Lagniappe

 

Chris Kraul :Brazil's now a hot commodity

 

SAO JOSE DOS CAMPOS, BRAZIL -- For years, the joke in this country was that Brazil's economy was the economy of the future. The morose punch line, of course, was that the future never arrives.

But finally, it seems, the future is now.

Just peek into Embraer's Hangar F220 in this city north of the capital, Brasilia, where this month the highflying commercial aircraft maker was putting finishing touches on a dozen gleaming planes being readied for delivery to airlines around the world, including Northwest, Air Canada, Tame of Ecuador and Virgin Australia.

Or visit the Odebrecht construction company, in Salvador in Brazil's northeast. It is managing billions of dollars worth of international public works projects, including its second $1-billion bridge over Venezuela's Orinoco River and a piece of the Panama Canal expansion.

Then there's Petrobras, the quasi-state oil company, whose engineers have launched deep-water drilling projects in places as far afield as Angola and close to home as Colombia and the Gulf of Mexico. Petrobras announced last month that it had discovered what may be the world's largest oil find in 25 years, in Brazil's offshore Tupi field. If that pans out, Tupi could propel Brazil into the ranks of significant oil exporters.

After several boom-and-bust cycles in recent decades, Brazil is in the midst of its best sustained economic growth since the 1970s. Optimism is high that the country may have turned the corner on the road to stability. And the emergence of companies like Embraer, Odebrecht and Petrobras on the world stage is one major factor in Brazil's improved fiscal health.

"The Brazilian economy is probably at its best moment in 25 years," said Paulo Levy, economist at a Rio de Janeiro-based think tank known by its Portuguese initials IPEA, citing four years of good economic growth.

Exports of manufactured goods and services have given Brazil's economy balance and helped foreign reserves climb to $167 billion, double the figure of September 2006. The country has paid down its debt, lowered interest rates and kept a lid on spending. Economic growth will come in at 5.3% this year, lower than the hemisphere's 5.7%, but quite a feat for a country that over the previous 10 years averaged only 2.5% annual expansion.

Foreign investors have taken notice, evidenced by the 44% increase in the Bovespa stock index this year, the fifth year of growth. That's a bigger percentage gain than in Russia, Chile or South Korea, even though Brazil's GDP growth this year will fall short of those countries. Brazilian companies have done a record 100 initial public stock offerings in 2007, five times the number of last year, with 70% of the money raised supplied by foreigners.

"That's good for Brazilian companies because it's a cheaper source of financing," said Reginaldo Takara, senior director in the Sao Paulo office of the Standard & Poor's credit rating agency. "Now they have partners instead of creditors."

Investors' improved perceptions of Brazil are also evident in the $30 billion that foreigners have plowed directly into Brazilian companies this year, a 60% increase over last year. The flood of foreign cash has helped spur the currency, the real, to double in value against the dollar in four years.

Also giving Brazil an enormous boost is the jump in commodity prices in recent years. The country is the world's leading exporter of chicken, coffee, sugar, soy, beef and orange juice.

Much of the foreign money now flowing into Brazil is coming from investors who expect the country's debt to receive an investment-grade rating from major firms such as Standard & Poor's over the next couple of years, said Gustavo Franco, a former head of Brazil's central bank and now an executive with Rio Bravo Financial Services in Sao Paulo, the country's financial center.

"If the experiences of Russia, Chile and Mexico are an indication, a ratings upgrade will produce a boost in equity prices, stock [price-to-earnings] multiples and earnings," Franco said. "That's what investors are anticipating."

Some institutional investors, such as pension funds, can only invest in countries with top debt ratings, Franco noted. If Brazil is able to secure that, it will drive demand and raise prices, he predicted.

About a quarter of Brazilian stock offerings this year have been launched by real estate investment companies targeting a housing deficit estimated at 7.5 million units by ABN Amro economist Zeina Latif in Sao Paulo. She expects a short-term boom in housing construction, fueled by long-term fixed-rate mortgage credit, which was not available in Brazil until recently.

The red-hot quality of Brazilian markets is all the more stunning considering the situation just five years ago. In 2002, leftist Workers Party leader Luiz Inacio Lula da Silva won the presidency by campaigning on promises to renationalize utilities that had been sold to the private sector. Investors fled, and stocks and the currency plummeted.

In something of a surprise, though, Lula has stuck with the fiscal reforms implemented by his predecessor, Fernando Henrique Cardoso. That, plus his "discipline" in limiting federal spending, Franco said, are big factors behind the current economic boom.

"Lula is a converted neoliberal," Franco said.

At the same time, welfare programs for the poor and elderly that give monthly handouts to one-third of the population have reduced the extreme polarization of wage distribution and helped turbocharge consumer spending, now growing at 15% a year, said Ana Carla Costa, an economist at Sao Paulo-based Tendencias consultants.

Wages are up and unemployment is down. Another encouraging sign for investors has been the rapid expansion of credit and banking activity. The number of bank accounts has grown 50% since 2001, while bank deposits and credit cards have doubled, said Nicola Tingas, the chief economist of the Brazilian Federation of Banks.

The value of outstanding loans is growing 20% annually. Analysts attribute the expansion to tougher bankruptcy laws passed two years ago that allow lenders to tap into borrowers' wages for repayment.

Of course, Brazil still faces serious challenges that could take the wind out of its economic sails. Lula has invested little in infrastructure, and Sao Paulo economist Roberto Troster said that was causing the nation to slip in world competitiveness.

Roads and ports are overloaded. Electricity demand is growing so fast -- 6% annually nationwide -- that power may be rationed as soon as next year if there is a cutoff of gas from Bolivia, which supplies half of Brazil's needs, or inadequate rainfall reduces hydropower output, said Adriano Pires, who heads a Rio think tank that studies infrastructure.

Taxes are 36% of gross national product, among the highest in the world, and bank federation economist Tingas said Brazilians receive little for what they pay. "You pay twice as much and you get nothing in return," he said.

A deep U.S. or global economic downturn would be damaging to Brazil's economy. For one thing, it would damp demand for its commodities, which account for 53% of its exports. Economist Troster said it was too early to declare that Brazil's economy had diversified enough and fundamentally changed. "We're not turning a corner, we're repeating a cycle," he said

At Embraer, management is less concerned about macroeconomics than maintaining a competitive edge and seeking out new market niches in an environment made more difficult by Brazil's appreciating currency.

It admits to growing pains such as difficulty finding qualified technical staff.

Booming demand for its 70- and 100-seat jets spurred the company to add a staggering 6,000 employees to its workforce this year. The company used to import foreign engineers to fill slots. Now it trains up to 100 engineers a year at its own master's-level, on-site engineering school.

After exploiting the mid-sized jetliner market over the last decade, the company believes it has found another niche in executive jets. Next year will roll out three private luxury models targeting the United States as well as booming emerging markets, such as Russia and the Middle East.

Such worries weren't even on Embraer's radar screen 15 years ago, when the company was primarily making propeller planes for the domestic market. Now, Embraer says it expects to soon become the third-largest commercial jet maker after Boeing and Airbus, passing Canada's Bombardier.

"Brazilian companies are starting to become global players," said Horacio Forjaz, the company's vice president. "We're in a virtuous cycle."

Chris Kraul is a Los Angeles Times Staff Writer (chris.kraul@latimes.com0 . Petroleumworld does not necessarily share these views.

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Petroleumworld News 12/31/07

Copyright© 2007 Chris Kraul. All rights reserved.

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