Financial Times - a big survey about Brazil

Com desculpas pela "enormidade" do post, mas é o conteúdo completo do caderno especial do Financial Times sobre o Brasil.
Destaco apenas um trecho de síntese:

"One of Luiz Inácio Lula da Silva’s great merits as president was to deepen and defend at home the orthodox economic policies launched by Fernando Henrique Cardoso, his predecessor, even though such policies might well have differed from the ideological positions he held while in opposition. Even so, Lula da Silva led his party to adopt measures whose results are now celebrated around the world, and with good reason. Roughly 10m of Brazil’s 192m people joined the ranks of the middle class between 2004 and 2008, and since 1990, poverty levels have halved.
Yet that has not been the case in the near abroad. In meetings with regional leaders, such as Venezuela’s Hugo Chávez or Fidel and Raul Castro in Cuba, Lula da Silva has often enthusiastically praised the merits of socialism – even though such ideas are notably absent back at home.
Moisés Naím, editor of Foreign Policy magazine, makes a trenchant point. “Mr Lula da Silva has been very good to Brazilians, but very bad for millions of his neighbours,” he says. “Those despots who have the luck to count themselves among the Brazilian president’s friends, even as they ruin their own countries while Brazil progresses, know they can count on his help or, at least, complicit silence.”
Either way, the country’s clout in international affairs is now an acknowledged fact. Still, it will be interesting to see whether Brazil continues its rainbow approach, which embraces Iran, among others, when Lula da Silva’s presidency ends this year and the country loses the shelter of his charisma, charm and prestige.
Yet despite the important successes of the “new Brazil”, many of the failings of the “old Brazil” remain. Most of them will be on view when the world comes to Brazil during the 2014 World Cup and the Olympic Games two years later.
The state remains remarkably inefficient and its bureaucracy a barrier to business: Brazil ranked 129th out of 183 countries in the World Bank’s latest Doing Business report, worse than Nigeria. The need to boost productivity is especially important given the currency’s recent strength, which threatens to bury local companies with cheap imports."
Paulo Roberto de Almeida
Enjoy...

Special Survey Brazil
Financial Times, 29/06/2010

Sumary:
South America’s giant comes of age
Who will lead Brazil?
Good fortune helps strengthen Brazil’s economy
Why Brazil must try harder
Brazil’s challenge: fuel for a nation
Brazilian banks return profits with interest
Bumper harvest as professional farming takes hold
End of the road for Brazilian farmers’ competitiveness?
Infrastructure investment puts Brazil on road to prosperity
Will Brazil be ready to play host to the world – twice?
Auto industry speeds ahead as Brazilian demand spikes
Massive dam project comes with sizeable obstacles
The long road to rainforest conservation
The power set: five influential Brazilians
A nation’s destiny - Lula

South America’s giant comes of age
By John Paul Rathbone
If the rise of Brazil was cast as a childhood story rather than a dry economics tract, the fable might go something like this.
Once upon a time, there was a skinny boy who was bullied at school. Every time there was a fight in the playground, he seemed to end up as the punchbag. The boy rarely complained, even though his sorry state did not match the glorious fate about which he often daydreamed. That just seemed to be the way things were.
One day, a new teacher arrived, bringing with him some new games for the classroom. These playthings distracted the big boys, and the fighting stopped. The skinny boy used the calm to do exercises, recommended by his canny stepmother, who also fed him a special soup to make him strong.
All good things come to end, however. The games broke, as they always do, and tempers flared again in the playground. This time, however, the big boys no longer bullied the skinny boy. He had become lean and fit, while they had grown fat and clumsy. Instead of pushing him around, they even seemed to look up to him. Standing in the school yard, blinking in the sun, the boy revelled in his new status. Would it last? He wanted to make sure it would.
The skinny boy is, of course, Brazil. His bullies are the financial markets of developed economies, the new games are the soothing palliative of the noughties credit boom, and the latest school-ground fight is the global financial crisis. His stepmother is China, the special soup he ate the commodity boom that has boosted Brazil’s economy, and his exercises represent the macroeconomic stabilisation policies Brazil put in place in the mid-1990s. The result, in this simple tale first told by Brazilian commentator Ricardo Amorim, is the new Brazil: a slightly gangly adolescent, standing tall amid the world community, not fully grown into its new stature but confident and eager to make its mark.
Ever since its separation from Portugal and the establishment of an independent empire in 1822, Brazil has viewed itself as destined for greatness. Sometimes, the outside world has reinforced this view. Dozens of books published over the past two centuries have recognised Brazil’s potential, most famously Stefan Zweig’s Brazil: Land of the Future. The country is “destined undoubtedly to play one of the most important parts in the future development of our world”, Zweig wrote in 1941 shortly after arriving in the country, fleeing war-torn Europe.
And yet for much of its history, Brazil – like so many other continent-sized countries, including its emerging peers, Russia, India and China – has been inward looking, more concerned with its own progress and development than projecting itself abroad.
Margaret Thatcher, the former UK prime minister, was not the last world leader to proclaim with surprise, as she supposedly did the first time she saw the serried ranks of São Paulo’s skyscrapers: “Why has nobody told me about this city before?” Perhaps her advisers had, but Brazil did not impinge on her consciousness. After all, it was only eight years ago, in 2002, that Brazil attended its first G8 conference, and that was just as an observer.
Indeed, as Leslie Bethell, editor of The Cambridge History of Latin America, notes, it is only in the past 20 years or so, since the end of the cold war and the passing of the Latin American debt crisis of the 1980s, that Brazil has begun to play a role in regional and world affairs commensurate with its size, natural resource wealth and financial and economic heft. This has been partly thanks to Brazil’s new-found confidence, which in turn rests on something it has never enjoyed before: political and economic stability.
In the corporate world, “new Brazil’s” projection of itself is most obvious in well-known consumer brands, from the Havaiana flip-flops now worn on millions of people’s feet to the Embraer executive jets flying over your head. Less glamorous Brazilian companies, slower to make their presence known abroad, are now raising their profile too. Vale, the world’s largest iron-ore producer, recently snapped up one of the world’s last great iron-ore mines from under its rivals’ noses. JBS, the world’s largest meat producer, last year bought Texas chicken company Pilgrim’s Pride. Earlier this month, Gerdau, the steel company, took full control of its US subsidiary in a $1.6bn deal.
In financial services, Banco do Brasil, South America’s biggest bank by assets, is starting to expand abroad – not to hoover up assets, but to service Brazilian companies on their foreign forays. It recently paid roughly £500m ($740m) for Banco Patagonia of Argentina.
This all makes good strategic sense. Past domestic crises left Brazilian companies with a legacy of conservative financial management and mostly sound balance sheets. Thus they were well placed to take advantage of opportunities thrown up elsewhere by the financial crisis. If they have a dominating position in the local market, now is a good time to look overseas.
Meanwhile, foreign companies are turning to Brazil not just for the size of its booming domestic market, but also as a platform to its Spanish-speaking neighbours. At General Motors technical centre in São Caetano do Sul, engineers join rolling, global conference calls to discuss new automotive products being designed for the growing number of emerging market consumers. Fiat’s factory in Brazil, for example, is the second biggest in the world.
The country’s new confidence can also be found, more controversially, in its friends-to-all foreign policy.
One of Luiz Inácio Lula da Silva’s great merits as president was to deepen and defend at home the orthodox economic policies launched by Fernando Henrique Cardoso, his predecessor, even though such policies might well have differed from the ideological positions he held while in opposition. Even so, Lula da Silva led his party to adopt measures whose results are now celebrated around the world, and with good reason. Roughly 10m of Brazil’s 192m people joined the ranks of the middle class between 2004 and 2008, and since 1990, poverty levels have halved.
Yet that has not been the case in the near abroad. In meetings with regional leaders, such as Venezuela’s Hugo Chávez or Fidel and Raul Castro in Cuba, Lula da Silva has often enthusiastically praised the merits of socialism – even though such ideas are notably absent back at home.
Moisés Naím, editor of Foreign Policy magazine, makes a trenchant point. “Mr Lula da Silva has been very good to Brazilians, but very bad for millions of his neighbours,” he says. “Those despots who have the luck to count themselves among the Brazilian president’s friends, even as they ruin their own countries while Brazil progresses, know they can count on his help or, at least, complicit silence.”
Either way, the country’s clout in international affairs is now an acknowledged fact. Still, it will be interesting to see whether Brazil continues its rainbow approach, which embraces Iran, among others, when Lula da Silva’s presidency ends this year and the country loses the shelter of his charisma, charm and prestige.
Yet despite the important successes of the “new Brazil”, many of the failings of the “old Brazil” remain. Most of them will be on view when the world comes to Brazil during the 2014 World Cup and the Olympic Games two years later.
The state remains remarkably inefficient and its bureaucracy a barrier to business: Brazil ranked 129th out of 183 countries in the World Bank’s latest Doing Business report, worse than Nigeria. The need to boost productivity is especially important given the currency’s recent strength, which threatens to bury local companies with cheap imports.
“If the real continues to strengthen as it has, by the 2016 Olympics, Brazil won’t have any domestic companies,” one economist joked cruelly.
Poor infrastructure – less than 10 per cent of roads are paved – remains a significant bottleneck. Ambitious plans are afoot, including a high-speed train link joining sober São Paulo to its historic rival, Rio de Janeiro. But this infrastructure project, at least, is unlikely to be completed in time for the World Cup as originally planned.
Brazil also remains among the world’s most unequal societies. Politicians still think little of stealing public money – fighting corruption was not one of Lula da Silva’s highest priorities. The drug trade is a growing problem not just in Brazilian cities, but also among the outer provinces that serve as transshipment points. As for violence, the death tallies notched up by Brazil’s thuggish police force can make paramilitary groups elsewhere look almost benign.
And yet the shadows are always darkest where the sun shines brightest. What lends the new Brazil its excitement and promise is that the political and economic stability the country has recently won make such problems seem manageable and solvable.
Nowhere will that be more apparent than in the upcoming presidential elections. On current form, no matter which of the two main candidates wins, it looks as though Brazil will transfer power from one democratically elected president to another for the first time without a financial or economic hiccup.
The skinny boy has come good at last, and the big boys are looking on in wonder.

