Brazil Insight

Article excerpt

Brazil's steady progress in moving away from a potentially crippling recession is perhaps the most outstanding comeback story among the world's battered emerging economics this year.

Little more than six months ago the Brazilian economy seemed to be on a fast track to disaster, with the currency crumbling, portfolio investors fleeing, government deficits ballooning, and interest rates suffocating both the public and private sectors. The outlook for 1999 was painful negative growth, with the GDP expected to shrink by 6% more.

Today the picture still isn't rosy, but the government's economic team--led by veteran finance minister Pedro Malan and the masterful new Central Bank president. Arminio Fraga--has managed to halt the backward slide and position the economy for hefty growth next year. "Getting Fraga to take over the Central Bank in March was a coup," says Dan Peirce, head of emerging markets research for BankBoston in Boston." He has great respect among international investors because he ran a hedge fund in New York himself. He turned around the negative sentiment on Brazil."

Fraga has done that by delivering on his promises-to stabilize the gyrating real by boosting interest rates to a breathtaking peak of 45% in March, then rapidly slashing rates as inflation and devaluation fears eased. In August rates were cut for the 10th time under Fraga, to 19.5%, the lowest rate in 25 years.

The government has also managed to boost tax revenue enough-despite an occasionally balky Congress-to defuse the fiscal deficit crisis that had the International Monetary Fund going berserk early this year. At the end of July the IMF commended Brazil for surpassing monetary targets that had looked unattainable six months ago and approved another $2.3 billion in standby funding.

To almost everyone's astonishment, GDP for 1999 may climb out of the negative column to about zero growth."Early in the year we had thought GDP might fall by as much as 5% for 1999,"says BankBoston's Peirce."Our latest forecast is minus 0.7%."Assuming no further external shocks, such as a sudden cooling of the US economy, many economists think Brazil could turn in a solid 4% growth rate next year.Against all odds, it seems likely that Brazil will meet the official targets of 8% inflation this year and 6% in 2000.

"It frankly has been a surprise that the downturn this year hasn't been as severe as expected," says Eduardo Gentil, head of the Goldman Sachs operation in Brazil. "Industrial production is down a bit, but the second half of the year looks better, and we should have neutral GDP, or just a small drop, for the year. That's a huge positive."

So positive, in fact, that foreign direct investors-after pausing slightly early this year-are still pouring into Brazil. Total foreign direct investment in the first half of 1999 reached $13 billion. For the year, FDI should total $20 billion, covering 90% or more of the country's current account deficit. In the first half of 1998, FDI was $8.3 billion.

Foreigner companies of all types clearly have Brazil in their sights, either to expand existing commitments, such as Ford's new auto plant in the northeast, or to start new ventures. For many, M&A is the preferred method of building stakes in Brazil. In an increasingly ebullient business mood, local groups are rushing either to embrace new foreign partners or to merge with their domestic competitors.

Their goal is symbolized by the stunning merger in July of the country's two biggest beer and beverage producers, formerly rivals. Brahma and Antarctica (now called American Beverage Company, or AmBev), is to bulk up for global competition. With combined brewing capacity of 6.5 billion liters a year,AmBev will be the world's third-largest beer producer, after Anheuser-Busch and Heineken.

With its enormous internal market of more than 160 million, and an export sector that produces everything from jet airliners to safety pins, an operation in Brazil has become an essential part of almost any company or bank that has global ambitions. …