March 10, 2013 5:46 pm

Brazil urged to halt industry favouritism

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Brazil needs to stop offering special benefits to individual industries as it tries to restore rapid economic growth, says Jin-Yong Cai, chief executive officer of the International Finance Corporation.

The comments by the head of the World Bank’s private investment arm, one of the biggest foreign private sector financial investors in Brazil, follows protectionist measures for the country’s automotive industry and other initiatives that economists say are impeding overall investment sentiment in Latin America’s biggest economy.

“The government is very pro-business,” said Mr Cai, who joined the IFC last year after running Goldman Sachs’ China business. But he added in an interview in Brazil that the key to revitalising investment was to unleash market forces through a level playing field.

“I’m for no special treatment, which I think would be very, very good for business. Investors would make adjustments based on a fair regime and that’s what’s needed here.”

Brazil’s economy virtually ground to a halt last year as foreign portfolio and domestic investors retreated, scared off by currency controls, the rising cost of labour and uncertainty over the investment environment.

The government of President Dilma Rousseff is keen to reignite investment announcing infrastructure packages aimed at removing bottlenecks in the country’s road, rail, air and sea transport systems and introducing incentives for various industries.

But economists say the government needs to assuage investor uncertainty stemming from some of its more aggressive measures, such as its “currency war” aimed at controlling the exchange rate, and even from well-meaning measures that offered tax relief to certain industries but not others, creating uncertainty in the economy.

Tony Volpon, economist with Nomura, argued that the “sudden stop” in Brazil’s economy, from growth of 7.5 per cent in 2010 to 0.9 per cent last year, was due to investor uncertainty. Investment was about 18 per cent of gross domestic product last year when it needs to grow at above 20 per cent to ensure fast economic growth in the longer term.

“The imposition of investor-unfriendly capital controls generated a self-inflicted ‘sudden stop’ which negatively affected investments and growth” he said.

The Brics countries have their own challenges but fundamentally I am much more positive about the growth prospects

- Jin-Yong Cai, International Finance Corporation chief

But Mr Cai said he was optimistic that Brazil and the other members of the so-called Bric club of emerging nations – Russia, India and China – would recover, with China’s still robust 7.5 per cent growth providing the springboard.

Most of the Brics were riding a wave of structural economic growth on the back of middle-class spending and rising urbanisation.

“I think the Brics countries, each of them, have their own challenges but fundamentally I think I am much more positive about the growth prospects,” he said.

Brazil is the biggest source of new business for the IFC, whose traditional role in emerging economies was to act as a “catalyst” to encourage private sector investment in new areas, such as infrastructure and the environment and in poorer regions.

The IFC committed $1.6bn to Brazil last year, bringing its portfolio in the country up to $3.7bn. This makes it one of the biggest financial investors in Brazil – the entire domestic and foreign private equity industry last year invested nearly $8bn.

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