Brazil's Hot Economy: What Could Spoil the Party
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By Maria Bartiromo,
The Fiscal Times
June 17, 2011

New worries about Brazil, one of the hottest places to invest in the last decade, are roiling the business world. Reason number one is that the  most powerful pro-business voice in Brazil's government resigned earlier this month following a scandal over his sudden enrichment, and that  has prompted concerns that his departure could trigger a leftward drift in economic policy.

Chief of staff Antonio Palocci, described by some as the most influential member of President Dilma Rousseff's government, said he quit to prevent a corruption scandal from further weakening her five-month-old administration. But as the government tries to rein in inflation and its soaring currency, the question on many minds is: Will tight money and new taxes on foreign capital derail one of the greatest economic growth stories on the planet? On June 16, in the face of signs that inflation is easing, Reuters reported that the Brazilian central bank hinted that another interest rate is coming. The benchmark Selic rate (the Banco Central do Brasil’s overnight lending rate, which is comparable to the Fed funds rate) is now at 12.25 percent.

Vulnerabilities to a Slowdown
On a recent trip to São Paulo, Brasilia, and Rio de Janeiro as part of a weeklong CNBC special on Brazil, I tried to gauge how vulnerable the country is to a slowdown.It was an eye opener to see firsthand the amazing transformation of the emerging powerhouse economy. Before I left for Brazil, I knew that money was pouring into the country – some $10.5 billion in foreign currency flows from trade and investments in March alone. I knew that virtually every CEO I interview tells me that they either have a foothold in Brazil and are betting on this region for growth orare trying to figure out how to set up business there. And I knew the country was rich in natural resources and assumed this leading producer of coffee, sugar, soy, maize, and iron ore – among  other commodities – was  benefitting from the massive demand coming from China and elsewhere.

What I did not fully understand was that this growth story is about much more than commodities. The boom in Brazil has a lot to do with the rising fortunes of its people. More than 30 million people have been lifted out of poverty in the past several years, and this new middle class is buying all sorts of things, from financial services to consumer products. Someone remarked to me that it feels like the U.S. in the 1950s.

People are climbing the income ladder. They have jobs (Brazil’s jobless rate, according to Bloomberg, was at 6.4 percent in April); they’re  making money; and they’re not afraid to take on debt, because they expect to have a job tomorrow and next month and next year. The pro-growth, pro-business policies put into place by the last two presidents, Fernando Cardozo and Lula da Silva, have proved enormously effective.

Inflation Worries Persist
But many are fretting that the absence of Palocci, who served as finance minister under Lula, could  diminish Rousseff's determination and ability to pass market-friendly policy changes such as a simplification of the tax code. Without him, other ministers may be encouraged to intervene in key industries such as oil.

One of the reasons that the bigger hand of government looms ever larger is a persisting worry over inflation: Consumer prices rose 6.55 percent year over year as of May. President Rousseff has said she is very concerned about accelerating inflation and will focus on controlling it. But she must walk a fine line and not cut off the flow of foreign capital – much  of it invested in commodities – that  has fueled the country’s fortunes. 

Brazil is on the verge of becoming an agriculture superpower. The agriculture minister told me he recently returned from China where he managed to lock up new deals. Even with all those exports, the country remains self-sufficient in food and oil.

In fact, many expect Brazil to move from being an oil importer to becoming a major oil exporter in the coming years because of important new reserves discovered offshore, as well as its vigorous biofuels program Brazilian billionaire Eike Batista told me he is expecting to become the richest man in the world because his company, EBX Group, sits on more than $2 trillion dollars in oil, iron ore, and other reserves. 

The Bovespa stock exchange is also a manifestation of this bullish economy. CEO Armenio Fraga told me he is expecting IPOs to catch fire. He looks for mining and technology companies to be among the leading sectors to list. He is expecting hundreds more in the coming years. And as financial literacy rise, the Bovespa is expecting some 5 million new individual investors in the coming few years, Fraga said.

Of course, nothing moves in a straight line, and there will be plenty of growing pains in the years ahead. There is still far too much poverty, and security is a major issue. I did feel vulnerable when not with the security team CNBC had on the ground. And the favellas, or slums, are a stark reminder that the country has much more work to do.

But Brazil is gearing up for two major economic catalysts: the 2014 World Cup and the 2016 Olympic Games. So the next big boom will be in infrastructure, as this massive nation prepares to be in the global spotlight for almost half a decade, given the intense interest that these events generate even before they happen. And the country is hoping foreigners will want to invest in the build-out of roads, bridges, tunnels, streets, and new buildings. Most of all, though, the government’s policies and relationship with business will be critical to where Brazil’s story heads next.

Maria Bartiromo is the anchor of CNBC’s Closing Bell and the author of The Weekend That Changed Wall Street .

Related Links:
Developing Countries Plan to Challenge U.S. Dollar (The Fiscal Times)
Sex, BRICS, and PIGS at the IMF (The Fiscal Times)
Brazil’s Big Challenge:  Protecting Its Seniors (The Fiscal Times)