By Arnout Nuijt
Positive news about Brazil’s economy is hard to find these days. In fact the bad news is piling up. A recent report by the Financial Times of London, quoting Brazil Central bank figures, suggests the country has entered technical recession more than 7 months ago by shrinking slightly for two consecutive quarters in 2013. Another report in the same publication expressed worries about what harm a recession may do to Brazil’s housing bubble. So how serious should you take these reports and what can you do to protect your business in Brazil?
Brazil’s own prestigious Fundação Getúlio Vargas institute’s Economic Climate Index reported last week that the economic climate in the country was worsening and that Brazil’s businesses expect little gain from 2014. Several warnings have also been issued about global risks to Brazil, like the US Federal Reserve’s tapering and China’s slower pace of growth (and less appetite for raw materials).
The country’s only engine last year appeared to be an insatiable consumption. Consumption remains a growth driver, but even so, retail sales grew only 4% in 2013 from 2012. That was the worst performance since 2003 and many economists will wonder whether Brazil will still be able to depend on consumption to drive growth.
Later this month Brazil’s Central Bank will publish its 2013 growth figure and I suspect it falls below 2,0% and possibly even close to the results of Brazil Weekly’s poll, held among its expert and experienced readers: a meagre 1,7%. But hey, let’s be reasonable: that’s still not a bad figure if compared to the EU, Japan and the US.
Interestingly, most economists still expect Brazil’s economy to grow this year, albeit by as little as 1.5%. So, don’t panic just yet. But note that this growth figure is an average and it may be the result of the performance of certain sectors of the economy and of specific regions of the country, while other sectors and regions are in the red zone. So take a good look at your business plans and if needed, ask a second opinion on your investments, their timing and their location.
About a year ago Atlantico Business Development, our consultancy, started warning certain clients (especially smaller and medium sized investors) about the risks of entering Brazil’s market. In some cases we even advised them not to go or to put their plans on hold and watch developments instead. This was highly appreciated, as there are plenty of advisors out there still misleadingly telling investors “booming” Brazil’s fields are greener that your own.
But smart foreign investors were already weary of the country for some time. Some people may simply have been expecting too much, like continuous Chinese style growth rates to follow up on Brazil’s exceptional 7,5% GDP growth in 2010. But Brazil is no Asian tiger and never was. In fact one should treat Brazil as a low or medium growth, semi-emerged country where size matters or where your international strategy prescribes you to be.
But if you are in investing Brazil and you are a medium-sized company, try to reduce your exposure to the local economy, trim your investments or put them on hold if possible. You could also use the situation to your advantage as leverage for a better deal with your local business partners. But for some investors already in the country that may come too late and they may have to sit out the ride, waiting for the next boom to happen.
Not just foreign businesses, but especially Brazilian ones will be looking for the exit signs in 2014. The interesting thing to watch will be the behaviour of Brazilians themselves, as they are more acquainted with boom and bust cycles than us gringoes. Creativity will flourish and you bet many locals are prepared, as they knew for years this slowdown would happen.
There are indications that Brazilian companies themselves may be relocating some of their business operations to tap into growth markets elsewhere, like Mexico, the US or the EU. Inquiries about relocating businesses abroad are up and places like Miami, London and Rotterdam in the Netherlands are the most sought after. Our hometown Rotterdam has developed a Brazilian business cluster since 2006, with at its core a load of Petrobras subsidiaries.
Lower corporate taxes may be another reason to migrate elsewhere, especially to the Netherlands, as the story of the city’s latest Brazilian arrival, PO&G (Petrobras’s African ventures), unveils. The Dutch press reported that this move alone will save Petrobras up to 150 million Euros per year. So, who’s next?
All rights reserved by Rotterdam Week.