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BRAZIL
Interactive map
An oil-rich countrythat focuses onrenewable resources
FT.com/brazil-map
FINANCIAL TIMES
SPECIAL REPORT
|
Tuesday July 7 2009
 www.ft.com/brazil-2009
Inside this issue
Exchanges
Even in theglobal panic,
JonathanWheatley
says trading hasremained unshaken
Page 2History 
Paulo Sotero
peers into recenthistorical events toreflect on how thecountry is developing
Page 2Interview 
JonathanWheatley
talks toGuidoMantega,(pictured) Brazil’s financeminister
Page 3World stage
JonathanWheatley
explores thecountry’s growing status asa global force
Page 4‘Black is culture’
The north-east’sslave heritage isa source of prideand a millstonearound itsneck, writes
OliverBalch
Page 4
Dancing through the economic crisis
F
rancisco Alves andhis wife Fernandahave just investedR$70,000 ($35,860),saved up over the pastthree years, to install newcold-rooms and other equip-ment at their “micro-dis-tributor” in Recife, north-eastern Brazil.For two days their 15saleswomen, earning 30 percent commission, have beenpushing hand carts aroundthe local streets selling Nestlé products – yoghurts,biscuits, coffee – door todoor.They used to distribute acompetitor’s products butswitched to Nestlé becauseof the marketing and sup-port they were offered andbecause their customerscould increasingly affordwhat is seen as an aspira-tional brand.“Based on what’s hap-pened over the past threeyears, we plan to spendanother R$70,000 nextyear,” Mr Alves says.And the global crisis?Of course, they say, therehas been some cooling inthe market. But this crisisis different from the manyothers that have shakenBrazil over the past coupleof decades.“Margins haven’t disap-peared as they did the othertimes,” Mr Alves saysIn fact his saleswomenhave just had their best twodays ever.A couple of hours inlandat Caruaru, the annual Fes-tival de São João – a tradi-tional winter party featur-ing peasant costumes andforró music – is in fullswing. In much of thenorth-east, the globallyrenowned Carnaval is insig-nificant by comparison.At Caruaru, about 1.5mpeople will visit the festivalbetween May 30 and July10, up to 80,000 of thempacking a square most daysat the top of the town for 27shows of pulsating, feel-good country music.This year, sponsorsfunded the party to thetune of R$6m, a 30 per centincrease on last year,according to the organisers.Companies such as AB
Is the Latin American giant  finally living up toits promise?
 Jonathan Wheatley 
investigates
Inbev – the world’s biggestbrewer, largely created andled by Brazilians – are keento get their products infront of what has becomeone of Brazil’s fastest grow-ing markets.AB Inbev recentlylaunched Brahma Fresh, amilder-tasting but stillpotent brew, for distribu-tion only in the north-east – a region that RicardoNeves, regional marketing manager, describes as“spectacular”.This is one corner of Bra-zil’s huge domestic marketof 190m people, a marketcapable of supporting notonly distinct brands butalso entire industries.Take the “flex-fuel” car.More than 90 per cent of new cars sold in Brazil have“flex” engines, capable of 
A chance to celebrate amid the global gloom: Carnaval is renowned throughout the world but in north-east Brazil the annual Festival de São João is far more significant
AP
Continued on Page 3
 Voters want transparency and respect from leaders
Reading the political pagesof Brazil’s newspapers it iseasy to form the view thatnothing has changed sincethe bad old days of theearly 1990s, when the coun-try teetered on the brink of collapse, with runawayinflation and a presidentsoon to be defenestrated byimpeachment proceedingsfor corruption.Then, as now, the paperswere full of extraordinaryrevelations concerning thequestionable behaviour of Brazil’s political leaders.Then, as now, most of thosepoliticians were able, with agood dose of chutzpah, toride out the storm.The current head of theSenate, a former president,regards well-documentedrevelations of nepotism as“a lack of respect” for his 50years of public service. Hispredecessor saw nothing wrong in an employee of aconstruction companydelivering cash payments tohis former lover. Congress-men formerly regarded asabove suspicion have beencaught handing out airlinetickets paid for by the tax-payer to friends and rela-tions and done little morethan apologise, if that. Evenformer president FernandoCollor de Mello, whoresigned in disgrace in 1992,is back in the Senate as apowerful government fixer.It is hard to reconcilesuch old-fashioned greedand graft with the modernBrazil emerging on theworld stage as an exampleof successful government.Yet these two Brazils do co-exist. And while the oldways will not disappearsoon, new ways are growing up beside them.