As one of the world’s largest economies, Brazil has always been a tempting market for investors. However, with complex governmental hurdles and nuanced cultural oddities to navigate, investing in Brazil can be tricky. The banking industry, in particular, has been unpredictable over the past few years. Since the financial crisis of 2008, the Brazilian economy has struggled to recover. Some economists point to the economic policies of former Brazilian President Dilma Rousseff who, after her election in 2010, established several protectionist policies in an attempt to protect the crippled Brazilian economy from further damage.
Initially, it worked; the GDP grew 7.5% in 2010. However, growth would slow to a sluggish 0.9% by 2012. The devaluation of the Brazilian real followed as then Economic Minister, Guido Mantega, implemented a new economic matrix, dubbed “detoxification.” The policies of former President Dilma Rousseff’s administration took their toll on multiple spheres of the business sector. These populist political policies wreaked havoc on the banking industry. In fact, the only two banks to weather the storm in Brazil were Itau Unibanco (ITUB) and Banco Bradesco (BBD), according to Igor Cornelsen. The two banking giants had enough capital to resist financial disaster due to their sheer size. They simply absorbed smaller banks, who were unable to contend with the unprecedentedly serious financial crisis.
Some saw the changes coming, such as Igor Cornelsen. Cornelsen is one of the most trusted international investors from Brazil. He made a fortune investing in Brazilian commodities and companies, but he diversified outside of the country long ago. He now resides and does business in South Florida, and he is ambivalent about making a return to Brazil. Currently, he works with Bainbridge Inc., making incredible things happen in the stock market. Throughout his life, Cornelsen has held high-level positions in several Brazilian banks, so he knows the Brazilian economy like the back of his hand. Most of his consulting work has to do with guiding high-net-worth investors toward profitable ventures. He most enjoys re-building stocks rather than actual companies. He believes that there are always great deals in the stock market, and his picks almost always make a decent profit.
Melhorar a mobilidade e a poluição em SP é simples, pedágio urbano tiraria muito carro da rua aumentando o conforto e o custo para o usuário
— igor cornelsen (@igorcornelsen) June 19, 2013
The Political Situation
The political instability of Brazil is doing an effective job of warding off investors. After taking office in 2016, the current president, Michel Temer, attempted to enact much-needed reforms to curb inflation and stimulate job growth; unfortunately, his policies have failed to address some of the country’s deep-rooted economic inequalities or generate growth. Simultaneously, the impeachment process against the previous president, Dilma Rousseff, which is perceived by most as a leftist coup, has become more damaging than expected by the politicians and middle class, who were responsible for the impeachment in the first place.
In his attempt to implement monetary reforms, Temer imposed a strict limit on annual spending, constitutionally limiting spending increases for the next 20 years. These austerity measures were very unpopular with most Brazilians but welcomed by the financial markets. Cornelsen feels that the targets laid out by the administration are looking more and more unrealistic. In order to adhere to them, future administrations will be forced to make drastic cuts in social spending, including particularly unpopular cuts to the pension system. As we know, the government is in a weakened position – not a good one for making these reforms without causing dramatic social and political backlash.
Political candidates on the left and center-left, like Guilherme Boulos and Ciro Gomes, are painting a rosy picture of these reforms becoming successful. The reality, however, is that even if a candidate friendlier to the markets like Geraldo Alckmin becomes president, the government spending cap will need to be amended. If one of the candidates on the extreme-right – like Jair Bolsanoro – wins the election, the markets will likely become more unpredictable. Like many political and financial analysts, Cornelsen agrees that Bolsonaro will be hard pressed to live up to his promises while enforcing austere financial reforms. Amidst all the uncertainty of the upcoming election, the administration, in an attempt to lower production costs and stimulate job growth, cut labor rights and defunded trade unions, creating job insecurity and drawing immediate opposition from labor unions and the courts.
Earlier in the year, Cornelsen predicted the Brazilian market would continue to struggle despite the fact that other analysts were clinging to data showing the economy was back on track. Brazil’s stock exchange began 2018 on a robust upward trend, fueled by the anticipation of a strengthened Brazilian real. The Brazilian market did rally to a historical high after the imprisonment of former president Luiz Inacio Lula da Silva in April. The IMF was forecasting that Brazil’s economy would expand at a rate of 2.3% for the year.
