Is Brazil Screwed?

With Brazil constantly headlining business news with uncertainty, there are a lot of questions being raised for the future.

There have been several positives being brought up, such as:

  • Dilma's impeachment
  • The national currency, the Real, rallying back from it's lowest point in history
  • Possibility of a positive impact from the Olympic Games

Meanwhile these positives, although convincing steps in the right direction, are seemingly outweighed by some of the following negatives:

  • Double Digit unemployment
  • Highest inflation in over a decade
  • Political Uncertainty
  • Crumbling Infrastructure
  • Zika Virus Epidemic

Clearly, Brazil has a lot on their plate right now but are the few positives enough to jump start a struggling country?

There are articles that argue that the Olympics have a substantial positive impact on trade exports. With Brazil being a country that is dependent on their exports, in my opinion, this can be rewarding.

On the other hand, there are many publications that are pessimistic towards the Olympic's effect on a national economy. Saying that government spending is streamlined into infrastructure that can not be used for the citizens, and profits being primarily made by multinational corporations instead of national businesses.

I personally think that the Olympics, combined with momentum from the Impeachment, will bring some type of positive results into the economy. Obviously, there is major fiscal work needed to be done, and it will be a long process with drawbacks. However, it's in the right direction.

I'd love to hear everyone's opinions on this and what effects it could have on us and specific industries as we start to head into the months leading to the Games.

 

What are you interested in? Investment outlook (equities/rates/FX/credit/corporates)? Economic performance (closely linked I know)? Social stability?

If you are interested in investment outlook then in my humble opinion it begins with the politics, closely followed by the fiscal issue. Political uncertainty generally results in an FX selloff, which in turn contributes to increased inflation expectations. The central bank has countered this with a tighter monetary stance, but this leads to an unsustainable fiscal situation given the floating portion of the government's debt, which in turn puts pressure on the currency and so on.

With Dilma gone there is a small window of opportunity for political coordination as everyone hated the PT. However, with Lava Jato still lurking (has claimed two ministers from this government) there is definitely an element of unknown unknowns. Fiscal reform is desperately needed as excessively high rates and negative growth creates serious debt sustainability issues. That said don't expect default given low % of govt debt in FX and ample FX reserves. Net net short term opportunities, long term issues. Unemployment/Zika/Olympics are not major shorter term drivers from my perspective for the investment outlook (clearly matters though).

Curious to hear what others think.

 

Interesting to hear your perspective, I definitely think that it all leads with the political system, then everything follows. I am looking forward to seeing how the Olympics play a part in the whole effect though as I think it could bring some much needed confidence back into the country. I'd love to hear what others think l

 

Mitt Romney is like the only person to have made it a net positive.

Not only are the Olympics a net negative, but there many athletes, and even entire countries, have are seriously considering not going because of Zika as well as the cesspool that is the Guanabara Bay. And this is without talking about kidnappings or the violence in the favelas. I feel like the whole thing is going to be a disaster, but I felt the same way about the World Cup and it turned out okay.

 

I personally do not think the favelas will be a big problem. I would relate it to Chicago, it's a great city but they have a horrible area within it. These areas that are common in most big cities, don't always seep into the nice areas and I could bet that Brazil is not going to organize their events in very close proximity to the favelas. But Zika however, that's a pretty scary question mark for the athletes.

 
Texas_Fight2015:

Not only are the Olympics a net negative, but there many athletes, and even entire countries, have are seriously considering not going because of Zika as well as the cesspool that is the Guanabara Bay. And this is without talking about kidnappings or the violence in the favelas.

I agree. Brazil doesn't have a nurturing system in place for athletes. The lack of safety and logistics may create a huge international embarrassment.

Even if things go smoothly, which is unlikely, Brazil is also not nearly as good as it could to the tourists and businessman. My bet is that little will change with the games. People won't suddenly start to visit the country more often and invest/spend their money after the games are ended.

"The curious task in economics is to demonstrate to men how little they really know about what they imagine they can design" F.A. Hayek "What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?" Adam Smith
 

Worked in Brazil for two years, and have closely followed the developments since I left. You're right in that this all boils down to the politics (Olympics are a net negative to the country), but it's much more complex than "Dilma/PT are out->economy will grow". There is serious belief that a coup is underway led by the right wing (albeit pro business) former holders of power, and that Dilma's impeachment was orchestrated as a distraction to stop the long-awaited crackdown on bribery and corruption that has plagued Brazil since its initial days as a democratic open market. If the elite regains power and suppresses the rising anger in Brazil's middle and lower class, I see no reason to expect Brazil's fortunes to improve in the near future.