Who will lead Brazil?
By Jonathan Wheatley
If any one figure personifies the new Brazil, it is surely Luiz Inácio Lula da Silva, president since January 1 2003.
His childhood journey from rural poverty in Brazil’s hard-scrabble north-east to the industrial rust belt around São Paulo is one that millions of his compatriots have made themselves. His ascendancy from shoeshine boy to lathe operator, from union leader to founder of one of Brazil’s biggest political parties and thence to the presidency, mirrors Brazil’s own extraordinary progress over the past decade and a half.
His charisma and popularity – his support in opinion polls has hardly dipped below 70 per cent during two four-year terms – are the perfect symbol for the exuberance and confidence of Brazil’s rising consumer classes.
But Lula da Silva’s time is almost up. Four months from now, in October, Brazilians must choose a new president.
To some, the election makes little difference.
“Sincerely, I really don’t think markets are worried,” says Rogério Schmidt of CLP, a São Paulo political think-tank. “There is a sense that whoever wins, there will be a mix of orthodox and heterodox policies.”
That view is supported by the fact Brazil has enjoyed broad continuity in macroeconomic policies for the past 16 years. The inflation-busting reforms that laid the basis of today’s prosperity were introduced in 1994 by Fernando Henrique Cardoso, then finance minister and subsequently president from 1995 to 2002.
When Lula da Silva was elected to succeed him, Brazil’s borrowing costs soared as investors worried that the former firebrand leftwinger would lose control of public finances and lead Brazil into default.
But Lula da Silva moved quickly to calm such fears, by promising no rupture with the past and by installing trusted pro-market figures at the finance ministry and central bank (the former lost to a corruption scandal in 2006; the latter still in office today). Many observers expect similar or greater continuity when the president hands over to his successor in January.
Others are less sanguine. They worry that investors take too much comfort from the ease of transition last time around and risk becoming complacent about Brazil’s future prospects.
“It worries me that people think this election doesn’t matter,” says Jim O’Neill, chief economist at Goldman Sachs and one of Brazil’s most vocal champions over the past decade. “People are getting carried away.”
He says he has no view on who would make the best presidential successor, as long as that person ensures current macro policies stay in place.
The frontrunners in opinion polls are José Serra and Dilma Rousseff. He was governor of São Paulo state (Brazil’s biggest) and she was Lula da Silva’s chief minister until both stood down in April to qualify as candidates.
It is often supposed that Serra is the more market-friendly candidate while Rousseff is more inclined to enlarge the role of the public sector in the economy to the detriment of the private sector. Serra was a highly successful health minister under Cardoso who has earned a reputation for managerial efficiency and fiscal austerity, not least as governor of São Paulo. If, as his centrist opposition party, the PSDB, has argued, what Brazil needs most is a dose of good management, he could be the man for the job.
But Rousseff is also billed as a master of management, although with the emphasis on central planning rather than a minimal state.
Lula da Silva calls her “the mother of the PAC [the government’s flagship growth acceleration programme]” and she is closely associated with what Brazilians call “developmentalism” – a drive for growth and income distribution above all else that pays less attention to the need for fiscal reform and an overhaul of Brazil’s tax system and labour laws.
This suggests a broad distinction: Serra more orthodox, Rousseff more populist. Yet this classification does not hold up to much scrutiny. The bastion of orthodoxy in the Lula government has been the central bank, led by Henrique Meirelles, a former head of Bank Boston and a former member of Serra’s PSDB.
Although the bank is not independent by law, it has been given operational independence, adjusting interest rates in pursuit of the government’s annual inflation targets, often in the face of fierce criticism from all sides, both inside and outside government.
Serra – who was moved to health from the planning ministry under Cardoso after disagreements with the finance ministry and central bank – is among the most vocal critics of Brazil’s high interest rates.
It could be argued that he would tackle the fiscal problems that have kept them high for so long. But he has a reputation as an interventionist and in recent interviews has done little to dispel a concern among many economists that he would attempt to reduce interest rates at the stroke of a pen. This, many observers fear, would not only undermine the credibility of monetary policy but also cause a mass walk-out of the central bank’s most competent directors. The impact on investor confidence could be disastrous.
Rousseff has gone out of her way to emphasise that if she wins, the three pillars of stability – inflation targeting, a floating exchange rate and gradual reductions in public debt – will be untouched. She is also close to Meirelles and to Antonio Palocci, the Lula government’s first finance minister who, in terms of economic policy, is probably to the right of Serra.
Does this mean that Rousseff is the investor’s choice after all? Perhaps, but perhaps not, for a number of reasons. One is that she is not Lula da Silva, and may lack the political clout to defend the central bank or to hold in check the statist instincts of other leaders of their leftwing party, the PT (and which some commentators say she also shares).
Another is that Serra, while erratic on monetary policy, shows every sign of being far more hawkish on fiscal issues – and a dose of fiscal hawkishness would be to Brazil’s benefit as evidence mounts that the economy is overheating, partly due to the exaggerated presence of the public sector.
Perhaps doubts such as these will be clarified as campaigning starts after the World Cup. But, again, perhaps not. Orthodox economic policies have been good for the Brazilian people but they have rarely gained much popularity, perhaps because of an enduring belief in the beneficial influence of the state.
If the opening salvos in the pre-campaign period have been any guide, the election will come down to a dispute over who is best suited to continue the work of Lula da Silva.
With the most popular president in Brazilian history making it the declared priority of his final year to get her elected as his successor, Rousseff has got to be the one to beat.

