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Brazilian economy at its most robust in 25 years

With 5.3% growth, it may have turned corner to stability

(SAO JOSE DOS CAMPOS, Brazil) 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 last 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 Oderbrecht construction company, in Salvador in Brazil’s north-east. It is managing billions of dollars worth of international public works projects, including its second US$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 last month 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 US$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 is expected to come in at 5.3 per cent last 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.

Foreign investors have taken notice, evidenced by the 44 per cent increase in the Bovespa stock index last 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 last year will fall short of those countries.

Brazilian companies held a record 100 initial public stock offerings last year, five times the number in 2006, 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 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 US$30 billion that foreigners have plowed directly into Brazilian companies in so-called foreign direct investment last year, a 60 per cent increase from 2006. 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,’ Mr Franco said. ‘That’s what investors are anticipating.’

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

 

Source: LAT-WP (Busines Times 2 Jan 08)

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