As Cornelsen predicted, all the hope and promises of prosperity vanished as quickly as they came. It all began when the government failed to reform the outdated and bloated pension system that banks and investors hoped would help control spending. In May, the economic crisis in neighboring Argentina caused foreign investors to flee the Brazilian stock market in droves, effectively erasing any gains from earlier in the year and weakening the Brazilian real against the US dollar.
To further compound Brazil’s economic troubles, a crippling transportation workers’ strike brought the country to a halt for an entire week, effectively paralyzing industry. The devastating nationwide shutdown was only resolved when the government caved in to numerous demands by truck drivers, which included everything from cheaper fuel to a change in the leadership of state-run oil company Petrobras. This inevitably cost the government billions of reals in taxpayer money and further weakened the government’s financial reputation. Market forecasts have now downgraded GDP expectations as a result of rising inflation rates and the worsening financial situation.
Cornelsen was able to steer away from the financial turmoil as a result of his years of experience with Brazilian markets. He managed to spot the subtle political and financial forces at work, which indicated to him that the economy was not ready to turn the corner. One major indicator was the transportation strike; it laid bare how weak and unpopular the government is. In the past, the Brazilian government would have intervened to cap the cost of fuel, hurting profits at Petrobras. Under the recent administration, however, Petrobras let the market dictate fuel prices, which was fantastic for the company’s profits, but horrible for Brazilian motorists, the transportation sector, and the shipping industry. It is this injustice which caused the truckers to go on strike and to block Brazil’s highways in protest.
When the government gave in to demands by cutting the cost of fuel and removing the CEO of Petrobras – Pedro Parente – it showed economists that it was willing to forgo fiscal discipline in exchange for political survival. Before the strikes took a dent out of the country’s production, economists were already lowering their growth forecasts for 2018 as a result of other indicators. Unemployment, for example, remains at 13 percent, and investment has slowed as a result of the unpredictable nature of the upcoming elections. Potential investors fear that the truckers’ unprecedented success could inspire other industries to follow suit and demand unsustainable benefits and further reductions in fuel costs. The government may not be strong enough to navigate the type of reforms that need to be carried out to get back to solid financial ground.
Since economic growth has failed to take hold, Brazil is relying on a surge of private investments or external demand to stimulate its economy. While the trade war between the US and China escalates, it is likely that global demand will suffer. For example, Brazil’s economic indicators for June revealed weakness in demand, and confidence indicators have remained low since May and June. There are also no signs of improvement in the retail sector, leaving little chance for recovery in the near future. Brazil is a consumer society and relies on consumer spending, which is crippled by the dismal job market. Lingering uncertainty caused by the impeachment of former president Lula and the unpredictable nature of the pending elections have made investors wary. Cornelsen sees this as a warning sign that investors are not ready to put their faith in Brazil.
Cornelsen has an intimate knowledge of Brazil’s immense potential, but he also understands that not even he can make promises about its economic performance. The uncertainty is still too great for a large potential to overcome. The elections will offer the next true indicator regarding Brazil’s financial future. The best investors can hope for is a victory for presidential candidate Geraldo Alckmin. The persistent problem is that public support is hanging around 10%, according to the latest polls – exactly what you would expect from a candidate who is seen as a continuation of the status quo.
For the financial markets, the economic reforms he would uphold are what Brazil needs to get out of this slump, but important reforms like that of the public pension system are extremely unpopular, and investors have been waiting for these reforms for years. The pension reform is the most glaring financial issue facing Brazil and is essential for balancing the accounts and controlling public expenses. The government continues paying public servants near-full pay after retiring at the unsustainably young age of 55. If such rampant spending continues, then any rebound in Brazil’s economy will not be possible.
Any hope of reigniting the economy in 2019 hinges on the new administration’s ability to carry out these difficult reforms and meet the cap for growth in public spending and the primary deficit goals. As far as options for other spending cuts go, Brazil needs to carve out an additional $2 billion. This should be possible since the figure is relatively low, even by Brazilian standards. There is even a small chance it can delay the contentious public pension cuts if it can curb its discretionary expenses instead. The fact remains that any hope for economic prosperity relies on Brazil’s ability to reform its economic system and the way in which the government controls public funding.