Good fortune helps strengthen Brazil’s economy
By John Paul Rathbone
“Neither a borrower nor a lender be,” Polonius warns his son in Shakespeare’s Hamlet. “For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”
Towards the end of 2009, Brazil only half took Polonius’s sententious advice – even if it was the better half – when it loaned $14bn to the International Monetary Fund to boost the multilateral lender’s coffers in the midst of the global financial crisis. The loan was a potent signal of Brazil’s new-found economic confidence.
It also represented a remarkable reversal of fortunes. Eleven years earlier, facing its own financial crisis, Brazil had been forced to devalue its currency, the real, and ask the IMF for a $42bn loan, one of the Washington-based lender’s biggest-ever rescue packages.
Today, however, the boot is firmly on the other foot. While most of the developed world worries about excessive debt and stunted economic growth, Brazil has little of the former and an abundance of the latter.
“We were one of the last countries to go into the global crisis,” Luiz Inácio Lula da Silva, Brazil’s president, told the Financial Times shortly after his country lent the money to the IMF. “And we have been one of the first to come out.”
After a short and relatively shallow recession, the Brazilian economy is now flying. This year it is expected to grow by as much as 8 per cent and, by some measures, is expanding at a rate of 10 per cent. Unemployment has fallen to record lows. The country’s net debt, at 42 per cent of GDP, is at a level that makes much of the developed world green with envy, while its banks are well capitalised. In April, bank credit grew at a rate of roughly 18 per cent, while retail sales rose by 30 per cent in March alone.
As a result, Brazil is awash with foreign capital. Last October, the central bank imposed a 2 per cent tax on short-term capital inflows to try to slow the boom. It made little difference, and the real continued to strengthen.
The contrast between Brazil’s current good fortune and most of the developed world is striking. Indeed, on the same day that the EU agreed a $1,000bn rescue package to try to prevent Greek rot from becoming a case of fully fledged European gangrene, Guido Mantega, Brazil’s finance minister, brushed off the eurozone’s distant problems.
“Europe was asleep,” he told a group of investors at an FT conference held at the neo-classical splendour of the Copacabana Palace Hotel in Rio de Janeiro. “But its crisis is not going to hurt Brazil’s economy. There may be some turbulence in financial markets. But it will pass.”
For the moment, Brazil is relishing its newfound dynamism. And with this confidence has come a palpable sense of optimism about its future.
Thanks to the orthodox anti-inflation policies of former president Fernando Henrique Cardoso, subsequently continued by Mr Lula da Silva, the hyperinflation that blighted the country in the 1980s is a nightmare that nobody remembers. Exports have quintupled in value over the past 20 years. Foreign debt has fallen to just 4 per cent of GDP.
More importantly, between 2004 and 2008, the level of poverty fell from almost half of Brazil’s 192m population to roughly a quarter. Over the same period, and helped by an income transfer programme called “bolsa família”, roughly 10m Brazilians joined the ranks of the middle class, defined as households with a monthly income of R$1,100 ($610) or more.
All this is a source of pride for Mr Lula da Silva, 64, a former lathe operator who began his political career in São Paulo as a trade union leader. In one of the world’s most unequal societies, his rise is a potent symbol of social mobility and hope.
This growth and hope has also had profound economic consequences. Brazil’s several million new consumers have created an internal market that multinational companies are scrambling to tap. Brazil is poised to overtake Germany as the world’s fourth-biggest vehicle market. “We’ve doubled our manufacturing capability,” says Antonio Roberto Cortes, chief executive of Latin American operations at MAN, the German truck maker.
São Paulo has also become a hot spot for global investment bankers. The flotation by Santander, Spain’s biggest bank, of its Brazilian subsidiary raised $8bn in 2009’s biggest initial public offering, and valued the unit more than the entire worth of Deutsche Bank worldwide. The BM&FBovespa, the Brazilian exchange, currently trades more single equity options than any other derivatives market in the world. And then there are mergers and acquisitions.
“There is huge foreign interest,” says James Sinclair, head of CFS Partners, an investment bank boutique. Emblematic of this interest was the attempt in May by Spain’s Telefónica to buy out its partner, Portugal Telecom, from Vivo, their jointly owned operation that is Brazil’s biggest mobile phone operator. Telefónica offered a 150 per cent premium to PT for its share. But given that Vivo is one of both PT and Telefónica’s few bright spots, the offer was not enough.
Much of the country’s recent economic and financial success stems from its own policy efforts, but a large part is also due to sheer good luck. Scarred by past crises, Brazilian banks spent most of the noughties at home rather than venturing abroad. They therefore avoided loading up with the sub-prime loans that later almost sank the west’s financial system. The Asia-driven commodity boom then kept Brazil going through the worst of the global downturn, while its social policies shielded the poor. Near-zero US interest rates, meanwhile, began to deluge the country with cheap money.
These capital inflows are a mixed blessing. Brazil, with its low savings rate, will always need foreign capital to finance its growth. BNDES, the state-owned development bank, has a balance sheet bigger than the World Bank’s. Yet even that is not enough to meet Brazil’s vast investment needs, such as the $500bn of planned infrastructure investments envisaged by 2014.
But the inrush of foreign money also threatens to drive the real to levels that threaten the competitiveness of local exporters. Cheap imports could, meanwhile, undercut the viability of local manufacturers. It is probably no accident that increasing numbers of Brazilians firms are setting up operations abroad.
Indeed, the country may be enjoying too much of a good thing. Either high commodity prices or low US interest rates would be enough to sustain a boom – and often have in the past. But Brazil has them both at the same time. As the IMF warned in its latest regional outlook, it is an unprecedented bonanza. The challenge now is how best to manage the bounty without pigging out. As Nicolás Eyzaguirre, the IMF’s regional director, has put it: “Avocadoes are good; so are cream, whiskey and tomatoes. But mixing them all together makes you pretty sick.”
A sense of complacency that the good times of the past 10 years will inevitably continue for the next 10 may therefore be Brazil’s greatest threat. With the economy growing faster than the 5 per cent rate it can currently sustain safely without further structural reforms, inflation has risen above the central bank’s 4.5 per cent target. In April, that prompted the first in a series of interest rates hikes that are expected to take the benchmark Selic rate to almost 12 per cent. That would be an unthinkable level in the US or Europe.
Unfortunately, it may also serve to attract even more foreign capital, so driving the real to ever more uncompetitive levels. The effects of this can already be seen in the widening current account deficit. While exports have been growing at a 30 per cent rate, imports are rising almost twice as fast.
Cuts in government spending will be required to cool down Brazil’s red-hot economy, although applying such restraint in an election year will not be easy. But without it, the country could in time face the same financial vulnerabilities that have done for its economy so often in the past.
As Cassius told Brutus in Shakespeare’s Julius Caesar, men and countries can be masters of their fate. Exercising that mastery would be the truest sign of Brazil’s coming of age.

Why Brazil must try harder
By Martin Wolf
Brazil is the country of the future – and always will be. So goes an old joke. But is it a joke on the world at last? Has Brazil – anointed by Goldman Sachs as the B in Brics – at last become a country of the present?
The answer is yes, but only up to a point. Brazil is still a long way from matching the performance of India and China. It can, and should, do far better.
Brazil’s great achievements of the past decade and a half are those of stability – political and economic. Under the presidencies of Fernando Henrique Cardoso (1995-2003) and Luiz Inácio Lula da Silva (2003-), it has achieved stable democratic rule. The era of military rule, which ended in 1985, seems distant; so, too, do the days ofinflation, which peaked at an annual rate of 2,950 per cent in 1990.
Under the “real plan” launched by Cardoso in 1994, inflation was at last tamed. After lowering inflation via a quasi-fixed exchange rate, a currency crisis in 1999 drove Brazil to adopt a floating exchange rate. Since then, the central bank has reduced the interest rate from 45 per cent to a low of 8.75 per cent in 2009. Buttressing this stability has been the accumulation of foreign currency reserves, which reached $235bn by February 2010, up from $33bn in January 1999.
Yet stability is not dynamism. Growth averaged only 2.9 per cent a year between 1995 and 2009. While the contraction in 2009 was modest, at a mere 0.2 per cent of GDP, the International Monetary Fund forecasts growth from 2010-13 at an average of 4.5 per cent, far below rates in China and India.
At least as important a failing is Brazil’s inequality of income. According to the World Bank, its distribution of income is among the most unequal in the world. Even if growth were to accelerate, most of the benefits are likely to go to the richest part of the population.
In 1980, China’s GDP per head (at purchasing power parity) was just 7 per cent of Brazil’s, while India’s was 11 per cent. By 1995, these ratios had reached 23 per cent and 17 per cent, respectively. By 2009, they had reached 63 per cent and 28 per cent. Between 1995 and 2009, the increase in Brazilian GDP per head was only 22 per cent, against 100 per cent for India and 226 per cent for China.
As a result, Brazil’s share of world output, at purchasing power parity, declined from 3.1 per cent in 1995 to 2.9 per cent in 2009. Over the same period, China’s jumped from 5.7 per cent to 12.5 per cent and India’s from 3.2 per cent to 5.1 per cent. This, then, is the rise of the “ICs”, not the Brics.
Brazil is a paradigmatic example of countries that have fallen into what economists call the “middle-income trap”. Can it do better in future?
If the answer is to be yes, Brazil must overcome huge structural disadvantages. Most important is its extremely low level of savings. In 2008, according to the World Bank, its gross savings were a mere 17 per cent of GDP, against India’s 38 per cent and China’s incredible 54 per cent. Unless this is raised to at least 30 per cent of GDP, the chances of sustained and fast growth in living standards are low.
Moreover, only 45 per cent of Brazil’s merchandise exports were manufactured goods in 2008, against 63 per cent for India and 93 per cent for China: industrialisation through trade will be hard to achieve. Brazil has also suffered a massive appreciation of the real exchange rate, estimated by JP Morgan at 156 per cent between October 2002 and April 2010. In addition, the ratio of trade to GDP was 28 per cent in 2008, against India’s 51 per cent and China’s 65 per cent. The appreciation of the real exchange rate makes a rise in the economy’s openness to trade unlikely.
The challenge then is clear and daunting: to move from today’s stability to tomorrow’s growth. With a population of 192m in 2008, Brazil cannot become as big a player in the world as the two Asian giants, but it could still achieve something far more important than power and influence in the world – a prosperous society at home. Much still has to change if that dream is to become reality.