"I don't know how to explain to you that you should care about other people."
 

There's two things to keep in mind: -Dilma's replacement is equally as corrupted. His appointed anti-corruption commissioner recently resigned on corruption charges (yeah). -she's still wildly popular despite her obvious flaws

Oh and Soros is involved, the last 4-5 countries he got actively involved in ended up in a civil war.

Never discuss with idiots, first they drag you at their level, then they beat you with experience.
 

I wouldn't go as far as to say screwed. I think this is normal behavior in EM. You see these cycles of political instability, investment outflows, and economic downturns throughout EM/DM/BRICS history. Capital has started to flow back in, and I think other areas of the world are becoming less desirable in comparison.

 

I think the risk of Dilma coming back is currently under-appreciated. There's a definitive vote coming up. Last time, she was suspended by 54 votes vs. 52 votes needed. The new government came in and has already screwed up more than enough times. Of the 54 suspension voters, a few are openly on the face - doesn't take much for shit to go sideways.

 
Best Response

If screwed is too much, normal behaviour is an understatement.

The -3,8% in GDP real growth last year is kind of rare in brazilian history, of course it happened before like in the hyperinflation crisis for example. But here is the thing, Brazil is facing its second year with negative growth (expectations around -3,7% in 2016), which is even rarer, plus the double digit inflation rate in 2015 and a double digit unemployment rate? That can't be a normal cycle from economic point of view.

The truth is that Brazil has never stopped being problematic and the growth from last 6 years or so wasn't based on productivity and competitiveness, but mostly on demand, a cheap dollar and expensive commodites which are the bulk of Brazil exports.

The bureaucracy to do business is huge as always. The tax system is incredibly complicated for businesses and unfair to the poor. In addition, the country is still one of the least open to international trade. The merchandise trade as % of GDP in Brazil (19%) was the smallest apart from Sudan (18%) out of the 248 countries in World Bank data in 2014. Brazil "lost" to every rich, poor, BRIC and latin-american country in the world except for Sudan!

Another problem is the lack of political robustness in the country, the numerous institutions weren't capable of preventing the situation to get so bad, but so bad, that the last resort of a pseudo-impeachment would be necessary to put the economy and politics on track again.

Still, the political scenario is a mess, and the new president only found out that the public deficits were even bigger than reported by Dilma. As a result, huge public spending cuts must be made while the country is still in recession.

"The curious task in economics is to demonstrate to men how little they really know about what they imagine they can design" F.A. Hayek "What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?" Adam Smith
 

As far as a country being screwed goes, I'd say Brazil is fairly far down that path. That being said, most things are cyclical in life, including the fortunes of countries. Those cycles can be rather long though (a generation or more sometimes) depending on the agenda of the political regime in power. Is this something that Brazil can recover from and move on with its life in several years? Probably. Will that happen? Hard to say.

This is a somewhat similar situation though for a number of Latin American countries right now. Countries like Argentina, Peru, Venezuela, and Brazil, to an extent, adopted a totalitarian socialist ideology back in the late 90s starting with Hugo Chavez. These countries are unraveling due to years of that agenda triggered now partly by the downturn in commodity prices (particularly in the case of Venezuela). A trait that all of these countries share is overly controlling central governments. A by-product of that is corruption which as others have mentioned Brazil has quite a lot of.

It will likely be a long journey for these countries to fix their problems given how long they have taken care of their people through welfare states. (It's well-known in Brazil that the best career path to take after school is to try to get a job working for the government in just about any capacity. Public jobs pay way more than private sector jobs). Hopefully Brazil, and the other countries mentioned, can correct their missteps sooner rather than later. Otherwise, Brazil is screwed.

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes
 

I think all investment decisions follow the basic rule of risk and return, whereas many companies will allocate different metrics to determine viability of the investment, they still remain Key. Brazil like many BRIC nations have had their share of challenges, in the case of Brazil, Corruption and an impeached president makes things dicey. having spent a fortune putting up world class infrastructure for the Olympics and world cup has put it into debt. Currency swings are major but lately driven by US. On the specifics on investing-Technology Without additional details from your end, Brazil has a similar population as USA but with lower tech penetration. They have a fairly young generation that has embraced tech, not sure on the numbers but you should get them online. I would really allocate alot of capital to Brazil and to any country with a large young population if my business involves large number of users , easy to scale-

My view would be to hedge a few exposures, Currency, etc, Joint Ventures can work very well if well executed.