Cornelsen has had an eye on the banking sector of Brazil for decades. As a result of the lingering uncertainty, banks in Brazil have become extremely tight with lending, only approving loans for those who have outstanding credit. This is creating severe disparity between the rich and the poor. Those at the lower rungs of society are forced to deal with indifferent public banks or adhere to a cash-and-carry lifestyle typical of the third-world. It leaves those without capital lacking access to financial resources and with little opportunity to invest in small businesses.
Facing such a disastrous situation in Brazil’s financial market, Cornelsen and other experts don’t see many investment opportunities at the moment. Brazil is experiencing an uptick in small businesses, but the infrastructure is not improving at a pace that will sustain this trend. Corruption remains unchecked, further crippling job creation and exaggerating wealth inequality even more than in years past.
Brazilians Need to Learn Personal Finance
Many people around the world, but particularly Brazilians, must learn to take on personal responsibility rather than making a habit out of dependence on the government. Even moderate economic stability can give an average person the ability to invest and expand their net worth. The goal is always to minimize risk, but the more educated you become, the more you understand the risks, and the more you may benefit by extending into riskier investments. Cornelsen believes that it is important to get started investing as early as possible. In this way, you can extend your learning curve earlier in life and with smaller amounts of money. Getting in early on an amazing investment can also generate huge returns, especially when focusing on long-term investments.
It is hard to time the market just right and even more complicated when considering a developing economy like Brazil, which is why he recommends staying away from day trading. It is better to think about the big picture and take stocks long-term rather than obsessing over the day-to-day. When it comes to the stock market, he also recommends diversifying into smaller stocks to make bigger gains.
Is the Real Worth it?
Cornelsen, an expert on foreign currency trade, knows that the Real has been overvalued for too long. As a result of the government’s stubborn currency controls, Brazil cannot claim competitive export prices. Especially within the past couple years, corruption in the government has caused even more debt, which is beginning to take its toll on the average citizen. The real is weakening as the elections approach, as is to be expected. The strengthening dollar, on the other hand, is doing Brazil no favors.
There is a small glimmer of hope when it comes to inflation; the Central Bank projects that inflation will reach a low of 4.11% this year and next, shy of the 4.50% target. Estimates drop a bit lower for 2020 at 4%. This is good news because interest rates will remain the same. Many external factors affect whether or not foreign investors invest in emerging markets. Brazil is looking towards less intervention regarding currency controls, which may have disastrous short-term effects. Although these effects may hurt, it is simply alleviating pressure from past government decisions.
More Focus Should Be Put on China
Having said all of that, Cornelsen recognizes that Brazil remains one of the world’s top food producers and the largest country in South America. The future potential of the country cannot be ignored, even with crippling bureaucracy. We also cannot ignore the fact that China is poised to become the largest economy in the world, and they are always investing in public and private infrastructure. When China has an industrial boom, Brazil is one of the top partners they turn to for the massive quantities of raw materials they purchase. As far as industrialized products are concerned, Brazil cannot compete with China on most fronts.
In the past, Brazil has prospered from a commodity cycle in which China consumed almost everything Brazil could grow. It used this vast source of income to expanded social welfare programs, which in turn helped stimulate the economy. Diversifying should also be a priority for Brazil, considering its political and economic insecurity. Venezuelans are a good example of a people who did not diversify their net worth and are now suffering the consequences. Foreign currency, precious metals, real estate, and even crypto-currencies are worth looking into in the name of diversification.
In the end, the survival of Brazil’s upcoming financial disasters will be on the shoulders of the people rather than the government. Securing one’s assets is never something that the government is responsible for, even if there are big promises being made. If you are not a professional investor, you can even consult with an adviser, who could show you how to invest and diversify. Investors are holding their breath to see if enough of the right pieces fall into place after the upcoming elections. We can only wait to see if Brazil’s recovery will not be hindered by more misguided reforms and corruption acting to dismantle the country’s democratic institutions.