Brazil’s challenge: fuel for a nation
By Ed Crooks
Once seen as cursed by its lack of fossil fuels, Brazil is now commonly depicted as an energy cornucopia.
The discovery of the vast “pre-salt” oil fields in the deep waters off the country’s southern coast, along with large volumes of potentially valuable gas, has raised the prospect that Brazil could meet all of its own energy needs and become a significant exporter of oil – and perhaps even gas.
However, while the opportunities are huge, so are some of the problems. The country faces an enormous challenge to deliver the reliable energy supplies needed to fuel its development and meet aspirations for improved living standards.
Brazil’s apparently meagre endowment of coal, gas and oil was a great stimulus to innovation, and the country pioneered renewable energy long before many developed economies.
As Antonio Dias Leite, the mines and energy minister during the 1970s who is the author of a definitive study of Brazil’s energy system, puts it, the country’s development of hydro-electric power for electricity and sugar-cane ethanol for transport fuel means it “occupies an outstanding position in the world regarding the proportion of renewable energy in its energy matrix”.
Hydro-power provides roughly four-fifths of Brazil’s electricity, and renewables overall meet nearly 45 per cent of the country’s energy needs.
However, those needs are growing fast. Brazil’s energy consumption is still well below developed-country levels, at about 1.2 tonnes of oil equivalent (TOE) per capita per year: less than half the level of the poorer members of the EU such as Portugal and Poland, which use about 2.4-2.5 TOE per head, let alone the US, which uses 7.8 TOE per head.
In electricity, the disparity is similar. Brazil’s yearly power consumption is roughly 2.2 megawatt hours per capita per year, compared with 3.7MWh in Poland, 4.9MWh in Portugal, and 13.7MWh in the US.
Brazil has been a success story in terms of access to electricity: about 97 per cent of the population is now connected, but the system requires continuous investment to meet rising demand. The rule of thumb is that electricity consumption grows by roughly 1 percentage point more than the economy, so with growth estimated at approximately 7 per cent for 2010, power demand could grow by about 8 per cent.
The country’s reliance on hydro-power may be good for its carbon-dioxide emissions and dependence on imported fossil fuels, but it can cause problems of its own. In 2001, the electricity system suffered severe shortages, caused by a combination of drought and previous underinvestment. This in turn caused significant damage to the economy, cutting growth to about 1 per cent in that year.
Mauricio Bahr, the chief executive of GDF Suez Energy Latin America, the French-owned group that is Brazil’s largest private sector electricity generator, says rising power demand means the industry has enormous potential to grow.
“We are too far away from the standard of power consumption in developed countries,” he says. “If you combine that huge potential demand with our huge potential resources, there is a great opportunity there.”
He adds that the structure of the electricity industry under Luiz Inácio Lula da Silva, who was elected as president in 2002, is highly favourable to private sector investment. Government agencies co-ordinate projections of power demand from the largely privately owned electricity distributors, and generators sign long-term supply contracts that allow them to finance their investments.
“The regulatory side today is very predictable, and once you have a concession, you can show a revenue stream for 30 years,” Bahr says.
However, the development of new hydro-power projects is hampered by growing concern about the effect of dam building on local communities and the environment, as reflected in the international campaign against the Belo Monte project planned for the Amazon region.
New projects are designed very differently from the giant dams of the past, and use newer, more advanced turbines in an attempt to minimise their impact on local communities. GDF’s Jirau dam, and the Santo Antonio dam being built by Odebrecht, the Brazilian construction group, both on the Madeira river in the far west of the country, require much less flooding per megawatt of electricity generated than dams from the 1960s, but that has not been sufficient to satisfy their opponents.
While in most developed countries all the potential for hydro-power has generally been exploited, Brazil still has huge untapped resources. Even allowing for the more restricted style of development now used to try to meet environmental concerns, the country is using only about 30 per cent of its hydro-power potential.
Even so, the limitations of hydro-power mean there is still interest in developing more coal- and gas-fired plants – which now provide roughly 13 per cent of Brazil’s electricity – and more nuclear plants in addition to the two already in operation, which generate a further 2 per cent.
However, supplies of fossil fuels remain limited. For oil, Brazil is now self-sufficient, and the offshore pre-salt fields offer the prospect that the country will become a significant exporter. But the oil is hard to access, often 23,000 feet below sea level under layers of water, salt and rock. BP’s massive oil spill in the Gulf of Mexico is a reminder of the hazards of extracting oil in such deep waters.
For gas, the problems are even more daunting. Piping the gas to shore seems out of the question owing to the long distances involved, and the most promising route appears to be liquefying it offshore, on floating plants. That, however, is a new and untried technology, and will hold difficulties of its own. Although Brazil is also trying to develop other sources of domestic gas, and has built two terminals for importing liquefied natural gas, it looks likely to have to rely on the 2,000-mile pipeline from Bolivia as its main source of imports, even as the share of liquefied natural gas grows.
So while Brazil now has a portfolio of energy resources that any country would want, it still has a long way to go before it can really be said to have a similarly enviable level of provision.

