Brazil clearly is one of the best places in the world to invest right now. Taking into account today's environment, however, the big question is if Brazil can weather potential global turmoil.
According to Brazil's Central Bank, the Brazilian economy looks well-armed to face that turmoil. Its growing cushion of nearly $198 billion in international reserves — combined with a continuous improvement in macroeconomic indicators — has reduced its external vulnerability in such a way that the country now has an investment-grade rating from Standard & Poor's.
Driving that amazing reserves pile is huge foreign demand for the raw materials that Brazil has in abundance, like iron ore, soybeans, and sugar for ethanol. The rise of China has as much to do with Brazil's good fortune as it does with good macroeconomics at home and long-awaited political stability.
Of course, if the U.S. were to enter a long, deep recession, then Brazil and the whole the world would be impacted. But that impact in Brazil, at least, will be far less than most people think.
Brazil’s own domestic demand now represents 8 percent of the country's economic growth while external demand is running at negative 1.8 percent, logical in a slowing world economy.
Household consumption at the end of the first quarter hit 8.6 percent, with the highest job creation since 2000 and rising. Consumer confidence stands at a high of 150 on the scale that tops out at 200. Gross domestic product (GDP) growth is forecast by the Central Bank at 4.8 percent this year, in line with the most recent survey of analysts who follow the country.
It’s also important to note that exports to the United States represent 15.1 percent (it was at 22.2 percent in 2003), while Europe accounts for 24.2 percent (the same as in 2003). Asia including China sits at 15.1 percent (up from 13.5 percent in 2003).
Latin America has become, together with Europe, Brazil's biggest export destination, at 24.5 percent (up from 17.7 percent in 2003). So, there is still huge room left for exports to Asia to grow!
When you go through all the latest data from Brazil’s Central Bank it becomes very clear that Brazil has, by far, many more positives than negatives.
Of course, if the U.S. were to fall off a cliff and go into a deep and prolonged recession, all economies in the world would be hurt. But Brazil’s $198 billion reserves cushion could mitigate such an impact.
All that said, investors should always look closely at all of the negatives.
It’s a fact that many reforms have been left undone during this ongoing commodity windfall. Another weak point is that Brazil's capital inflows have been, until now, short-term. This trend should now reverse dramatically since Brazil has finally obtained investment grade with what is termed a "positive outlook."
Big, institutional investors don’t invest long term in countries that lack investment-grade status. Getting that rating will help bring money into Brazil.
In fact, soon after achieving graduation from speculative to investment grade, Brazil promptly sold $500 million of bonds due in 2017. The 6 percent bonds yielded 5.30 percent, 1.40 percentage points above U.S. Treasuries at the time.
So, in my opinion, Brazil is one of the better places to invest, certainly for the medium to long term. It's also interesting to note that Brazil still has very high real interest rates, averaging 8.4 percent from 2006 to 2008.
Their target interest rate, the SELIC, has just recently been raised to 12.25 percent in order to fight inflation (one analyst targets 14.25 percent by year end). These kind of interest rates, however, are not a big problem for Brazilians who are long-used to living and prospering despite high interest rates.
Every investor should, as always, do his or her homework before investing.
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