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The aligning of the political establishment (with the election of Dilma Rousseff) with an economy which is once again reporting robust growth, set in the context of Brazil's infrastructure taking centre stage as the country hosts two major sporting tournaments, means Brazil has unprecedented potential. Currently, we are forecasting annual average real growth of 7.2% between 2011 and 2015, based on a number of positive factors:
Positives for growth:
* 2014 FIFA World Cup: US$11.3bn has been pledged by federal governments, states and municipalities involved, to be invested in construction of stadia, hotels and transport; * 2016 Olympics: US$14.4bn has been budgeted to prepare Rio de Janeiro to host the 2016 Olympics, with much of this expected to go towards infrastructure; * PAC II: BRL958.9bn (US$534bn) allocated to be invested in construction projects between 2011 and 2014, with 81.6% of this to come from the public sector. A further BRL631.6bn (US$351.9bn) to be invested beyond 2014; * Ring-fencing of infrastructure invest trash bins ments and all PAC II spending by President Dilma Rousseff meaning that the growth acceleration programme has not been hit by budget cuts announced in February, and should be immune to further spending cuts. * Real GDP growth will hinge on the improvement of Brazil's infrastructure, improving access to transport and warding off potential electricity shortages. The need for infrastructure investment is substantial - US$85bn of financing for infrastructure is estimated to be required by 2020, according to Banco do Brasil.
Erosion of Growth
On the face of it, our outlook for Brazil is optimistic and growth has the potential to be much higher based on the factors listed above. However, it is of note that we are only cautiously optimistic,, with complex bureaucratic and regulatory hurdles stymieing both public and private investment. The Brazilian government's good intentions have failed to materialise as investment on the ground due primarily to the shortcomings of its business environment, which have left inexperienced international investors reliant on local partners to navigate the sector.
Negatives capping growth:
* History of PAC I: by the end of 2009 only 40% of PAC investments had been realised, however, this reached 74% by the end of October 2010, illustrating an improvement in dispersing funding. However, this in the context of an election year, and it was the final year of the PAC, therefore momentum may slow in 2011. * Business Environment: There is a high level of bureaucracy and complex regulations - Brazil scored only 62.5 out of 100 in BMI's Infrastructure Business Environment Ratings; * Politicisation of infrastructure projects means the government is pushing through large projects regardless of feasibility (e.g. Belo Monte hydropower project and high-speed rail) * Shortage of local skilled labour; * High public debt levels: public debt at around 50% of GDP could limit investment ability; * Growing pressure on the government to cut spending, although BRL50bn of cuts was announced in February 2011 and infrastructure is c helicop ter technology urrently 'ring-fenced', there are calls for more, which could erode infrastructure investment. * The Brazilian development bank Banco Nacional de Desenvolvimento Economico e Social (BNDES), a financier crucial to infrastructure, is lending at unsustainably high levels to support PAC projects. The bank has had its budget cut in 2011, although it is unclear by how much; * Difficulty in accessing finance - commercial loans in Brazil are both expensive (due to high interest rates) and unfit for purpose, due to the inability of banks to provide loans beyond a 5-10 year period. In addition, the difficulty and expense of getting money in and out of the country means revenues are reduced and repaying loans is difficult.
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