Brazil No Economic ‘Superpower’ as Investment Lags: Week Ahead

Brazil’s rate of investment is failing to keep pace with demand sparked by President Luiz Inacio Lula da Silva’s stimulus programs, threatening to quicken inflation and force policy makers to increase interest rates.

As demand recovers after Brazil’s first recession since 2003 — helped by public spending, tax cuts and lower borrowing costs — investment in new capacity rebounded too slowly to guarantee near-term supply, according to Morgan Stanley and Credit Agricole SA. Quickening inflation and rising interest rates may slow gains in the benchmark Bovespa index from 80 percent this year to less than 30 percent in 2010, Morgan Stanley said.

“We have a lot of catching up to do,” Vladimir Caramaschi, Brazil strategist at Credit Agricole, France’s biggest bank by branches, said in an interview from Sao Paulo. “Investment is just not going to be enough to meet demand.”

Brazil, historically a laggard in investment in factories, machinery and other fixed capital, hasn’t changed course even as it recovers faster than most from the global recession. The so- called Brazil cost of taxes, bureaucracy, labor laws and interest rates that remain the highest among Group of 20 economies discourages investment, Caramaschi said.

‘Not the Same’

The Brazilian economy is “doing well,” Nobel Prize- winning economist Paul Krugman, 56, told journalists in Sao Paulo Dec. 2. “It’s not the same as to say it will become the economic superpower next year. The markets are reacting as if it will.”

Brazil’s real is up 34 percent against the dollar this year, the biggest advance among the world’s 16 major currencies, and the Bovespa index has outperformed benchmark measures in all of the 10 largest stock markets except China, according to data compiled by Bloomberg.

Krugman said he plans to sell some of his Brazilian assets because he is concerned the gains aren’t sustainable.

Investment accounted for 19 percent of Brazil’s economy last year, the most since the national statistics agency began tracking the data in 2000. That compares with the 41.8 percent investment rate of developing economies in Asia, led by China, and the world average of 24 percent, according to the International Monetary Fund.

Investment Rate

In the second quarter, Brazil, the world’s eighth-biggest economy, invested 15.7 percent of GDP. Caramaschi estimates the rate advanced to “a still very low” 16.5 percent in the third quarter.

The investment data will be released on Dec. 10, as part of the government’s GDP report.

The economy grew 2 percent in the third quarter from the previous quarter, when it expanded 1.9 percent, according to a Bloomberg survey of 13 analysts.

“There isn’t the slightest possibility Brazil can sustain its present pace of growth with this investment rate,” said Luis Fernando Lopes, who helps manage 5.6 billion reais ($3.3 billion) in assets as partner and chief economist at Patria Investimentos in Sao Paulo. To maintain 5 percent growth on average, Brazil would have to invest 22 to 24 percent of GDP, he said.

Ramiro Alves, a spokesman at the Finance Ministry, didn’t return a message left on his mobile phone outside regular working hours.

Brazil ranks 129th among 183 countries in the 2010 “Ease of Doing Business” index in the World Bank’s Doing Business report, trailing Swaziland and Bhutan. It fell two positions from last year, as indicators such as registering property, dealing with construction permits and getting credit, worsened.

Scrapped Investment

“I always borrow less money than I could use,” said Andre Barbierato, chief executive officer of Buffalo Investimentos, a Sao Paulo-based private equity firm with stakes in auto parts, clothing and engineering companies.

Jose Ricardo Roriz Coelho, the executive director of Vitopel do Brasil Ltda., Latin America’s largest maker of plastic films used for packaging, said he backed off buying $85 million worth of equipment to expand capacity.

The average interest rate on a business loan was 26.5 percent in October, according to central bank data, and government borrowing constricts credit for businesses, Barbierato said.

“Heavy taxes, expensive money, and the currency really make us think twice about investing,” Coelho said. “It’s increasingly hard to export because of the exchange rate, and the domestic market is flooded by cheaper imports.”

Policy makers may start increasing interest rates in the first quarter next year as economic growth accelerates, Marcelo Carvalho, Morgan Stanley’s chief economist in Brazil, said in an interview from Sao Paulo.

Rate Forecast

The central bank will push up the so-called Selic rate as much as 1.5 percentage points to 10.25 percent by the end of 2010, according to the median estimate in a Bloomberg survey.

Monetary policy is the biggest threat to gains in the Brazilian stock market, Morgan Stanley equity strategist Guilherme Paiva wrote in a report Dec. 1. In Paiva’s “best case Goldilocks scenario,” the Bovespa index would reach 85,000 by the end of 2010, from 67,603.52 on Dec. 4.

Morgan Stanley was the second-biggest U.S. securities firm behind Goldman Sachs before both converted to banks last year.

Markets Last Week

The real rose 0.5 percent last week closing at 1.7315 per dollar, from 1.7408 on Nov. 27.

In the overnight interest-rate futures market, the yield on the contract due January 2011 rose 5 basis points, or 0.05 percentage point, to 10.45 percent.

The benchmark Bovespa stock index gained 0.8 percent last week to 67,603.52 points. Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s biggest retailer, led the gains, rising 13.6 percent to 62.49 reais while Souza Cruz SA fell the most, losing 6.8 percent to 59.07 reais.

The following is a list of events in Brazil this week:

Event                                             Date
CNI Capacity Utilization (Oct.)                   Dec. 7
Trade Balance (Weekly)                            Dec. 7
FGV Inflation IGP-DI (Nov.)                       Dec. 8
FGV CPI IPC-S (Weekly)                            Dec. 8
Fipe CPI (Weekly)                                 Dec. 9
IBGE Inflation IPCA (Nov.)                        Dec. 9
IBGE Inflation INPC (Nov.)                        Dec. 9
SELIC Target – Central Bank                       Dec. 9
FGV Preview Inflation IGP-M (Weekly)              Dec. 10
GDP IBGE (3Q)                                     Dec. 10