January 21, 2014 2:57 pm

Brazil’s businesses face year of distractions

Drum Queen Juliana Alves of the Unidos da Tijuca samba school dances on the first night of the annual carnival parade in Rio de Janeiro's Sambadrome, February 10 2013©Reuters

Colourful diversion: Carnival is later than usual this year, making March a write off for business, claims a mock calendar

Just before the new year, a mock calendar for 2014 went viral in Brazil.

Typically, business is quiet in Latin America’s biggest economy during the summer months of January and February until the end of the annual Carnival street parties.

But this year, Carnival will be later, occurring in March, meaning this month too will be a write-off for business, according to the calendar. A flood of public holidays will wipe out April while the football World Cup will occupy May, June and July, after which there will be the presidential elections in October and summer holidays again in December.

That leaves only three months to get work done – August, September and November. While an exaggeration, there is more than a grain of truth in the joke. For those not involved in the World Cup, this year will be a challenging one in Brazil, because of the late Carnival and the uncertainty resulting from the football tournament and the election.

“If things get done, it will probably be in the first part of the year,” says David Sonter, mergers and acquisitions partner and head of Brazil group at Freshfields Bruckhaus Deringer, the international law firm. “If not, business could go into hibernation until 2015.”

Indeed, if recent years have been challenging for Brazil because of a slowing economy, this year promises to be the biggest test yet of the country’s ability to deliver on its promises of maintaining growth.

In 2007, Brazil won with great fanfare the right to stage the World Cup, but since then the event has often seemed more of a millstone around the country’s neck than a blessing. The preparations have been characterised by bitter infighting between the government and Fifa, football’s organising body, over missed deadlines for stadiums and other infrastructure, while huge public spending on the tournament has led to political protests.

Already under threat of a credit rating downgrade this year, the ruling centre-left government of President Dilma Rousseff will have to check further excesses in public spending in spite of its need to win the election. Failure to do so could risk shattering the country’s hard-won reputation for responsible macroeconomic management over the past decade.

“It’s hard to believe things will improve in an election year,” says Marcelo Salomon, economist at Barclays, referring to Brazil’s fiscal stance. “If the central bank doesn’t announce a new intervention programme, the real will depreciate more strongly.”

The distractions of the World Cup and the election are probably the last thing the country needs as it struggles to overcome a period of economic stagnation.

In 2010, it caught the world’s attention as one of the so-called Brics, the elite group of large, high-growth emerging markets that also includes Russia, India and China. During that year, the economy expanded 7.5 per cent, the culmination of a golden decade for the country that was fuelled by a commodities boom, increased access to credit, wage rises and a huge expansion in lending by BNDES, the country’s state-owned development bank.

Since then, however, growth has struggled to exceed 2 per cent, as the commodities boom lost steam and the expansion of new credit slowed. Government interventions, including tax breaks for sectors such as the car industry, have not been enough to restore growth to about 4 per cent, seen as the optimum rate for Brazil.

Problems tend to follow periods of rapid credit growth. And on this measure, several emerging markets, including China, Brazil and Turkey, now look vulnerable

- Capital Economics

“Problems tend to follow periods of rapid credit growth,” said a note by research firm Capital Economics on the main threats facing developing economies. “And on this measure, several emerging markets, including China, Brazil and Turkey, now look vulnerable.”

For Brazil, much will depend on whether it can discover an enthusiasm for reform. The expected end of quantitative easing by the US Federal Reserve this year is expected to affect capital flows to a country already seen as ambivalent in its attitude to international investment.

While steady foreign direct investment and short-term flows seeking to take advantage of the country’s high interest rates are expected to continue, Brazil could fall short of its potential to attract even more foreign dollars.

In one positive sign, however, Brazil has managed to breathe some life into its limping infrastructure programme. At the end of 2013, the government managed to auction several toll roads to the private sector after earlier efforts had failed. It has also tendered Rio de Janeiro’s archaic international airport to private sector international and domestic operators in an effort to improve service levels.

Perhaps Brazil’s greatest challenge this year, however, will be containing political risk in view of mass protests last year during the Confederations Cup, the dress rehearsal for the World Cup.

The protests reflected widespread dissatisfaction with public services and corruption, a feeling that could re-emerge this year during the World Cup and the election.

Ms Rousseff is seen as the favourite in the election so far, but her Workers’ party is suffering from fatigue after nearly 12 years in power. It still boasts Brazil’s most formidable political campaign machine, backed by Luiz Inácio Lula da Silva, Ms Rousseff’s popular predecessor, but like everyone else, it was caught off guard by the extent of the protests.

“While it’s tempting to blame discontent on weaker economic growth, the reality is more complex,” said Capital Economics. “One thing that links those countries that have seen unrest is long-serving governments. This has helped feed a sense of political stagnation as well as complaints of cronyism and corruption. As governments’ time in office lengthens, the risk of political instability seems likely to increase.”

Overall, economists believe Ms Rousseff will seek to muddle through until the election, avoiding any serious policy adventures. Perhaps most importantly, she will be praying for a Brazilian victory in the World Cup – or at least a defeat of the old enemy, Argentina.

“If Brazil does win the World Cup, the resulting energy and enthusiasm will mean 2015 will be a cracking year for business,” says Freshfields’ Mr Sonter.

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