Brazilian banks return profits with interest
By Jonathan Wheatley in São Paulo
Regina Araújo, one of Brazil's army of domestic servants, has just bought a cordless telephone and answering machine from Casas Bahia, a big high street retailer.
She takes the sales slip from her handbag to show the price: R$169.90 ($95). Or, that's what she would have paid up front. Instead, she chose to pay 10 monthly instalments of R$40.15 each.
"I know," she says, as if doing the maths for the first time. "For us [people on low incomes], it's impossible to buy anything up front. But the instalments fit our pockets."
For Brazilians, high interest rates are a fact of life. According to the central bank, the average overdraft rate charged by high street banks in May, for example, was 161 per cent a year.
The average annual interest rate paid by individuals was 41.5 per cent. For companies it was 27 per cent. Both figures are artificially low, distorted by subsidised credit in the corporate sector and by new forms of secured lending available to only some consumers.
So it is hardly surprising that Brazil's banks are among the most profitable in the world. Return on equity - a standard measure of profitability - at Unibanco, Latin America's biggest bank, will be about 25 per cent this year, according to a recent study by Roberto Attuch and colleagues at Barclays Capital. Other big banks are not far behind.
Such earnings have been a big pull for investors. Last year, Santander of Spain floated Santander Brasil, its Brazilian unit, raising $7bn in the world's biggest initial public offering of the year. Its ROE trails that of its Brazilian competitors, Mr Attuch says, simply because it has yet to put that capital intake to work.
"Margins are high in the retail sector because there is not much competition," Mr Attuch says. Account holders take little notice of what their banks charge, paying more attention to convenience and standards of service, he says, although even these factors would have to be compelling to make them change banks.
With little pressure to reduce margins, other analysts say, private-sector banks tend to use the big public-sector banks - made less efficient partly because they often lend according to government policy rather than market imperatives - as their benchmark.
Luis Catão, economist at the Inter-American Development Bank, says one reason consumers accept expensive credit is because it is so scarce. "People didn't used to be able to borrow at all," he says. "Effectively, interest rates were infinite. Anything below that induces you to borrow."
Under the high inflation that dogged Brazil until the late 1990s, banks preferred to lend to the government - a low-risk, high-return investment - rather than consumers and businesses. Credit has expanded in recent years but is still equal to only about 45 per cent of gross domestic product, much less than in other big economies.
One problem is the lack of any positive data on people's credit history. Only bad payers have a history; in the absence of data, good payers are treated as being just as risky.
This in part explains why small changes in the central bank's overnight rate - currently 10.25 per cent a year - have a big knock-on effect on market lending rates. Banks still often prefer smaller but safer returns from the government. If the overnight rate goes up a little, banks will charge a lot more to take the additional risk of consumer credit.
This is one reason why spreads - the difference between funding and lending rates - are so high. There are others: reserve requirements (the share of deposits banks must park at the central bank) are very high at almost 30 per cent, and a lot of lending is directed by law to lowreturn sectors.
But recent developments show that spreads do come down when conditions are right. Since 2004, loans have been permitted in which instalments are deducted from borrowers' pay before they receive it.
With a reduced risk of default, such loans cost an average rate of 27 per cent a year in May - compared with nearly 57 per cent for other forms of consumer credit - and accounted for 60 per cent of all personal lending, up from 53 per cent in December 2008. Yet access to such credit is still much easier for public sector workers, who take 86 per cent of loans, because they are less likely to lose their jobs than private sector workers.
Even so, Mr Attuch says this is part of a broader shift from unsecured to secured lending that will help drive down rates across the credit industry. For this and other reasons he thinks that, in spite of their attractive margins, banks face little risk of being undercut by lending from other institutions.
If anything, it is banks that are expanding into new areas. Casas Bahia - where Ms Araújo bought her telephone - used to finance its sales with its own capital. Since 2004 it has handed such operations over to Bradesco, Brazil's second-biggest private-sector bank.

Bumper harvest as professional farming takes hold
By Jonathan Wheatley
André Pessôa stands in a field of cotton that stretches across a wide plateau to the horizon and beyond.
The vast field is part of a farm near the town of Luís Eduardo Magalhães in the far west of the state of Bahia. Like many in the region, it is owned by foreign investors: in this instance, Agrifirma Brazil, a UK farm fund set up in 2008 and backed by Jacob Rothschild and Jim Slater, the former corporate raider.
“I think this region is almost a laboratory for what we will see in other parts of Brazil’s agricultural frontier,” says Pessôa, a partner at Agroconsult, a farm consultancy.
Investors have been attracted to western Bahia – and, increasingly, to parts of the neighbouring states of Piauí, Maranhão and Tocantins – by a unique combination of circumstances.
Land here is flat, on a plateau about 800m-1,000m above sea level, which means that even if the days are scorching, the evenings are cool (an important consideration not only for foreigners but also for the many farmers who have migrated here from Brazil’s south). Rainfall is adequate and, crucially, predictable. Transport logistics, it is true, remain problematic, but the distance to market is much less than in Brazil’s other big agricultural frontier in Mato Grosso state, to the west.
Above all, there is a lot of virgin land and it is still relatively cheap. This means farmers here can apply from scratch the lessons learned over the past 20 or 30 years as central Brazil, formerly regarded as useless for agriculture, has been transformed into one of the world’s most fertile regions.
Like the farmers in Mato Grosso, those in western Bahia treat the soil with nutrients and put down chalk to reduce its acidity. They rotate crops – typically soya, maize and cotton – to keep soil rich. They use the latest technology, in crop varieties developed for the tropics and in combine harvesters with satellite guidance systems accurate to within a few inches.
But unlike farmers in other parts of Brazil, they have managed to avoid some of the pitfalls encountered during the country’s rapid agricultural development. Many farmers colonised the centre-west and parts of the Amazon basin during the military dictatorship of the mid-1960s to the mid-1980s, when they were helped by government incentives and little regard was paid to social or environmental issues.
Some of them simply ignored environmental regulations that were rarely enforced, tearing down the scrubby cerrado woodland and, further north, the Amazon rainforest, often for ranching. Others were placed outside the law by new legislation in the 1990s that reduced the amount of land they could clear for farming or ranching.
Labour laws were also ignored, with workers often housed in menial conditions and on minimal pay that amounted to slavery.
Better enforcement, education and pressure from environmental groups and the market have brought many improvements. And because western Bahia and the surrounding areas have been settled relatively recently, many farms have been established using modern practices and governance that those in other parts in Brazil have adopted only slowly, if at all. For investors here, being associated with the kind of practices that have often tarnished Brazilian agriculture in the past is not a risk they are prepared to take.
“You have investors who follow your day-to-day activities, and no investor wants the risk of being involved in a situation that infringes the law,” says Pessôa. “This is the big change. It’s another type of capital and another way of doing business.”
This means not only that farmers are rigorous in obeying environmental and labour laws, but that they also adopt best practice at all levels of the operation, from the correct use of fertilisers and pesticides to hiring reputable lawyers and accountants – and not relying upon friends or relatives, as is common elsewhere.
Because of their commitment to the bottom line, they pay special attention to how their crops are commercialised and to hedging against fluctuations in commodity prices and exchange rates.
Farms here also tend to be big: tens or even hundreds of thousands of hectares, rather than the 40-50 hectares many farmers of the previous generation used to work. Efficiency is gained much more quickly; workers are properly trained, clad, housed and fed, and they are also retained for longer and have a stake in the business, which offers them stable employment and the prospect of promotion.
Not all farms around Luís Eduardo Magalhães are run along these lines. Such farms may not even be in the majority yet, but will be soon. Already, they have enough weight to have created a culture of good governance that other farms will find it almost impossible to ignore. Many farms, for example, have introduced profit-sharing for their workers. Any farms unwilling to follow risk losing their best employees.
“We are very, very positive about Brazil,” says Martin Richenhagen, chief executive of AGCO, the farm machinery manufacturer. “It is one of very few countries that has not only resources but also very professional farmers.”
The expansion of farming into Mato Grosso and other parts of central Brazil has already created a global agricultural powerhouse. From a middling agricultural country just two decades ago, Brazil has become the world’s biggest exporter of beef, chicken, orange juice, green coffee, sugar, ethanol, tobacco and the “soya complex” of beans, meal and oil, as well as its fourth-biggest exporter of maize and pork.
It has achieved this by opening new land for farming and by making enormous efficiency gains. Over the past two decades, productivity – measured in tonnes of grain produced per hectare – has doubled, according to Roberto Rodrigues, a former minister of agriculture and now a consultant and professor at GV Agro, part of the FGV-EAESP business school in São Paulo.
What has often been lacking is good governance and, with it, the capital to deliver the kind of growth to take Brazilian agribusiness to the next level.
“This region will overtake other frontier regions, and other new areas will develop along the same lines,” says Pessôa. “It’s a much more sustainable model. And it’s excellent for the country.”

