Brazil is getting back in the stimulus business, underscoring the limits of emerging markets to drive growth in the global economy.
Facing a deteriorating economy, President Dilma Rousseff Wednesday announced an infrastructure investment strategy valued at about $66-billion (U.S.), the first of several programs that local media reports say could be coming in the weeks ahead.
The massive program, which includes private construction of toll roads and investment in rail lines, comes amid slowing growth in other emerging powerhouse economies such as India and China, which along, with Brazil and Russia form the BRIC group of nations.
Not so long ago, Brazil was an economic high flyer, turning its back on a history of financial crises and emerging as one of the world’s most dynamic economies.
But more recently, the country has been grounded, dashing hopes that Latin America’s largest economy would help offset weak recoveries in the United States and Europe.
“The optimism around Brazil overshot,” Nick Chamie, global head of foreign exchange strategy and emerging markets research at RBC Dominion Securities, said from Toronto.
“It was unreasonable to expect emerging market economies to decouple from the rest of the world.
“In fact, it’s the opposite.”
Ms. Rousseff’s plan should accelerate construction. Loosening the government’s grip on public goods, she pledged to sell concessions that will clear the way for private contractors to build 7,500 kilometres of roads, and then collect the tolls.
The government also will hire private companies to build 10,000 kilometres of railroads and allow them to share in the profits.
Brazil’s state-run development bank will finance all the projects at subsidized rates.
The close of the London Olympics brought several unflattering news reports about how Brazil is falling behind in its efforts to upgrade its roads and railways in time for the Games in Rio de Janeiro in 2016 – never mind the 2014 soccer World Cup, which Brazil will host.
In 2010, Brazil’s gross domestic product grew 7.5 per cent, the fastest in more than two decades, amid strong global demand for its vast array of commodities. But in 2011, Brazil’s growth slumped to 2.7 per cent as the global rebound from the financial crisis faltered. This year, some economists say Brazil’s GDP will do well to expand by more than 2 per cent.
“Brazil is one of our least favourite countries in the current environment,” analysts at Brockhouse & Cooper, a Montreal-based investment consultancy, wrote in a report in May.
Brazil’s surge to the rank of sixth-biggest global economy in recent years masked serious structural issues that will restrain the country from taking its place among developed economies such as the U.S. and Canada.
In the World Bank’s 2012 ranking of ease of conducting business, Brazil placed 126th out of 183 countries. The placement reflects what is known as the “Brazil Cost,” a term locals use to describe money lost to bureaucratic inefficiency and miserable infrastructure that seriously delays getting exports to market.
According to the World Bank, it takes 119 days to start a business in Brazil and 2,600 hours to file taxes. In terms of infrastructure, Some estimates say only 15 per cent of the country’s roads are paved. Stuart Bergman, assistant chief economist at Ottawa-based Export Development Canada, said he has seen research suggesting Brazil will need to spend nearly $1-trillion (U.S.) on infrastructure by 2016.
“Brazil has to address this legacy of underinvestment if it really hopes to meet its export potential,” he said. “Right now, they don’t have the capacity to meet even the reduced level of demand that is coming from abroad.”
The focus on investment marks a shift in Brazil’s approach to stimulating economic growth. The government’s practice in recent years has been to focus on consumer demand, spending heavily on social programs that boost the wealth of the country’s poor and directing state-run lenders to dole out credit. In the meantime, the Finance Ministry and central bank have sought to restrain the appreciation of the currency to ensure Brazilian factories remain competitive.
Despite the dark cloud over Brazil, many economists predict it will rally once the global economy shakes off its current doldrums. The real’s strength is a reflection of the confidence global investors have in the country’s longer-term prospects, said Pablo Breard, Bank of Nova Scotia’s vice-president of international research.
Negativity about Brazil is “a very short-term view,” Mr. Breard said from Buenos Aires. “The efforts to expand and upgrade infrastructure equals vast amounts of investment. Countries that receive lots of foreign direct investment are better off in the long run.”Report Typo/Error