when the going gets tough you rethink:
Challenging year forces Brazil to rethink growth strategies
By Samantha Pearson in São Paulo
Plastered across shop windows along São Paulo’s main Paulista Avenue this week is one word: ‘liquidação’ (sale). Stores in Brazil’s biggest city are offering discounts of up to 90 per cent as they frantically try to clear stock after the worst Christmas in a decade.
“The whole family spent less on presents this year – in fact, we cut back on pretty much everything,” says Maria Germano de Oliveira, an office cleaner, glancing through one shop window as she hurries to work.
Retail sales during the week before Christmas rose 2.7 per cent – the lowest increase since 2003 as inflation and rising debt levels scared away customers, according to Serasa Experian, a credit consultancy.
But last year was not only a disappointment for Brazil’s retailers. Data this week show that 2013 was the year that everything changed for Brazil. The end of the commodity supercycle and expectations of a tapering of US monetary stimulus signalled an end to the era of easy liquidity that had masked Brazil’s flawed economic policies and helped sustain its exhausted model of consumption-led growth.
A report from Brazil’s central bank on Wednesday showed $12.26bn left the country last year – the biggest net dollar outflow since 2002. That follows data last week showing that Brazil also posted its worst trade balance in 2013 for 13 years. On Tuesday, Brazil’s national automakers’ group Anfavea reported that car sales last year fell for the first time in decade. Even beer consumption in Brazil, the world’s third-biggest consumer and producer, is expected to have dropped for the first time in 10 years, according to Ambev, Latin America’s biggest brewer.
Brazil’s stock market posted the worst yearly lossamong the world’s 20 biggest equity indices last year, according to Bloomberg. Meanwhile, the corporate sector reeled from news of the bankruptcy of Eike Batista’s oil company OGX, which triggered Latin America’s largest-ever corporate default.
For economists, though, Brazil’s fateful 2013 may prove to be exactly what is needed . After 10 years in power, the ruling Workers’ party (PT) will be forced to turn to more market-friendly policies, which would stimulate the economy and employment, to hang on to the country’s newfound prosperity and secure its own re-election later this year, they say.
“In 2012 we saw some extremely market-unfriendly policies but the positive global environment still drove money into Brazil, letting the government think that they could do no wrong,” says Tony Volpon, an economist at Nomura.
“When you have a lot of money coming in there is no need for market discipline but now this isn’t happening we’re seeing policies beginning to improve,” he says.
One of the biggest disappointments for investors has been the government’s reliance on consumption to drive growth, particularly the car industry. Since the PT took office in 2003, Brazil’s fleet of vehicles has doubled to just over 80m, fuelled by a series of incentives to persuade the new middle classes to buy their first car.
However, consumers are now laden down with record levels of debt and the country’s roads are clogged with record levels of traffic. In November São Paulo recorded 309km of traffic jams – an all-time high for Brazil’s business hub and roughly equivalent to a queue of cars all the way from New York to Boston.
Meanwhile, the country’s decade-long consumption binge has helped drive annual inflation close to the 6.5 per cent ceiling of the central bank’s tolerance band, forcing the government to enforce costly fuel subsidies to help cap prices.
“The wheels are now starting to come off Brazil’s consumer-led growth model,” says David Rees, emerging markets economist at Capital Economics in London. “Debt servicing is eating up an ever-increasing share of income – 20 per cent by our calculations, which does not compare favourably to a share of about 15 per cent in the US before the crisis,” says Mr Rees.
However, Mr Volpon says the government’s efforts to auction off a series of highway and airport concessions over the past few months have shown an improvement in policy since 2012, when state meddling in the economy and creative accounting by the government sparked harsh criticism.
“One area the government still needs to improve though is its fiscal policies,” says Mr Volpon. “The rating agencies have made it clear they won’t make any changes this year because of the elections but in 2015 the pressure will be on.”
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