End of the road for Brazilian farmers’ competitiveness?
By Jonathan Wheatley
In spite of the efficiency gains Brazil’s farmers have achieved over the past two decades, they still face one significant constraint on competitiveness: transport.
According to Agroconsult, a farm consultancy, it will cost an average of $103 to transport a tonne of soya from Mato Grosso in central Brazil to ports in the country’s south-east during the current harvest. That compares with a field-to-port cost of just $22 in the US and $17 in Argentina – both important competitors of Brazil’s on world markets. Even in Paraná, southern Brazil, where the distance to port is much shorter, the average cost per tonne will be $44.
The reason is simple: the extreme paucity of rail and river transport, ideally suited to carrying relatively low-value goods over long distances when time is not of the essence. In Brazil, in spite of the country’s continental dimensions, roughly 70 per cent of cargoes are carried by road. Most highways are poorly paved, if at all, which means high maintenance costs for lorries, many of them old and long past their best. Rising fuel prices and punitive taxes add to the burden.
It would not take much to turn this situation on its head. Brazil is blessed with one of the world’s greatest river systems. Apart from a chain of mountains along the coast, much of its countryside is flat, making it easy to build railways. Yet a chronic shortage of investment has left these advantages largely untapped.
This is starting to change: a railway from Belém at the mouth of the Amazon to the interior of São Paulo state 1,700 miles to the south has been under painfully slow construction since 1987, although progress has speeded up recently. Other railways privatised in the late 1990s have taken some of the burden off highways in the south. Two more railroads that will connect central Brazil to ports in the states of Rio de Janeiro and Bahia are being readied for construction.
Some investors are already taking a punt that these will indeed be built – and quickly.
“The prices you’re seeing for land good for soya beans in the north of Brazil are taking into account the fact they expect to have infrastructure improvements that will allow these properties to be more profitable further down the road,” says James Sinclair of CFS Partners, a São Paulo boutique investment bank involved in farm deals.
“[But] if these infrastructure improvements are not put in place, some of the prices they’re talking about are too high.”

Infrastructure investment puts Brazil on road to prosperity
By Jonathan Wheatley
It is about an hour and 20 minutes by helicopter from Rio de Janeiro to Açu, a coastal village in one of the poorest areas of Rio state.
There is not much to see on the way north once you pass Búzios, the resort made famous in 1964 by Brigitte Bardot when she visited with her boyfriend, Brazilian musician Bob Zagury. The mountains soon recede behind a wide, sandy coastal plain, dotted with coconut plantations and not much else. Green coconuts sell for 50 centavos ($0.28) each near Açu; growers can get more, maybe R$2 each, if they load up a lorry and drive the five hours to Rio. But they may soon be able to earn more closer to home.
Just beyond Açu you can see why: a massive concrete finger, 2.9km long and 26.5m wide, points out into the south Atlantic. This, when it is ready for operation in 2012, will be the main pier for Açu Superport, a port and industrial complex one-and-a-half times the size of Manhattan island.
It would be hard to find a more fitting symbol for the new Brazil. At sea will be 10 deepwater berths for ships carrying oil, coal, iron ore, steel, pig-iron, granite and other goods; 9,000 hectares of land behind the beach are being prepared to receive (among other things) two steel mills, two cement factories, an iron-ore terminal, a thermoelectric power station and a car factory.
The synergies are clear. Iron ore will arrive on a conveyor belt being built by Anglo American from its inland mines in Minas Gerais state. Coal will arrive by ship. Out to sea are Brazil’s most productive oil fields, ready to pump natural gas to the power station – which, as it is on a private complex, can deliver tax-free electricity at a 30 per cent discount to the national grid.
This is more than a list of promises. Açu Superport is being built by Eike Batista, owner of EBX, a holding company that controls five publicly traded operating companies in mining (MMX), oil and gas (OGX), power generation (MPX), shipbuilding (OSX) and logistics (LLX).
LLX is building the port complex at a cost of R$4.3bn. MPX will spend US$10bn on the power plant; Batista hopes to attract another US$30bn from other investors. A dozen companies have already committed, including Wuhan Iron and Steel, China’s third-biggest steel maker, Royal Dutch Shell and White Martins, the Brazilian gas company. Altogether, LLX has signed 70 memoranda of understanding with companies preparing to invest at the complex.
“No heavy industry operating in Brazil or thinking of doing so can afford to ignore Açu,” says Batista. “It will deliver an industrial revolution.”
The contrast with the old Brazil could hardly be more striking. Down the coast at Santos, Latin America’s biggest port, 90 per cent of freight arrives by truck and just 10 per cent by rail. When the FT visited recently, the streets were strewn with soya beans that had bounced off lorries travelling on poorly paved roads from farms as far as 2,000km away.
Today, Santos handles about 90m tonnes of cargo a year – more than a quarter of all Brazil’s foreign trade. By 2014, it will handle 230m tonnes, with about 70 per cent still arriving by road. That will put enormous strain on the two coastal highways and on the town of Santos itself, already congested with queues of heavy lorries crawling through its cobbled streets.
Açu is not the only port in Brazil holding out the promise of world-class efficiency: there are plans for a steel mill and oil refinery at the port of Pecém in the north-east; an industrial complex is developing at the port of Suape, also in the north-east. At Sepetiba near Rio, the mining group Vale is building an industrial complex centred on a port and steel mill.
But if such projects throw the problems of Brazil’s older ports into relief, the outlook for the country’s infrastructure is deeply uneven. In electricity generation, for example, vast hydro stations are being built in the Amazon basin, often in the teeth of fierce environmental protests. At the same time, Brazil has diversified from heavy reliance on hydro power – which is cheap and relatively clean, but can run into trouble when rainfall is low – by building more thermal plants and investing in other renewable sources such as wind power and biofuels.
The electricity sector is widely seen as a successful example of joint public and private enterprise, based on well-designed regulation. In water and sewage, by contrast, regulatory uncertainty has stymied progress. Although 80 per cent of households have access to clean tap water, just 42 per cent are linked to a sewage system and only 32.5 per cent of sewage is treated.
In transport infrastructure – widely seen as one of the biggest obstacles to growth in Brazil – the picture is also uneven. Highways, with a few exceptions, are of dismal quality and the government has been reluctant – often for ideological reasons, say critics – to put them out to concession. Brazil’s rail network is tiny for such a large country; new railways have been promised for decades and some are being built, but progress has been painfully slow.
In spite of shortcomings, one thing can be said that is very positive for the creation of the new Brazil: investment in infrastructure is now at the centre of the political agenda. The rate of investment, while still low, has risen over the past decade and is likely to keep rising. In the past, investment has been sacrificed while the machinery of government has become ever more bloated. This, at last, is changing. For all Brazilians, and not only the coconut growers of upstate Rio de Janeiro, that is very good news.

Will Brazil be ready to play host to the world – twice?
By Harvey Morris
Brazil scored an impressive sporting double last year when it won a bid to hold the Olympic Games in Rio de Janeiro in 2016, capping its earlier selection as nationwide World Cup football finals host in 2014.
Celebrating the choice of Rio as the first South American city to host the Olympics, President Luiz Inácio Lula da Silva declared: “Brazil is no longer a second-class country. It is a first-class country. Today we received the respect that people are already starting to show to Brazil.”
Question marks persist, however, over the readiness of the country’s infrastructure to stage the world’s two premier sporting events to the standards demanded by the organisers.
Both events will demand major investments to improve and build stadiums. But a bigger challenge will be to enhance a creaking transportation system to accommodate tens of thousands of additional visitors and – in the case of the World Cup – to transport them between 12 venues, some as much as 3,000 miles apart.
Some transport projects are already too far behind schedule to meet the 2014 World Cup deadline.
The long-mooted ambition of building a “trem bala”, or bullet train, to speed visitors between the two biggest cities of Rio and São Paulo was to have been a showcase project ready in time for 2014.
Dilma Rousseff, speaking before she stepped down as Lula’s chief of staff to run as his would-be successor in elections in October, said the plan was now to have the project up and running in time for the Olympics but that a World Cup deadline was unlikely to be met.
Air transport, the main means of long-distance transport in a vast, continent-sized country, presents even greater challenges.
The Brazilian government has shelved plans for airport privatisation until after the general election in October, delaying one proposed solution for a sector seen as woefully in need of expansion and modernisation.
Airports are already at full capacity and Embratur, the federal government tourism agency, estimates the number of foreign visitors will more than double in a decade that will see potential bottlenecks around the two big sporting events.
Jérôme Valcke, the International Football Federation secretary-general, has told Brazilian authorities that airport facilities and links between host cities is the issue most preoccupying Fifa ahead of the 2014 contest.
Infraero, the state airport authority that reports to the defence ministry, insists everything will be in place to cope with an estimated 160m passengers expected to pass through Brazil’s main airports in 2014.
When the government’s latest infrastructure investment plans were announced in March, Rousseff acknowledged, however, that the two forthcoming sporting events would test Brazil’s logistics capacity to the limit.

