Brazil Economy: Reduced Growth, Increased Opportunities Country: – October 2013

British Embassy Brasilia

Summary

IMF lowers estimate of Brazil’s potential growth rate to 3.5% from 4.25%. Expects Brazil will grow close to potential in 2014 at 3.2%. OECD more cautious, expecting 2.2% growth. Both catching-up with local commentators and Brazilian Government in recognising structural challenges that constrain higher growth. Both critical of fiscal policy and need to increase investment. But Brazil’s structural challenges in some cases are our opportunity, including a new £1bn High Value Opportunity in infrastructure.

Detail

In its annual assessment the IMF lowered its estimate of Brazil’s potential growth rate – the most that can be achieved without stoking inflation – to 3.5% from 4.25%. It expects Brazil to grow close to its potential in 2014 at 3.2%. The OECD, releasing its annual Economic Survey, was more cautious, forecasting 2.2% growth in 2014. Both reports acknowledge a recovery in Brazil’s growth but both believe growth will soon reach a ceiling unless investment in infrastructure and productivity growth increase.

 

This is not a surprise. Local commentators, including us, have for some time argued that structural challenges would constrain growth below the 4% of the last decade. Brazil has exhausted its quick wins – with past growth boosted by labour force growth and high commodity prices. Future growth now depends on harder to deliver productivity gains. The Brazilian Government recognises this, and has announced ambitious infrastructure projects, a desire to open trade with the EU, and significant investment in education. The IMF and OECD are simply catching-up.

 

Both bodies highlighted the need to rein in expansionary fiscal policy, arguing greater saving by Government is necessary to fund higher investment and growth, as Brazil cannot rely on ever increasing inflows of foreign direct investment. It is doubtful it could attract much more than the $65bn of foreign investment it received in 2012, and to do so would require an appreciation of the Real or worsening of the trade balance. In contrast to its recognition of other structural challenges, the Government rejected the IMF’s criticism, with Finance Minister Mantega arguing that it was the IMF that had recommended fiscal expansion in the wake of the financial crisis.

 

The OECD also recommended other growth friendly policies Brazil should implement:

• ·Reduce dependency on the state development bank BNDES for long term financing.

• Change the indexation of the minimum wage so that wages increase in line with productivity.

• Cut the link between pensions and the minimum wage to avoid increasing the social security deficit.

• Implement a single unified VAT system to make doing business easier.

• Open up more to trade to deepen participation in global value chains.

 

Implications for the UK?

 

Growth of 2.5% to 3.5% in the world’s 7th largest economy still presents significant opportunities for UK companies. Exports to Brazil have grown by a third since 2010 and should more than double by 2020. Brazil’s attractive consumer base means new UK brands may soon become visible on Brazilian high streets.

 

Increasing physical and human capital investment brings further opportunities. Brazil’s embrace of PPPs to deliver its transport infrastructure needs has been identified by UKTI as a High Value Opportunity with a potential UK accessible value of £1bn by 2017. Health PPPs are another major opportunity. Education is a major theme of our GREAT campaign, with opportunities for English language providers and for UK institutions to receive Brazilian students.

 

Disclaimer

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