“There is a historical, cul-tural problem of a certainbackwardness which is veryhard to overcome,” saysJorge Gerdau, chairman of Grupo Gerdau, one of Bra-zil’s biggest steelmakers,and of the MovimentoBrasil Competitivo, a pri-vate sector organisationdedicated to reducing Bra-zil’s enormous tax burden-through efficiency in publicspending. “But there is alsoincreasing public demandfor transparency andrespect for the electorate.”There is plenty of evi-dence to support this view.Mr Gerdau says his initia-tive got off the ground inthe 1990s, when a group of businesses from his homestate of Rio Grande do Sulin southern Brazil devel-oped a management qualityprogramme that expandedinto the public and “third”sectors. One example is acharitable hospital wherethe programme increasedthe usage of operating thea-tres from 50 per cent of capacity to 80 per cent.Since 2003, INDG, a man-agement consultancy thatworks with the MBC, hasbeen selling managementadvice to state govern-ments. The first was MinasGerais in south-eastern Bra-zil, where INDG helpedclear the state’s debts of R$1.7bn in two years from2003. Its success in putting the state’s finances in orderhelped secure the re-elec-tion of Governor AécioNeves in 2006.INDG insists it is entirelynon-political. Eight morestates have become clients,led by government andopposition governors, andnot only in the more devel-oped south and south-east.Pernambuco, Alagoas andSergipe in the less devel-oped north-east hired INDGand are recognised as exam-ples of more modern, effi-cient government. The con-sultancy also works forsome of Brazil’s biggestmunicipal governments andwith the federal govern-ment’s planning ministry.Welerson Cavalieri, a con-sultant at INDG, says hiscompany takes manage-ment systems that havebeen tried and tested in theprivate sector and appliesthem to public administra-tion. State budgets, he says,are little more than state-ments of intent to whichpoliticians have little com-mitment. “Our work is toset real budgets with effi-cient systems of control, sothat monthly targets are setand evaluated at all levels,”he says.Why should politiciansbother? “Voters are paying more attention to the qual-ity of services provided bythe people they elect,” saysMr Cavalieri. “For politi-cians today, managementability is synonymous withvotes. If you look at the lastround of elections for stategovernor, the ones running for re-election who got thehighest votes were thosewho had demonstrated thebest management skills.”As he points out, suchapproval did not followparty lines, with candidatesfrom government and oppo-sition parties doing equallywell. At the next presiden-tial election in October 2010,Mr Cavalieri says manage-ment ability will be among the deciding factors.It may well have been anissue in the 2006 poll, whenPresident Luiz Inácio Lulada Silva – the most popularpresident in Brazil’s his-tory, who was seeking re-election – was forced into asecond round by GeraldoAlckmin, the former gover-nor of São Paulo state whoseemed to epitomise mod-ern managerial efficiencyduring his campaign.Unfortunately for MrAlckmin, personality alsostill counts and his short-age of social skills cost himdearly in the final stages.Unless Mr Lula da Silvasurprises everyone by try-ing to run for a third term – which would demand achange to the constitutionand could cause severedamage to his democraticcredentials – his enormouspersonality will no longerbe a factor.The two most likely lead-ing contenders are JoséSerra, governor of SãoPaulo and a leader of thecentrist opposition PSDB,and Dilma Rousseff, MrLula da Silva’s most power-ful minister and a memberof his leftwing PT.Both will make much of their management ability.Mr Serra earned a name asa potent manager as healthminister under Mr Lula daSilva’s predecessor and hasstrengthened that reputa-tion in São Paulo. Ms Rous-seff is the president’s right-hand woman and in chargeof running the govern-ment’s flagship infrastruc-ture investment.Given that neither hasmuch charisma and bothare regarded as prickly,each will hope voters paymore attention to theirachievements than thewarmth of their smiles.