Auto industry speeds ahead as Brazilian demand spikes
By John Reed
At General Motors’ automotive technical centre in São Caetano do Sul, near São Paulo, a group of engineers is studying a cross-section of a car on a screen while conferring with colleagues halfway across the world.
The $100m facility, opened last September, is one of just five global product development sites the US carmaker runs; the others are in Michigan, Germany, South Korea and Australia.
GM’s Brazilian engineers regularly discuss products in development with colleagues around the world in rolling conference calls that can run from 6am to late in the evening.
Alongside GM, also investing in Brazilian engineering and design capacity are Fiat, Volkswagen, Ford and PSA Peugeot Citroën. Increasingly, this means they are developing cars not just conceived, made and sold in Brazil and Latin America, but also destined for the global market.
“We’re now developing programmes not only for our region but for the globe,” says Alberto Rejman, GM’s regional head of product engineering.
The increase in research and development and engineering capacity reflects Brazil’s growing weight in an industry whose centre of gravity is shifting from North America and Europe to faster-growing emerging markets – a long-term industry trend that accelerated during the downturn.
Last year, as the US car market shrank to a size last seen in 1982, vehicle sales in Brazil grew by 11 per cent to 3.1m, propelled by the country’s resource-led GDP growth, expanding credit and growing middle class. Industry analysts believe Brazil will overtake Germany as the world’s fourth-largest vehicle market after China, the US and Japan as early as this year.
While most European and US car plants are working below capacity as the market struggles, many factories in Brazil are operating around the clock. Fiat’s factory near Belo Horizonte in the state of Minas Gerais, produced 722,400 vehicles last year, second only to VW’s mammoth plant in Wolfsburg, Germany, which made 740,000.
As the Brazilian market sets new sales records, carmakers are reporting bumper profits. Fiat, which does not break even on its carmaking business in Europe because of intense competition, earned nearly $1bn after tax in Brazil last year, where for the first time it sold more cars than it did in Italy.
Ford, struggling to return to profitability in the US for the past decade, reported 25 consecutive quarterly profits in Latin America – making most of that money in Brazil. GM does not break out earnings for its Brazilian unit, but in the words of one official it was “printing money”. Like its competitors, GM sees tailored engineering and design as de rigueur for any global carmaker worth its name. “There are certain tastes in certain regions,” says J. Holt Ware, exterior design director.
From the late 1960s, GM began adapting its vehicles’ suspension and structural reinforcement to cope with the potholes and lombadas (speed bumps) of Brazilian roads. Later on, it tweaked cars engineered by Opel in Germany to work in Brazil: a saloon version of the Astra and a pick-up based on its European Corsa small car.
From about 2000, GM began developing vehicles in Brazil, starting with the Chevrolet Celta supermini and including the Agile small car, launched last October. Its technology centre, with more than 2,000 engineers, now designs fully formed Chevrolet cars destined not just for Brazil.
“We have now moved into global programmes and are designing pure-bred Chevrolet products from the get-go,” says Ware. “Our skill sets here are as good as, or better than, any in the world.”
Similarly, Ford employs roughly 1,000 engineers at its development centre in the northern state of Bahia. In April, Alan Mulally, chief executive of Ford, announced that it would invest $4.5bn in Brazil in 2011-15 and develop the EcoSport, a compact SUV engineered in Camaçari, Bahia, as a global vehicle, with projected worldwide sales in its different variants of 1.6m by 2014.
“For the first time, Ford is designing a global product that will be produced in Brazil,” says Rogelio Golfarb, Ford do Brasil’s institutional director. This is not just a point of pride for the local industry, but also a hard profit calculation. Carmakers, under intense competitive pressure, must pull together their global operations to remain profitable.
“No carmaker is developing cars for a single market today,” says Thomas Schmall, president of Volkswagen do Brasil. “They must be sold and produced in India, Africa and Asia.”
The industry now accounts for close to 5 per cent of Brazil’s GDP and more than a 10th of its industrial output. Carmakers are predicting continued growth, with at least 20m Brazilians having joined the ranks of the middle class in the past decade.
Brazil’s market, where high taxes make all cars expensive, was long dominated by small, no-frills “popular” cars, many with one-litre engines. While most are “flex-fuel” (equipped to run on ethanol), Brazil has not been a leader in other alternative technologies, such as hybrid or electric cars. And while the country can be proud of its home-grown cars, in other regions they would be considered very low-spec.
But Brazilian drivers are starting to demand features such as air conditioning, electric steering and automatic transmission. New regulations mean features such as air bags and anti-lock braking systems will become standard over the next 3-4 years.
“Consumer behaviour is starting to change,” says Fernando Trujillo, analyst with CSM South America. “This will be good for Brazilian production – it will make cars competitive with the world.”
The big carmakers – protected for years by Brazil’s 35 per cent import duty on cars – admit their margins are under threat from growing competition. That raises the stakes as they expand their ability to make cars in and for Brazil.
While the market’s big four – Fiat, VW, GM and Ford – control nearly 80 per cent of the market, Asian carmakers are eroding their dominance. South Korea’s Hyundai and China’s Chery Automobile both have plans for Brazilian plants.
“Brazilian consumers are becoming much better educated,” says Hau Thai-Tang, product development director for Ford do Brasil. “The days of manufacturers selling last-generation products in Brazil are numbered.”

Massive dam project comes with sizeable obstacles
By Ed Crooks
The proposed Belo Monte dam project encapsulates the problems facing large new hydro-power developments in Brazil.
Dam design has evolved since the projects of a previous generation, such as the spectacular Itaipu hydro-electric power plant in the south of the country, which began operation in 1984, and Belo Monte is intended to have a smaller impact on local communities and wildlife habitats.
But the project has nevertheless attracted a storm of protest, not only from local people, but also from environmental campaigners and celebrities in the US. James Cameron and Sigourney Weaver, the director and star of Avatar, respectively, have campaigned fiercely against the project, highlighting the similarities to their film.
Belo Monte, planned for the Xingu River in the Amazon region of northern Brazil, is a large and ambitious project. With full capacity expected to be about 11,200 megawatts, it would be the third-largest hydro-power plant in the world, after the Three Gorges dam in China, and Itaipu.
In April, the contract to build the dam was won by Norte Energia, a consortium that has Eletrobrás, Brazil’s largest power generator, as its major shareholder with just less than 50 per cent of its shares.
Eletrobrás is listed on the stock market, but the state owns more than half its shares.
The project is strongly backed by the Brazilian government, which believes the electricity generated will be essential to meet rising demand. Critics have suggested the development is unlikely to be economically viable, and that projections for the dam’s total power supply over the course of a year – generation will be lower in the dry seasons – have been overly optimistic.
The strongest objections, however, are over the impact on the area. The Belo Monte project would mean flooding 500 sq km of rainforest, far less than the 1,350 sq km that was flooded when Itaipu was built but still enough to enrage indigenous people.
One group of Kayapo people has blockaded a ferry crossing. The chief of another told TF1 of France: “I have asked my warriors to prepare for war.” Kayapo chief Megaron Txukarramae described President Luiz Inácio Lula da Silva as “enemy number one”.
However, with fossil fuel or nuclear plants also presenting a range of difficulties, it seems highly unlikely that the government will renege on its support for Belo Monte.

