Investors need to be ‘warier’ on Brazil

In the realm of investor perceptions, few countries have undergone as great a transformation as Brazil – but the country’s new-found confidence is breeding complacency, says Nicholas Spiro at Spiro Sovereign Strategy.

He argues the markets are mistaking stability for durable growth, and holding Brazil to an indulgently low standard given its increasing international clout and huge economic challenges.

“Macroeconomic stabilisation should no longer set the benchmark for performance 14 years after inflation was tamed and 11 years after the adoption of a floating exchange rate and a fiscal responsibility law,” says Mr Spiro. “Brazil is now sufficiently established on the world stage to be judged instead on the basis of its ability to deliver strong and sustainable growth.

“Markets are overlooking the fact that among Latin America’s seven largest economies, Brazil’s dollar gross domestic product per head based on purchasing power parity grew the slowest after Venezuela’s between 1995 and 2009, according to the International Monetary Fund. And Brazil’s GDP per person grew at roughly one-third to one-sixth the rates of that of India and China during this period.

“For markets, the scale of Brazil’s development challenge will be the dominant post-election theme as short-term macroeconomic and longer-term competitiveness-related issues come to the fore, prompting investors to take a warier stance on Brazilian assets.”