POLITICS
Old-fashionedgreed and graft areunder pressure, writes
Jonathan Wheatley 
‘There is ahistorical, culturalproblem ofbackwardnesswhich is very hardto overcome’
 
2
★
FINANCIAL TIMES
TUESDAY JULY 7 2009
Brazil
Contributors
Jonathan Wheatley 
São Paulo Correspondent
Javier Blas
CommoditiesCorrespondent
Oliver Balch
FT Contributor
Paulo Sotero
FT Contributor
Tom Griggs
Commissioning Editor
Steven Bird
Designer
Andy Mears
Picture EditorFor advertising details,contact:
John Moncure
on:+1 212 641 6362;fax: +1 212 641 6544;e-mail: john.moncure@ft.comor your usualrepresentative
Investors prepare for a rush to the market
If anyone still doubted Brazil’ssignificance as a global equity marketthose doubts were surely swept awaylast week as VisaNet, the Brazilianarm of the credit card giant Visa,completed the biggest IPO in Brazil’shistory and the world’s biggest this year. The sale raised $4.3bn, priced atthe top of its target range, and theshares jumped 15 per cent as tradingbegan last Monday. The vast majorityof buyers were foreign investors.The deal shows how ready manyinvestors are to come back to Braziland their appetite for a piece of itshuge domestic market – in this case,a play on its still largely unservicedcredit market.VisaNet’s success will encourageother companies to come to market.The next couple of months could seeone of the highest levels of issuancein the country’s history. But worriespersists about how sustainable thecoming round will be.A secular drop in interest rates tosingle digits and low levels of debtsuggest the country will suffer ashorter recession than most of therest of the world, says Jean-MarcEtlin, executive vice-president andhead of investment banking at localBanco Itaú BBA in São Paulo. Brazilimplemented counter-cyclical policiesearly and while interest rates are downsubstantially they are still as high as9.25 per cent, leaving the governmentroom for further stimulus measures,adds Scott Piper, executive directorand portfolio manager at MorganStanley Investment Management.Signs of economic recovery arelaying the groundwork for the issuancebonanza. Up to mid-August, Braziliancompanies could raise as much as$8bn, according to Nicolas Aguzin,chief executive of Latin America atJPMorgan.Cosmetics company Natura isplanning to issue more shares andmulti-brand firm Hypermarcas has alsoprepared a prospectus for investors,although both have been coy aboutdetails and shares suffered on theannouncements, as investors feardilution.This jittery reaction shows howbrittle confidence remains. The rush tomarket comes because cash-starvedBrazilian companies fear the windowof opportunity in equity markets mayprove fleeting. Even though bankersand investors are sounding moreoptimistic, the uncertain outlookglobally means that the durability ofthis latest recovery is anything butcertain.Then there are the scars left by thelast boom and bust in equity marketswhen “investor appetite wastremendous for anything new”, saysMr Piper. That allowed investmentbankers to turn a fast buck. Not alldeals were well executed and manydid not perform well, he notes.That means investors will be morediscerning than before. New dealsfrom large companies that have ademonstrably successful track recordand proven management should get agood hearing. Mid-cap, small-cap anduntested companies will mostly getthe brush-off, Mr Piper believes. Thisis a market that is selective andfocused on confirmed stories, such asfollow-ons, adds Mr Etlin.All may not be lost for companieswith a less obvious appeal. Mid-capcompanies are increasingly showinginterest in listing directly on US equitymarkets, according to Mr Aguzin.The spotlight on the equity marketsmeans corporate debt issuance, longthe wallflower at Brazil’s capitalmarkets party, still has a limited dancecard. “But falling rates have stimulatedtwo sovereign deals and onefixed-income bond from the BNDES,the national development bank,” saysMr Aguzin. Furthermore, assetmanagers are starting to weigh upcorporate issuance more seriously as yields on government debt tumble.This should provide a base forcorporate fixed-income deals over thelonger-term. In the short-term,international markets will continue toprove more fertile ground, with$10bn-$15bn in new issuance expectedin the second half of the year, a bigincrease over the first half, if nothingspectacular by historical standards,says Mr Aguzin.Brazilian companies are keepingtheir fingers crossed that the equityrally of recent months will keep itsmomentum. Their very haste to cometo market is already making investorsnervy and the irony is that the sheervolume of planned deals couldoverwhelm a fragile recovery.
John Rumsey 
Exchangegains fromcaution and strict rules
 A 
s often happens in times of crisis, Brazil’s capital mar-kets were the first choice lastyear for investors needing cash to cover losses in the first waveof subprime panic. The sell-off wasgigantic – and, as confidence hasstarted to return, half the outflowshad already been reversed before theend of last month.Yet throughout all the turbulence,Brazil’s capital markets haveremained unshaken.“At the height of the crisis and of volatility, when investors neededliquidity, the markets worked,” saysMaria Helena Santana, head of theCVM, Brazil’s securities commission.“They stayed open and the counter-parties were there. Of course, this wasin line with a narrow exit door. Butthe BM&FBovespa [the multi-assetexchange formed last year by themerger of São Paulo’s derivates andstock exchanges] was solid through-out.”One reason investors can operatewith confidence on the BM&FBovespais that the exchange itself acts as acentral counterparty in all trades.“The exchange interposes itself between the two parties,” says PauloOliveira, director for new business.This is a legacy of times when tradersin Brazil had little capital and oftendid not trust each other to deliver.But as the market has grown – andthe BM&FBovespa is now the world’sfourth-biggest exchange in terms of market value, bigger than names suchas the London Stock Exchange, NYSEEuronext and Nasdaq – it has proveda valuable guarantee that trades willbe completed.
