Goldman Sachs’ chief Jim O’Neill, the same guy who coined the term BRIC, just got back from “Beautiful Brazil”… and among the gifts he brought back was a signed Neymar shirt. Anyway, in his latest note, he had some (mostly positive) things to say about Brazil, though he doesn’t like many of the government’s policies… of course.
“… How can anyone doubt the “B” in BRIC?
A large part of Brazil’s investor base still does, that is for sure. There is the great saying, “never listen to anyone about their own economy”. Virtually everyone I had detailed discussions with had the same, if not worse, view about the Brazilian economy’s growth potential and policy issues than they did back in the early days of post- BRIC life when many couldn’t see why it was placed in such illustrious company. The broad consensus view for 3 years was that, at best, growth potential was 4%. Now, this seems to have come down to below 4%.
I am not entirely sure what to make of this. It is certainly the case that the past decade’s success has raised the bar for Brazil to positively surprise for the decade as a whole, but 4% plus growth is quite achievable barring a massive external shock, so long as inflation stays low and stable. In fact, I return thinking that consensus growth for 2012 and 2013 might easily positively surprise. Indeed, one person we met suggested 2013 could be easily 6% (although he was quite negative about the longer term).
It is clear that the government is too keen to use spending as a permanent tool to try and boost growth. As I remarked, Brazil wants to be more like China, as China wants to be less like China. This is opposite of the way Brazilian government policies should be moving. Like all other BRIC and N11 economies, copying South Korea and trying to get policies to achieve Growth Environment Scores (GES) like them should be a clear goal of policy. If Brazil could move more down this path, with its 190 million people, it could easily achieve 5-6% trend growth.
I also discussed Inflation Targeting (IT) with many, and there appears to be a strong view that the central bank is moving away from its intensity of focus on it, which if were true, would be an issue that would greatly bother me. However, having discussed with so many, including those that have great experience on the topic, I wonder whether, in fact, they are becoming more “Australian-like” than “New Zealand-like” in their approach and simply being a flexible IT central bank. So far, it looks to me as though they have been quite sensible, and the most recent inflation report slowed more than expected.
As for the Real, it clearly seems too strong, but if real interest rates continue to decline and inflation stays within target, then this problem might start to be less burdensome than also widely believed. And in any case, as I pointed out to many, a strong Real is infinitely more preferable to Brazil’s historic dilemma with currencies, and a strong currency isn’t necessarily a barrier to being a strong exporter. In fact, the world’s best exporters often come from strong currency countries – Germany, Japan (well they used to be, no more, note Panasonic moving offshore completely!)”
Full letter below…