the Financial Time nicknamed it.

Just when it was track for the first year of expansion since 2014, it dropped right back into disarray when a 10-day truckers’ strike unfolded at the start of the World Cup (see breakout box). With an estimated 64 per cent of the country’s goods transported by road, the strike hit Brazil’s economy at the core, with São Paulo alone reporting costs of up to $158 million a day.
By the time the Government caved, agreeing to a diesel fuel subsidy and minimum freight price, industrial production had already fallen 10.9 per cent – a substantial blow for an economy facing ongoing external and domestic challenges.

“The strikes…cost the Brazilian Government an enormous amount of money and ground the country to a halt, cutting off supplies of fuel and general goods,” recalls Sophie Foggin of Brazil Reports – adding the International Monetary Fund (IMF) almost instantly adjusted Brazil’s predicted GDP growth from 2.3 to 1.8 per cent.

Even though Brazil’s central bank has since successfully worked to stabilize the country, experts like ex-Finance Minister, Antonio Delfim Netto, say the strike undermined whatever confidence was left in President Michel Temer’s Government.

Neither will it help the nation’s struggling manufacturing industry: Soy sales, for example, have slowed significantly post-strike as truckers and farmers keep fighting over transportation costs, which have surged as much as 150 per cent following the strike. The result: less demand for transport equipment.

What’s worse, the nation’s Congress continues to expand public spending by approving measures that benefit specific groups amid a power vacuum none of the many candidates for president in October’s elections seems ready to fill, Delfim said during a Bloomberg interview. “We should be telling people the situation is dramatic and will demand sacrifices.”

The Financial Times’ Joe Leahy, who coined the zombie analogy in March article, agrees, saying the strike could not have come at a more sensitive time for Brazil’s economy, which was suffering from a “deep malaise”.

As Laehy found, Brazilians vastly overpay for consumer goods and services, for example – a factor that increases inequality and costs in the economy. For instance, a humble Toyota Corolla in Brazil, which produces the vehicle, costs more than €39,000. This compares with Mexico, which also produces Corollas but where they cost just over €26,000, or in the US, where they cost €17,000.

Other Brazilian price distortions Laehy uncovered include mobile voice services, which are nearly twice as expensive per minute as those in Argentina and eight times US rates. “[And] the list goes on,” he adds. “Manufacturing companies in Brazil spend an average of nearly 2,000 hours a year preparing their taxes compared with 800 for Venezuela and less than 200 for the US.”

Laehy also found Brazil has about double the applied import tariffs of China, and four times those of the US, prompting him to paint a dark picture of the country’s future: “Brazil has not gained new markets for its exports in recent years [and] on the fiscal side, Brazil’s budget is a case study in how not to develop a country.”

Back in March, when an OECD report predicted Brazil’s GDP growth would pick up to 2.2 per cent this year and 2.4 per cent in 2019, Leahy quipped it would be a “walking dead recovery” for an economy emerging from its worst recession in history and looking to at least return to its previous size.

Now, with the trucker strike having made history and the next election looming, the verdict got even worse: “Investors fear that there are no clear market-friendly candidates with either a strong chance of victory or of implementing much-needed reforms and getting them through the unwieldy congress.”

A meeting of Brazil’s National Confederation of Industry during the final World Cup week only cemented that analysis, according to Leahy. “Ciro Gomes, the centre-left candidate, said he would unwind some reforms of the centre-right government of Michel Temer, including one of its few achievements – an overhaul of arcane labour laws.”

Meanwhile, far-right candidate Jair Bolsonaro, who is leading in early polls, said he would put military officers into the ministries, “not because they are generals, but for their competency”.

Environmentalist Marina Silva, who is second in early polls, spoke about political reform too, but Leahy says she remained vague on the economy, with promises to increase investment even though Brazil’s budget crisis means there are no more funds for discretionary spending.

“The most popular candidate among investors remains Geraldo Alckmin, former Governor of São Paulo. But his lack of charisma or of voter appeal, especially outside his home state of São Paulo, is making investors nervous, too.”

Leahy and Delfim agree that by installing a populist candidate without the ability to implement much-needed reforms, Brazil’s economy could spend considerably more time on the ground than Neymar during his second World Cup. And yet: “It can be dangerous to bet against Brazil,” says Leahy. “If the country can suddenly lift its game by electing a strong centrist candidate, there might be upside for those with the stomach to defy the consensus.”
Until then, however, most analysts continue to see South America’s second-largest economy sidelined.

*Brazilian slang for a highly talented player

Fast Fact
While the Brazilian national football team prepared for the 2018 World Cup in Russia, a nationwide truck strike paralysed the nation’s €1.7 trillion economy for more than a week – with protesters blocking traffic on hundreds of highways, supermarkets rationing fruit and entire airports running out of fuel. What sparked the industrial action was a 50 per cent rise in fuel prices over the past year, prompting the highly fragmented truck driver community to demand lower diesel prices, as well as reductions in taxes and tolls. The Government eventually agreed to a diesel fuel subsidy and minimum freight rates – regardless whether a truck is loaded up or not. Some experts now predict that larger transport companies will respond by buying up more trucks and optimising their fleets rather than employing the costly owner-operators.

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