Mr Oliveira says stability is furtherunderpinned by Brazilian regulationsthat force brokers to provide inform-ation on every trade executed by everyclient. In many developed markets,brokers are obliged to reveal only thenet position of their clients – so that if a client is long in one asset and shortin another, his exposure will count aszero. But if something goes wrong oneither side of any trade, he would stillbe a source of risk.
This is true not only of equitiestrades on the Bovespa segment butalso of over-the-counter derivativestrades – which must all be registeredat the BM&F.Rules governing the fund industryare similarly strict. All funds must beregistered at the CVM. They mustpublish their investment strategy andreveal the make-up of their portfoliowithin 90 days of any change. Theymust describe in their prospectus theway they will mark asset prices tomarket values – the rule in Brazil forseveral years – and be inspected tomake sure they do so. “Our rules aremore wide-ranging, even for qualifiedinvestors,” Ms Santana says. “Wereally concentrate on getting goodquality information to the investor.”In the banking sector, too, rules arestricter than in many other countries.Banks must publish consolidatedresults – no off-balance sheet vehiclesor investments in non-financial com-panies can be hidden away as theyoften were in the past. This is a leg-acy of an overhaul of the banking sector carried out in the late 1990s andis something, says Ross Levine, abanking industry specialist at BrownUniversity, many developed nationscould learn from. “If you are going to ask for one major output from aregulatory authority it would betransparency about the riskiness of abank,” he says.Other countries may also be watch-ing with interest as Brazil extends therole of public sector banks in theeconomy. While lending from privatesector banks is only about 2 per centmore than it was at the height of thecredit crisis last September, lending by public sector banks has risen bynearly 20 per cent, according to thefinance ministry.Banks are more conservative thanin many other jurisdictions, too. Manycountries use guidelines laid down bythe Bank for International Settle-ments in Basel – the central bank of central banks – saying banks shouldhave assets equal to at least 8 per centof their lending. The minimum inBrazil is 11 per cent but the averagereal level is closer to 18 per cent.Alexandre Tombini, head of regula-tion at the central bank, says Brazilhas tended to take a more conserva-tive approach, after emerging fromdecades of economic volatility in themid 1990s and shortly afterwardsrestructuring its banking system.“Where we have used frameworksestablished in other markets, we havecustomised them to our own economicreality,” he says. “Our calibration hasbeen very conservative.”Brazil’s regulators still face chal-lenges. One of the biggest is bringing down the enormous spreads in thebanking industry – the differencebetween what banks pay to depositorsand what they charge to borrowers.While the central bank’s target over-night interest rate recently fell below10 per cent a year for the first time inits history, rates for credit cardsand overdrafts are often more than150 per cent a year.Among the reasons are high taxrates, obligations on banks to lend tosectors such as housing and farming,high reserve requirements – theamount of their deposits banks mustpark at the central bank – not to men-tion big profits.But reserve requirements, whileoutdated in the view of many observ-ers, have proved useful as the centralwas able to release R$100bn fromthem to provide relief to liquidity-starved banks when the crisis hit.Expect Brazil’s regulators to keep err-ing on the side of caution.
CAPITAL MARKETS
In spite of global panic, trading has remainedunshaken, says
 Jonathan Wheatley 
‘Our rules are morewide-ranging, even forqualified investors. Wereally concentrate ongetting good qualityinformation to the investor’
Traders at the Brazilian Bolsa de Mercadorias e Futuros
Bloomberg
Stability and democracy are catalysts of success
Presidente Prudente, a bus-tling community of 206,000in the south-western cornerof São Paulo state, offers agood view into Brazil’s rise.From its unremarkablebeginning as a stop on theSorocabana railway whencoffee was king, it is nowone of two dozen prosper-ous municipalities at thecentre of one of Brazil’s suc-cess stories – agro-industry.Less than one hour to thewest, a state-of-the art etha-nol plant is nearing comple-tion. Conquista do Pontal,is one of three plants being built by ETH, a subsidiaryof Grupo Odebrech withSojitz Corporation, the Jap-anese trading company.Agriculture has histori-cally been associated withslavery and, in recent dec-ades, with the abuse of workers rights. But, thanksto the rapid expansion of the sugar ethanol industryalongside flex-fuel cars thatwere introduced in 2003, itis now being transformedinto an industry that isemblematic of the SouthAmerican country’s emer-gence as a social