Embracing the future

For years, the joke in this country was that Brazil's economy was the economy of the future. The morose punchline, of course, was that the future never arrives.

But finally, it seems, the future is now.

Just peek into Embraer's Hangar F220 in this city north of the capital, where the high-flying commercial aircraft maker was putting finishing touches this month on a dozen gleaming new aircraft being readied for delivery to airlines around the world, including Northwest, Air Canada, Tame of Ecuador and VirginAustralia.

Or visit Odebrecht construction company, in Salvador in Brazil's northeast. It is managing billions of dollars worth of international public works projects, including its second $1 billion bridge over Venezuela's Orinoco River and a piece of the Panama Canal expansion.

And then there's Petrobras, the quasi-state oil company, whose engineers have launched deep-water drilling projects in places as far afield as Angola, Colombia and the Gulf of Mexico. Petrobras announced recently it had discovered what may be the world's largest oil find in 25 years in Brazil's offshore Tupi field. If it pans out, Tupi could propel Brazil into the ranks of significant oil exporters.

After several boom and bust cycles in recent decades, Brazil is in the midst of its best sustained economic growth since the 1970s. Optimism here is high that the country may have turned the corner on the road to stability. And the emergence of companies such as Embraer, Odebrecht and Petrobras is one major factor in Brazil's improved fiscal health.

"The Brazilian economy is probably at its best moment in 25 years," said Paulo Levy, economist at the Rio-based think tank known by its Portuguese initials IPEA, citing four years of good economic growth.

Exports of manufactured goods and services have given Brazil's economy balance and helped foreign reserves climb to $167 billion, double the figure of September 2006. The country has paid down its debt, lowered interest rates and kept a lid on spending. Economic growth will come in at 5.3 per cent this year, lower than the hemisphere's 5.7 per cent, but quite a feat for a country that over the previous 10 years averaged only 2.5 per cent annual expansion.

International interest

Foreign investors have taken notice, evidenced by the 44 per cent increase in the Bovespa stock index this year, the fifth year of growth. That's a bigger percentage gain than in Russia, Chile or South Korea, even though Brazil's GDP growth rate this year will fall short of those countries. Brazilian companies this year have held a record 100 initial public stock offerings, five times the number last year, with 70 per cent of the money raised supplied by foreigners. "That's good for Brazilian companies because it's a cheaper source of financing," said said Reginaldo Takara, senior director in the Sao Paulo office of Standard & Poor's credit rating agency. "Now they have partners instead of creditors."

Improved investor perceptions of Brazil are also evident in the $30 billion that foreigners have ploughed directly into Brazilian companies in so-called foreign direct investment this year, a 60 per cent increase from last year. The flood of foreign cash washing over Brazil has helped cause the value of the currency here, the real, to double in value against the dollar in four years.

Also giving Brazil an enormous boost is the jump in commodity prices in recent years. The country is the world's leading exporter of chicken, coffee, sugar, soy, beef and orange juice.

Much of the foreign investment now flowing into Brazil is coming from investors who expect the country's debt to receive an investment-grade rating from major firms such as Standard & Poor's over the next couple of years, said Gustavo Franco, former head of Brazil's central bank and now an executive with Rio Bravo Financial Services in Sao Paulo.

"If the experiences of Russia, Chile, and Mexico are an indication, a ratings upgrade will produce a boost in equity prices, (price-to-earnings) stock multiples and earnings,"Franco said. "That's what investors are anticipating."

Some institutional investors, such as pension funds, can only invest in countries with top debt ratings, Franco noted. If Brazil is able to secure a top rating, that will drive demand and raise prices, he predicted.

About a quarter of Brazilian stock offerings this year have been launched by real estate investment companies targeting a housing deficit that ABN Amro economist Zeina Latif in Sao Paulo estimates at 7.5 million units. She expects a short-term boom in housing construction, fuelled by long-term fixed-rate mortgage credit, which was not available until recently in Brazil.

The red-hot quality of Brazilian markets is all the more stunning considering the situation just five years ago. In 2002, leftist Workers Party leader Luiz Inacio Lula da Silva won the presidency by campaigning on promises to re-nationalise utilities that had be sold to the private sector. Investors fled, and stocks and the currency plummeted.

In somewhat of a surprise, though, Lula has stuck with the fiscal reforms implemented by his predecessor, Fernando Henrique Cardoso. That, plus his "discipline" in federal spending, Franco said, are big reasons for the current economic boom.

At the same time, welfare programmes for the poor and elderly that give monthly handouts to one-third of the population have reduced the extreme polarisation of wage distribution and helped turbo-charge consumer spending, now growing at 15 per cent a year, said Ana Carla Costa, economist at Sao Paulo-based Tendencias consultants.

Rapid expansion

Wages are up and unemployment is down. Another encouraging sign for investors has been the rapid expansion of credit and banking activity. The number of bank accounts has grown 50 per cent since 2001, while bank deposits and credit cards have doubled, said Nicola Tingas, chief economist of the Brazilian Federation of Banks.

The value of outstanding loans is growing 20 per cent annually. Analysts attribute the expansion to tougher bankruptcy laws passed two years ago that allow lenders to tap into borrowers' wages for repayment.

Of course, Brazil still faces some serious challenges that could take the wind out of its economic sales.

Lula has invested little in infrastructure, and Sao Paulo economist Roberto Troster said that is causing Brazil to slip in world competitiveness.

Roads and ports are overloaded. Electricity demand is growing so fast - six per cent nationwide per year - that power may be rationed as early as next year if there is a cut-off of gas from Bolivia, which supplies half of Brazil's needs, or if inadequate rainfall reduces hydropower output, said Adriano Pires, who heads a Rio think tank that studies infrastructure.

Taxes are 36 per cent of gross national product, among the highest in the world.

A deep US or global economic downturn would be damaging to Brazil's economy because it would dampen demand for its commodities, which account for 53 per cent of all its exports. Sao Paulo economist Troster said its too early to declare that Brazil's economy has diversified enough and fundamentally changed. "We're not turning a corner, we're repeating a cycle," he said.

At Embraer, management is less concerned about macroeconomics than maintaining a competitive edge and seeking out new market niches in an environment made more difficult by Brazil's appreciating currency.

It admits to growing pains such as finding qualified technical staff.

Such worries weren't even on Embraer's radar screen 15 years ago, when the company was primarily making propeller planes for the domestic market.

Now, Embraer says it expects to soon become the third-largest commercial jet maker after Boeing and Airbus, passing Canada's Bombardier. "Brazilian companies are starting to become global players," said Forjas, the company's vice]president. "Were in a virtuous cycle."