Eternally lain on a splendid cradle,
by the sound of the sea and the light of the deep sky,
thou shinest, O Brazil, garland of America,
illuminated by the sun of the New World!
Hino Nacional Brasileiro (Brazilian National Anthem)
Brazil certainly has a lot to boast about in the New Year, not in the least its winning bid to host the 2016 Summer Olympics in the Cidade Maravilhosa of Rio de Janeiro. The decision by the International Olympic Committee (IOC) on October 2, 2009, speaks loudly to the global community, signalling Brazil’s arrival on the world stage and showing that a developing nation has the ability to muscle in on both global athletic and economic games.
The real gold medal, however, is not Brazil’s winning bid or its recent economic prowess—while a shiny new investment grade rating and a prediction to be the world’s fifth largest economy by 2016 are impressive achievements—it’s that the Games should enable the country to deliver a more stable, robust investment market in the long term.
Brazil’s ability to meet this goal will depend largely on whether its public and private sectors can work together strategically and with purpose and responsibility. This article proposes that Brazil is taking steps in the right direction, with a post-Olympics market expected to be more sophisticated and transparent. Required infrastructure development will have a ripple effect on economic growth, with improvements in civil-society apparatus making the country more attractive to stable long-term investment. Opportunities in commodities, foreign exchange (FX) and the green sector are likely to grow, while consistent improvements to the country’s regulatory system will better protect the market.
The Brazilian Model
Key to Brazil’s investment approach for the Games is its integration of funding partners and unique mixing of social policy and market economics. Brazil’s Administration has allocated $11 billion for infrastructure-related spending, with the mega-event expected to add around $51.1 billion to the economy through to 2027. Funding is split between local and federal levels of Government, private sources, the IOC and multilateral institutions such as The Worldbank. This layering and cross-sectional investment backing is good news for the risk-averse investor. Private sector participation in infrastructure will be essential for Brazil to meet its development targets in time for the Games, as well as the preceding 2013 Confederations Cup and the 2014 World Cup.
With China’s growth rate barely skipping a beat throughout the global downturn, commodity prices are returning to pre-GFC levels. Key indicators of market stabilization include copper, steel and the Baltic Dry Index returning to levels seen in 2007 before the sub-prime bubble began to burst. With the requirement for raw materials necessary to build up infrastructure, these prices will be crucial in assessing the economic impact on the Host nation. Brazil’s wealth of resources will see it source materials locally, and, with such a massive requirement for base metals and an increase in the need for energy, domestic mining and drilling firms look set to enjoy prosperous times. Opportunities abound for investors to ramp up their holdings in local equity. As the government continues to award local firms contracts, there will be a smattering of small domestic firms coming out of the woodwork and requiring foreign dollars for IPOS. Post-Olympics, Brazilian commodities will only become more attractive to the hungry giants of China and India. The insatiable demand of “Chindia” is also likely to hike up prices in the near future.
The ability of Brazil to source its resources internally may reduce the requisite net cost associated with infrastructure development, an important factor in particular if spending exceeds budget, as was the case for China at the 2008 Beijing Olympics. Further, recent discoveries in local pre-salt oil fields will boost Brazil’s ability to better finance infrastructure costs.
Infrastructure investment is also likely to lure more sophisticated companies to the market, with Brazil’s demand for strategic planning expertise providing opportunities for international consultants, developers and contractors.
The Brazilian Real has been the strongest appreciating currency against the USD over the past calendar year, gaining 33.67% (31/12/08–07/12/09, Bloomberg). This is in part due to the Brazilian economy being one of the last in and first out of the economic downturn; however the carry trade also has its own part to play. With the interest rate differential between Brazil and America, it is increasingly popular for investors to short the dollar against the Real, as debt is cheaper on the northern side of the Panama Canal and Central bank rates are more than 8% lower. With the FED recently affirming that it plans to keep interest rates low for the foreseeable future, the popularity of this trade doesn’t appear to be pending, and the Real is expected to continue to strengthen. The U.S. is showing signs of recovery, and the Central Bank of Brazil (COPOM) unanimously agreed to maintain the current rate of 8.75% at its latest meeting. With COPOM citing the easing of monetary policy and the “benign inflationary scenario,” the ideal time to invest in Brazil doesn’t appear to be far off. Until the rates reach parity, there will always be the carry-trade buffer to give Brazilian investments that little helping hand.
The alternative investment market is likely to become more sophisticated in the near future. This is in part due to Brazil’s commitment to an “all-green” Olympics, ramping up spending on technologically savvy environmental programs and the resulting inflow of green dollars into the country. Similarly, as demand for alternative investment increases as a result of the nation’s heightened media profile, global financial powerhouses are likely to cash in and augment their product offerings to include more “ethical” options.
Brazil is already using the Olympics as a platform for showcasing its environmental stewardship and has demonstrated its commitment to greening the Games through a number of programs. As part of its bid, Rio allocated a Green Olympic Sustainability Division (OSD) to assist in strategic environmental planning, set goals for greenhouse gas reduction with pre- and post-Game targets, and launched the Carbon Zero 2016 campaign. This campaign will see 3 million trees planted across Rio before 2016. Sustainable investment solutions are still required for the country’s problematic water and sewage systems.
The ability of Brazil to profit from the Olympics will depend on whether the government can maintain its role in overseeing investment while letting private investors actually get things done. Success will further be determined by the strength of these public-private partnerships, and whether the nation can continue to avoid the ideological polarization that has previously disrupted its market. Similarly, Brazil will need to continue to chip away at the layers of bureaucracy hindering international investors.
Brazil certainly has made progress in the regulatory arena over the past few years, and its accomplishments herein should be recognised. The country’s conservative tax policy is particularly noteworthy. The tax increases leveraged at foreign investors late 2008, albeit not popular, demonstrated the Government’s proactive stance to avoid speculative investment. Tax was implemented in two stages: a 2% tax levied on international stocks and bonds in October, followed by a 1.5% hike on American Depository Receipts (ADRs) a month later. The latter tax was issued to balance out distortions arising from investors attempting to skirt the first levy via the purchase and immediate cancellation of ADRs.
These taxes are unlikely to have a negative impact on the underlying value of the Brazilian market long term. Such measures create a tactical downgrade on the Real, and although it may underperform other emerging currencies in the near future, this will mean Brazil is less likely to overprice assets or experience a Bubble. The nation’s booming middle class, strong exports, improving infrastructure and increased domestic spending—the Olympics will augment this by providing close to 120,000 jobs per year up until 2016—will only increase market value. There’s a lot to be said for stability, and conservative fiscal policy is a sign of improving corporate governance. The regulatory arena should make for interesting watching come election time in October.
Let the Games begin…
While the Olympic Games will shine light on Brazil as a key investment destination, it will be the country’s ability to utilise correct government and corporate coordination to not only avoid the evident overheating dangers of previous boom and bust cycles but further to emerge as a continental and world economic leader. Sport and investment are global languages that know few boundaries, and together they may set the standard for how developing nations can expand their economies and extract significant social value in doing so. If the Brazilian model of public and private cooperation fulfils its possibilities, the gains may not just be short-term economic growth but a farther-reaching shift in business culture and international perception.