innovatoron the world stage.From 1968 to 1973 – theworst years of repression bythe military regime thatruled the country until 1985– impressive growth ingross domestic product ledto predictions of a rise toglobal prominence. Thatprosperity, however, provedshort-lived and unevenlydistributed, aggravating thehistoric social inequality.The oil shocks of themid-1970s exposed the fra-gility of Brazil’s positionand caused a crisis thataccelerated the end of mili-tary rule. It took almost adecade of civilian leader-ship and a series of crisesfor Brazil to find a route toeconomic stability in apolitically plural, open andcompetitive environment.The feat was accom-plished in mid-1994 by ateam lead by Fernando Hen-rique Cardoso. The combi-nation of democracy andprice stability, achieved forthe first time in the coun-try’s history, is the root of much of the current goodnews coming from Brazil.Under president Cardoso,privatisation of telecommu-nications, mining, aviationand highways and the regu-latory reform that endedthe monopoly of Petrobrasfurther contributed to Bra-zil’s international economicintegration. Exposed tointernational competition,companies historically asso-ciated with Brazil’s statedriven development, suchas Petrobras, CVRD andEmbraer, became successfulglobal enterprises.Gerdau, Odebrecht, busbuilder Marcopolo, Natura,the cosmetics maker, andother private companies fol-lowed the trend of seeking expansion abroad, generat-ing further pressure forinternational integration.The roots of this historicchange have grown deeperunder current PresidentLuiz Inácio Lula da Silva. Aformer union leader whobuilt his career denouncing the liberal reforms of the1990, rose to power in 2003after promising, in hisfourth presidential cam-paign, to embrace and pre-serve the economic stabilitybrought the reforms heonce criticised.Stability, world growthand income distributionprogrammes have contrib-uted to a lowering of thecountry’s notorious levelsof inequality and to theexpansion of the middleclass, which now encom-passes half of the popula-tion.Brazil’s resilience to thecurrent global crisis under-mines the argument thatthe recent economic successof South American’s giantwas simply a byproduct of good luck made possible bythe rapid expansion of theworld economy before lastyear’s crash.While it is true that Bra-zil was shielded from theworst effects of global melt-down by the shallowness of its capital markets and itslimited exposure to theinternational economy, thecountry still increased itspresence on the worldstage.According to most meas-ures, last year the countrytook Canada’s place as thesecond-largest economy of the Americas, after theUnited States. It is 50 percent bigger than Mexicoand represents close to 60per cent of South America’sGDP, compared with 40 percent in 1980.As the countryapproaches next year’s pres-idential election, the goodnews is that the worldseems to have “brazilian-ised” its approach economicpolicy, responding to thecrisis with heavy stateintervention.Furthermore, none of thetop candidates to succeedLula in January 2011, in astill unpredictable electionscheduled for October 2010,advocate a change in thedirection of the economicpolicies that helped propelsBrazil’s current rise.
 Paulo Sotero is director of the Brazil Institute at theWoodrow Wilson Inter-national Center for Scholars
HISTORY
 The sugar ethanolindustry mirrors the nation’s rise,says
Paulo Sotero
 Natural advantagesshould sweeten deals
A large landmass, warm cli-mate, abundant water and largeamounts of unused fertile land – these are the elements that havemade Brazil a leader in globalagriculture commodities mar-kets, according to PresidentLuiz Inácio Lula da Silva. Healso believes they are likely tofacilitate further growth in itsfood exports.“Brazilian agriculture hasundergone enormous improve-ment in recent decades, trans-forming entire regions into richfarmlands and achieving globalpre-eminence in the productionof several agricultural commodi-ties,” says Fabiano Costa andEmma Cardy-Brown in theirreport “Investing in Agricul-tural Land in Brazil” by AgriInvestments Publications.“In the process, considerablewealth has been created wherepreviously there was often littlemore than subsistence farming,”they add. “Not only has the gen-eral population seen animprovement in living stand-ards but also landowners haveseen their personal fortunes risedramatically.”Starting almost from scratchin the early 1970s with the helpof Japanese trading houses suchas Mitsui, Brazil has become theworld’s second-largest exporterof soyabeans – a key commod-itiy for livestock feed in China.The country is also theworld’s largest exporter of sugarand coffee and plays criticalroles in corn, in which it is thethird largest exporter, livestockand lean hogs, in which it is theworld’s largest and third-largestexporter, and rice, where it isthe 10th largest exporter.Brazil’s natural advantages,particularly the large stock of land and abundant water, willcontinue