Last year, the Brazilian government’s intervention in various sectors led to heightened uncertainty for corporations, resulting in the postponement of pro-growth investments that are vital if Brazil’s economic growth is to recover in 2013. In the utilities sector, the government made changes to concession terms aimed at reducing electricity prices, whilst in the banking sector, public banks were forced to lower loan rates, squeezing the profitability of the private banks. There was even pressure placed on the Brazilian central bank to extend the interest rate cutting cycle, despite worrisome inflation data. This government interference caused uncertainty for investors and a fall in private sector investment, culminating in sluggish gross domestic product growth of 0.9% last year. The forecast for 2013 is that private sector investment could be the ‘swing’ factor for the economy.
2013 has begun with some signs of positive change in Brazil. The government has recognised that investments by the private sector are needed in order to spur an economic rebound. The government has re-examined its policies with respect to privatisations and has increased the rates of return offered to private investors. This has prompted a marketing drive to attract investors ahead of infrastructure concession auctions due later in the year. Importantly, having offered paltry returns in the last round, the finance ministry has indicated that more attractive returns will be on offer this time. In addition, there has been recognition that rising inflation is a problem. To this end, April saw the central bank raise interest rates from the record low level reached last year. Given the scale of the cuts in the past, coupled with loose fiscal policy (the use of government revenue collection and expenditure to influence the economy), this should not be viewed as an impediment to a reacceleration of growth.
The long-term outlook for Brazil is compelling. The country is resource-rich and has favourable long-term demographic trends (e.g. rising disposable incomes). However, the government has often created problems that have held Brazil back from reaching its full potential. The tide may be turning as the incremental changes described above indicate that the government is becoming more open and conciliatory with the private sector in order to promote investment. The hosting of the next World Cup and Olympic Games provides imposing deadlines that ensure progress has to be made. These events and the recent appointment of a Brazilian to head the World Trade Organization show the country will be in the spotlight like never before in the coming years. It is up to the politicians to ensure that an improving economic picture is part of that display.