Just my thoughts

 

I'd say they should be more selective. We had some few boom years where you were selling coal for the price of gold here. Everybody wanted so bad to join the party, they made some mistakes ranging from exagerated valuations to poorly done due diligence leading to losses and disapointment.

Technology here has a lot of room to grow - From a customer perspective you have a young population, low penetration of tech and in some areas, low competition. However, you will still see the same problems plaguing any other business here: Corruption, absurd red tape, low productivity, stupid labor laws...

Since US companies generally have an advantage compared to local players regarding cost of capital and fx rate, it would make sense to allocate some reasonable capital here IMO.

You still need to do your homework, though. Recently KKR got burned after investing in a Brazilian tech co with all sorts of problems (this is still in the courts btw another problem of Brazil - These things here take forever).

 
junkbondswap:
F that, if Julio Cesar is coming out for that ball he has to fckin win it, whether that means taking off the head of an opponent or his own teammate it doesnt matter...dude missed the ball completely.

And that red card was garbage (not like the Rooney/Ronaldo incident), just give the guy a yellow

As a former keeper, I completely agree. That's not how this is going to be remembered though.

Dunga is out for sure, now.

 

The Dutch should try their luck at Broadway, I had never seen so much acting in a game.

Felipe Melo is a fool, but the biggest one is Dunga. Worst midfield in history, Kaka clearly injured...Brazil was lucky to have gotten an easy key, but as soon as they faced a more balanced team, Dunga's poor choices became evident.

I still think Ronaldo should have been there, he's decisive and scores even if he looks like a whale doing so.

 
total:
i give a lot of credit to dunga for putting dani alves in the midfield. he is too good to be on the bench

Not really, he only did it because Elano is out.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard. -30 Rock
 

Alves has played mid before and the way he plays defense (pushing forward) its not that surprising, especially considering he'd likely be starting if he didn't play the same attacking style of Maicon.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard. -30 Rock
 
  1. Why Brazil?
  2. Have you ever been to Brazil?
  3. Do you speak portuguese?
Valor is of no service, chance rules all, and the bravest often fall by the hands of cowards. - Tacitus Dr. Nick Riviera: Hey, don't worry. You don't have to make up stories here. Save that for court!
 

I've been to Brazil twice and loved it both times. I have no Portuguese but I can start this summer and study abroad next spring for study abroad..and yea the bitches with the big butts is a motivation as is the lifestyle. I think there's a lot of opportunity there and less competition, that's my professional motivation obviously there's a lifestyle motivation as well.

 

yeah there might be less competition but everything is also based on personal contacts etc. if you dont know anybody down there and just are picking up portuguese its gonna be a very long shot.

thats why i think it would be actually easier to start in the us in a latam group and then transfer out to sp later on

"too good to be true" See my WSO Blog
 

I got an offer to go to Brazil about 3.5 years back at a BB; they wanted me to spend 2 years in NY and then interview in BR. At the time, I got a better offer stateside (the job mkt was ridiculous), so I respectfully declined.

I spoke conversational Portuguese at the time (haven't continued much since then). This is the biggest key. You MUST speak fluent Portuguese (read, write, speak).

"Cut the burger into thirds, place it on the fries, roll one up homey..." - Epic Meal Time
 

That's essentially what I've heard: the language component is key. I think I'm going to explore abroad options as that's got to be the quickest way to pick up the language skills.

 

^^^ + a lot of oil, are the biggest coffee producers and home to the biggest meat producers, also the have a rising biofuel industry and are flooded by foreign investments.

Valor is of no service, chance rules all, and the bravest often fall by the hands of cowards. - Tacitus Dr. Nick Riviera: Hey, don't worry. You don't have to make up stories here. Save that for court!
 

^^Personal experience or an opinion? And assume I have no interest in going into banking (which is becoming more and more true), is this also true in other busniess sectors?

 

I'd believe it'd be a great time to short USD/BRL. Right now I have a short position in $PBR (Brazil's corrupt oil company) at $7.06 taken on 6/9/16 because of the latest news about a police raid, technical analysis, and the selling of large terminals that will apparently "help reduce debt" which in my opinion is a joke because even though these terminals will go for around 250 million USD, the company is in debt 250 billion USD. Fundamentally destroyed company.

 

I have been trading and following PBR over the past couple of months and it's crazy how volatile it is. One week it just shoots up and the next couple days it trails back down. Just this week I closed a long position for a great return and opened a short after at around 6.75. You got a great position at 7.06 though, that's just around where I closed my long.

 

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