to enhance the coun-try’s critical role in global agri-cultural markets. However, thefinancial crisis has also high-lighted vulnerabilities of therecent expansion, notably alarge accumulation of debt.In Mato Grosso, Brazil’s keystate for soyabean production,banks are repossessing farmmachinery while credit for ferti-liser and other inputs has driedup. Some farmers are selling land or tractors to pay debts,while the government is trying to extend the terms of loans toease pressure on farmers.Elsewhere in Brazil, finance isso tight that Bayer, a largeEuropean chemical company, isaccepting grain as payment foragrochemicals as a way to staveoff a slowdown in sales as farm-ers struggle to obtain bankloans to raise cash.The sugar sector is emblem-atic of the overall debt problem,but experts say the sector alsoserves as an indicator that,through consolidation, Brazil’sagriculture industry couldemerge stronger from the crisis.Brazil’s capital-intensivesugar industry, which leveragedits expansion on cheap debt, hassuffered under the weight of thecredit crunch and low prices formost of 2007 and early last year.Five sugar companies withtotal production of about 1mtonnes – about 4 per cent of thecountry’s exports – have appliedin the past 18 months for “judi-cial recuperation”, the Brazilianform of US Chapter 11 bank-ruptcy protection. The sector isnow undergoing a rapid consoli-dation, with companies such asCosan SA Industria e Comercio,the world’s biggest sugar-caneprocessor, buying troubledsmaller rivals.Another key problem is thelack of adequate infrastructure– particularly roads – to trans-port crops from the frontierareas of the cerrado, near theAmazonian forest, to export ter-minals on coast of the Atlantic.Although Brazilia has investedconsiderable amounts in logis-tics, traders say the countrylags behind its neighbourArgentina on infrastructure.Brazil’s environmental recordis also a problem – the push toincrease agricultural productionhas come, at least in part, at thecost of cutting down the fringesof the Amazonian rainforest.Although some in the indus-try refers to this reputationdamage as one of the “myths”about the Brazil’s farming industry, the government isaware of the problem and istightening regulations about theexpansion of farmland.Mr Costa and Ms Cardy-Brown, echo a widely-held viewamong industry participantsand acknowledge in their reportthe current difficulties of farm-ing in the country, but they add:“Brazil is definitely not for theuninitiated but, despite the tur-bulence in world markets, itcontinues to offers huge oppor-tunities.”One of these opportunities isthe local food market: Brazil’s200m population is becoming more affluent and is demanding more and more varied food.But the export market islikely to continue to dominateproduction as Brazil is a worldleader in low cost agriculturalcommodities, particularly soya-beans.Analysts also continue topoint to natural factors such ashigh soil quality and favourableweather – particularly rainfall – application of the latest technol-ogy such as genetic modifiedorganisms to achieve higheryields and a move towardslarge-scale farms that achieveeconomy of scale: “As a conse-quence of these factors – anddespite some trade barriers – the trend has been for Brazil toconsistently increase exportsyear-on-year,” the Investing inAgricultural Land in Brazilreport states.
COMMODITIES
 Javier Blas
reports onagriculture’sadvantages and thepitfalls the sector needs to avoid
Chopped down to size: the sugar industry is facing a period of consolidation because of low prices and a lack of credit
AFP
Brazil is definitely notfor the uninitiated but,despite the turbulencein world markets, itcontinues to offershuge opportunities
 
FINANCIAL TIMES
TUESDAY JULY 7 2009
★
3
Brazil
Dancing its way through theglobal economic crisis
running on gasoline or eth-anol or any mixture of thetwo. This means motoristscan decide at the pumpwhich fuel to buy, depend-ing on price.Flex-fuel cars have helpedBrazil become the world’ssixth biggest auto producerbut they are made almostentirely for Brazilians.And the global crisis? Ithit the auto industry hard,because sales depend oncredit and credit disap-peared from Brazil last yearas it did from the rest of theworld.But the governmentpumped liquidity into theeconomy by releasing R$100bn from banks’reserve requirements – theshare of their deposits theymust park at the centralbank – and temporarilyremoved vehicle sales taxes.In May, a quarter of a mil-lion cars were sold in Brazil– 2 per cent up on May 2008.This is the Brazil thatfinally, after years of unful-filled promise, is catching the world’s attention – andsucking in foreign directinvestment, while manyrivals go without.It is a mature democracywith a diversified economy,a young, adaptable popula-tion revelling in increas-ingly stable employmentand rising incomes.It is also a rising power infood and industrial com-modities, a big futureexporter of oil and home tothe world’s fourth biggestderivatives and equitiesexchange.But it is also a Brazilwhere old, bad habits diehard and where policy mak-ers are still content, as theBrazilian expression has it,to push unappealing fiscalproblems forward with theirstomachs. And the fact thatBrazil appears to be coming out of the global crisis morequickly than expected doesnot mean no damage hasbeen done, nor that it isimmune to further globaldownswings.Instead of consistentlychalking up primary fiscalsurpluses (not including debt repayments) as it hasfor the past few years, thegovernment has recentlygone into the red, reflecting not only a slump in tax rev-enues but also the high costof its stimulus packages,including tax cuts, subsi-dised credit and – most wor-ryingly for the future – more public sector jobs andhigher public sector pay.Why worry? After all, big-ger, more developed econo-mies than Brazil’s are going into debt to a much morealarming extent. But it isprecisely because it hasdone much to put its fiscalhouse in order that Brazilhas become so attractive toinvestors. And the govern-ment has been able to pro-duce primary surpluseslargely because tax reve-nues have been rising evenmore quickly than publicspending – a trick it willnot be able to pull off forever.Ever since Fernando Hen-rique Cardoso – the prede-cessor to President LuizInácio Lula da Silva – launched the inflation-bust-ing Real Plan in 1994, therehas been a well-known listof “strategic” reforms thatBrazil must enact if it is toachieve sustainable, fasterrates of growth and thedeveloped nation statusthat is coming into view butremains tantalisingly out of reach.There is still ambivalenceabout how such reformshould be achieved. GuidoMantega, finance minister,told the Financial Times inan interview for this reportthat he is preparing to doaway with the 25.5 per cent“contributions” thatemployers must pay on topof payroll to a slew of wel-fare and educational insti-tutions.This, without a doubt,would remove a big elementof the
custo Brasil 
that sapsthe competitiveness of Bra-zilian business.Yet there is no intentionto tackle the rigidities of Brazil’s labour code – imported wholesale fromMussolini’s Italy – todeliver real dynamism andagility to the jobs market.Similarly, the governmentprefers to give targeted taxbreaks to labour-intensiveparts of the economy ratherthan tackle the muchharder job of pushing ameaningful tax reformthrough Congress, deliver-ing greater productivity andcompetitiveness to all.Two storm cloudsthreaten to spoil Brazil’sotherwise bright and sunnyoutlook. One is the dangerof further trouble from theglobal crisis.The other is the dangerthat this or a future govern-ment, emboldened by theglobal distaste for free mar-kets, may drift away fromthe path of reform towardsone of increasing stateintervention and control of the economy.Yet Brazil seems unlikelyto veer off course intoadventurism of any kind.The country has been fol-lowing broadly the sameeconomic policies for thepast 15 years, under onecentre-right and oneleftwing administration.That may not sound likethe full political spectrumbut – unlike, say, Mexico,which has yet to put aleftwing government to thetest – there is no seriouscontender for governmentin Brazil who could beexpected to jeopardise theachievements of the pastdecade and a half.One reason is that in the1980s and early 1990s, Bra-zilians tired of quick-fixpopulism as its experimentswent badly wrong.Another is that Brazil,unlike Russia, India andChina, with which it is con-stantly compared as a mem-ber of the Bric group of big emerging nations, is notonly a mature, stable anddiversified economy butalso one largely unthreat-ened by social, demographicor economic upheavals.Its institutions havedeveloped slowly and sol-idly. Some economists com-plain that the central bankneeds de jure as well as defacto independence. Yet anyattempt by government, forexample, to make it cutinterest rates at the strokeof a pen would risk itsboard walking out en masseand plunging the countryinto crisis.“There are powerful con-straints on the will of thepresident,” says Maílson daNóbrega, a former financeminister and now head of Tendências, a São Pauloconsultancy.As well as the strength of democracy and institutions,he points to Brazil’s inde-pendent, investigativemedia and the population’sabiding intolerance of infla-tion.Such constraints onpower, he says, are akin toEngland’s Glorious Revolu-tion of 1688 and are whatmakes Brazil different fromsome of its neighbours andother emerging marketrivals.This does not mean Bra-zil’s work is done. Every-where you look in the coun-try, the old Brazil ispresent: in its dilapidatedroads and other infrastruc-ture, its out-of-my-way driv-ers, the threat of violentcrime and the acceptance of graft as normal in publiclife.But if talk of green shootsmakes sense anywhere inthe world it is in Brazil, anemerging world leader infarming, mining, oil, eveninvestment banking, andwith a home market itsrivals can only dream of.
There is nointention to tacklethe rigidities ofBrazil’s labour code– imported fromMussolini’s Italy
Continued from Page 1
Interventionist basking innew economic orthodoxy 
G 
uido Mantega, Brazil’sfinance minister, isfinally in his element.For years he lan-guished in opposition as eco-nomic adviser to the leftwing PT (Workers’ Party), his viewsclashing with the orthodox,market-friendly policies intro-duced by the previous govern-ment and which the Lulaadministration surprised manyby keeping largely in place from2003.Since taking office in March2006 – replacing the highly-re-garded Antonio Palocci, whobecame caught up in scandal – he has often been derided bymarket economists for indeci-siveness and for subverting thecentral bank’s austere monetarypolicies with a softer approachto fiscal policy.But now that state interven-tion is fashionable, economicorthodoxy and Mr Mantega’sinstincts are more closelyaligned.Often defensive in interviews,he began a recent conversationwith the Financial Times insubdued mood but during 90 minutes warmed up to acheerful ebullience, reflecting his confidence that Brazil’s eco-nomic policies are working, thatthey are his, and that hehas more successful measuresup his sleeve.He begins with a rompthrough the impressive array of initiatives the government hastaken in response to the globaleconomic crisis: the R$100bnreleased from reserve require-ments to rescue a banking sys-tem starved of liquidity; theadditional R$100bn provided tothe BNDES, the government’sdevelopment bank, to financeinvestment and working capitalfor business; and the cuts insales taxes on motor vehicles,construction materials andhousehold electrical goods suchas fridges, cookers and washing machines.He says the cost of the meas-ures is far outweighed by theirbenefit. Revenues lost fromvehicles sales taxes betweenDecember and June, for exam-ple, were just R$2bn, while salesand production have bouncedback.“Sales of cars and buses arenow back to pre-crisis levels,”he says. “I know of only twoother countries that have donethat: China, which is
hors con-cours
, and Germany, which isgiving people a fat cheque tobuy a car.”Policies such as these havebeen criticised for indulging acorporatist habit of picking win-ners, instead of giving everyonein business a smaller but equalboost.Mr Mantega is unrepentant.“These are the sectors that mostpromote employment and earn-ings,” he says.He stresses the central role of programmes such as BolsaFamília – a relatively cheapincome transfer programme thathas turned millions of poor peo-ple into consumers for the firsttime – plus increases aboveinflation in the national mini-mum wage and pension pay-ments – policies often criticised,in contrast, for their expenseand comparatively small impacton inequality.Far from simply reacting tothe global downturn, he says,Brazil “was ready for the crisisbefore it happened”. He cites theincrease in the country’s rate of investment – from 16 per cent of gross domestic product in 2006to 19 per cent in 2009 – althougheconomists say the rate stillneeds to be much higher tomake Brazilian business com-petitive.Increasingly, he says, invest-ment will be driven by the state.Petrobras, the government-con-trolled oil company, will behugely important.Its investment plan of $174bnbetween 2009 and 2013 will drivedemand for steel, ships, drilling gear, helicopters and a lot more.“It’s at the head of a huge pro-duction chain,” he says.Other investment will be ledby the government’s “acceler-ated growth programme”, orPAC, which in addition to Petro-bras’s spending includes big infrastructure projects, such aspower stations, roads and rail-ways, being contracted out tothe private sector.Mr Mantega says such stimu-lus to growth, along with falling public debt, low inflation, asolid fiscal base and, above all,Brazil’s healthy domestic mar-ket, will push the country to theforefront of a new world order.“Emerging markets will comeout of the crisis more quickly,”he says. “They have greaterdynamism and smaller fiscalimbalances. The US is no longerthe locomotive of world growth.Emerging countries will have torely increasingly on their ownand each other’s economies.”
He says those with big domes-tic markets – China, India, Bra-zil – will take a lead in driving growth, while those with abun-dant natural resources – Russia,Brazil – will benefit as exporters.
He is confident Brazil willmeet his target of 1 per centeconomic growth this year – although “we will have to workhard and keep taking measures”to make that happen – and of 4per cent in 2010.Among new measures in prep-aration is what, by Brazilianstandards, is a radical move tocut the very high cost of labour.According to the World Bank/IFC’s annual Doing Businessreport, Brazil ranks 121st out of 181 countries in terms of theease and cost of hiring and fir-ing workers. The average cost of firing somebody, for example,remained stuck at 37 weeks’wages from 2004 to 2009.Mr Mantega is preparing toannounce the abolition of charges – equal to 25.5 per centof employees’ wages – that com-panies must pay into Brazil’swelfare system. He says he willdo this without infringing worker’s rights and that theshortfall will be covered byother measures – although hedoes not say what those will be.Other initiatives in the pipe-line include subsidised credit forlorries and for working capitalloans from public sector banks,lower taxes on investment, andspecial incentives for labour-intensive industries.“We are going to deliver aqualitative leap in productiv-ity,” he says. “We want to grabthe opportunities open to Brazilin the post-crisis world.”
INTERVIEW
GUIDO MANTEGA
 The finance minster  tells
Jonathan Wheatley 
why hiseconomic stimuli will work 
Sitting pretty: Mantega is keen on state intervention – which is currently in vogue
anderson schneider
MORE ON FT.COM
For a map including political,economic and social statistics
 www.ft.com/brazil-statistics
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