The long road to rainforest conservation
By Fiona Harvey
Flying over the Amazon rainforest, the scale of the wilderness is hard to comprehend. More than half the world’s rainforest lies in Brazil and the Amazon. So huge and so impossible to conquer that it is still home to an estimated 40-50 uncontacted tribes and contains thousands of unique species of plant and animal.
And yet, for enormous sections at its edges and radiating out from its few urbanised centres, the encroachment into the forest is obvious. Large sections have been cleared, often for ranches grazing thousands of cattle, stretching for many miles.
The rainforests of Brazil have been an icon of the environmental movement for years, as the scale of destruction has become apparent: an estimated 230,000 sq miles have been lost since 1970. Brazil points to success in slowing the rate of deforestation under President Luiz Inácio Lula da Silva: in 2004, a near-record of at least 4,100 sq miles (an area almost the size of Jamaica) was cut down, but in recent years that rate has more than halved.
But severe problems remain. One is governance: exerting control over such a huge area is impossible, and the government struggles to limit illegal logging and other activities. Satellite images, including Google Maps, are helping, but more resources are needed.
Another is that the Brazilian government must perform a delicate balancing act between the powerful interests of the ranchers and soy farmers, and the activities of landless peasants who venture into the forest simply to cut down a few acres where they can grow food for their families. To shift that balance in favour of conservation requires money. If forested nations – not just Brazil but also Indonesia, Malaysia and the Democratic Republic of Congo – were rewarded for keeping their forests standing, deforestation could be slowed and halted relatively quickly.
For decades, the world has failed to agree on a way of achieving this. At the Copenhagen climate summit last December, governments failed to create a mechanism that would ensure the transfer of money from developed to forested nations.
A breakthrough came at last in May, when Norway led an agreement among several countries that will result in the transfer of $4bn for forest preservation. The first beneficiary of the agreement, called Reducing Emissions from Deforestation and Forest Degradation (Redd), will be Indonesia, which is to receive $1bn from Norway. However, Brazil was also represented and will be included in future talks.
“Brazil actively participated in the process of developing the initiative, and considers it essential to ensuring sustainable forest management in the coming years,” says Izabella Teixeira, Brazil’s environment minister. “Redd is important because it demonstrates that global partnership is possible.”
She says Redd can go ahead without the global treaty nations are still hoping to draw up to replace the Kyoto protocol when its main provisions expire in 2012. “Brazil firmly believes in the formal negotiation process, but in the meantime, climate change is too important to wait,” she says. “We need to show the world action. Redd will set an interim foundation for the formal strategy that is eventually negotiated.”
Recently, the Brazilian government announced an expansion of palm-oil production. Its plan is to ensure that this will be done in an environmentally responsible and sustainable manner, by only using land already degraded. Cutting down native vegetation for palm-oil plantations will be forbidden. The government argues this will provide jobs and prosperity as an alternative to destroying forest.
Green organisations are also taking steps to try to link the destruction of the Amazon rainforest with the activities of people in the developed world.
Greenpeace scored a major success last year with a campaign directed towards luxury goods companies and food producers. It managed to trace the leather in luxury goods and meat in certain food products sold in western supermarkets back to cattle that had been raised in the Amazon. Although many processing companies in Brazil are supposed to have rules in place to ensure their supply chain does not include Amazonian cattle, Greenpeace found evidence of breaches.
The campaign worked, as several luxury goods retailers and food producers said they would examine their supply chains and processors to ensure that no cattle farmed in the Amazon could find its way into their products.
Sarah Shoraka, Greenpeace forests campaigner, says: “Companies are driving the destruction of the Amazon by buying beef and leather products from unscrupulous suppliers in Brazil. The cattle industry is the single biggest cause of deforestation in the world and is a disaster for the fight against climate change. Global brands must take a stand.”
As well as taking part in the Redd initiative, Brazil has become much more engaged in ongoing international climate change talks. As the Copenhagen talks looked like breaking down in their final stages, the so-called Basic nations – Brazil, South Africa, China and India – got together with US President Barack Obama and forged a compromise. They put their names to a short-term agreement that would commit them to action on emissions. It was the basis for the Copenhagen Accord, a deal that, for the first time, involved both developed and developing countries signing up to limit their greenhouse gas emissions.
Brazil hailed the deal as a breakthrough; it had already taken a lead in the talks by announcing one of the most ambitious emissions-reduction targets for a developing country. The country aims to reduce its greenhouse gas emissions by between 36 per cent and 39 per cent by 2020, relative to business as usual. That should amount to an absolute reduction of roughly 20 per cent on 2005 levels.
The government is also keen to portray Brazil as an example of a “green” economy. For years, drivers have used biofuel produced from the country’s massive sugar-cane plantations. Brazil’s ethanol plants are widely acknowledged as the most advanced and efficient in the world. For instance, they require much less energy to distil the fuel as they use plant waste, known as bagasse, for heating.
A frustration for Brazil, however, has been the tariffs imposed by other countries (chiefly the US) on imports of its biofuels. The government hopes this might eventually be resolved, perhaps as a byproduct of the climate change talks. However, the role of biofuels in the Brazilian economy may be diminishing in favour of something much less environmentally friendly.
The country is home to the second-biggest oil reserves in South America after Venezuela’s, and production of substantial reserves of natural gas is just beginning to ramp up. Fossil fuel companies are looking forward to a bonanza. For Brazil, the future may be less green than it has been painted.

The power set: five influential Brazilians
By Jonathan Wheatley and Vincent Bevins
The FT profiles five men who can each claim his part in Brazil’s rise – from running its capital markets to Rio’s Olympic selection.
Carlos Nuzman
Few men can claim to have bested Barack Obama. But despite a last-minute intervention from the US president, it was Carlos Arthur Nuzman who was victorious in the Olympic bidding sweepstakes last October. Crowds on the streets and beaches of his native Rio de Janeiro burst into celebration at the news their city would be hosting the Summer Olympics in 2016.
It was a long time coming, some said: no South American country had ever hosted the games. But as president of the Brazilian Olympic committee (COB), Nuzman made the case that Brazil could rise to the challenge. And now, as chairman of the organising committee, he must prove it.
Olympic firsts are familiar to him: in the 1964 Tokyo games he competed for Brazil in his own sport, volleyball. Later, having launched a career as a lawyer and businessman, Nuzman took over as head of the Brazilian volleyball confederation, and the international success of Brazilian volleyball teams is often attributed to his leadership between 1975 and 1996.
As COB president, Nuzman’s bid to stage the Olympics in Rio in 2004 was thwarted, but he brought the Pan American Games there in 2007, showcasing the city’s talents in preparation for the 2016 bid. He also launched a training programme for athletes and coaches, and was able to get the full backing of the government for his Olympic bid.
Nuzman will have few worries about sportsmanship or enthusiasm at the Rio Olympics. Far more challenging are the twin obstacles of inadequate infrastructure and the threat of violence. The often shocking levels of lawlessness in the favelas that surround Rio can be addressed, he said during the bid process, through a special security project for the Olympic village, relying on the armed forces if need be.
The infrastructure challenge may prove to be more difficult to overcome. Brazil has longer to prepare for the Olympics than for the World Cup in 2014, but rumours are already swirling that the Brazilian football confederation, under the leadership of the controversial Ricardo Teixeira, is behind on many of its construction timetables. The country is woefully behind in infrastructure building generally.
It will fall on Nuzman to show that Brazil can handle the responsibility that he, and many others, have long argued it deserves. – VB
Eike Batista
Eike Batista is Brazil’s richest man, with a fortune estimated at $27bn, and the eighth richest in the world, according to Forbes magazine. He has been used to media attention from an early age; his father, Eliezer, helped turn state-owned miner Companhia Vale do Rio Doce – later privatised and renamed Vale – into the world’s biggest producer of iron ore and the second-largest mining company in the world.
Raised as a polyglot in Europe, Batista sought financial independence while studying engineering at the University of Aachen by selling insurance door to door. Back in Brazil, he hit the headlines in 1991 by dropping his society bride-to-be for model and carnival queen Luma de Oliveira, with whom he went on to have two children. His enthusiasm for extreme speedboats earned him Brazilian, American and world championships.
But Batista is not the playboy his early fame suggests. He no longer races speedboats but recently secured a 10-year contract to host the sport’s world championships, held for the first time this year off Rio de Janeiro.
Brought up with mining and logistics, Batista has made these his own business since the early 1980s, first as an intermediary for diamond and gold miners in the Amazon, and later by developing his own mines in Brazil and overseas. From 2000, he concentrated his attention on Brazil and created EBX (his initials, plus X for multiplier of value) and its subsidiaries MMX (mining), MPX (energy), OGX (oil and gas), LLX (logistics) and OSX (shipbuilding and other supplies for the oil and gas industry).
He achieved something close to notoriety among Brazil’s often-sceptical media when he raised roughly $10bn from the initial public offerings of all five companies between 2004 and 2008, with little more to offer investors than ambitious plans. But his companies’ investments are on schedule and beginning to live up to their promises. MMX – which sold some of its mines to Anglo American for $5.5bn in 2008 – is already producing iron ore. MPX and OGX will be delivering energy and oil by mid-2011. LLX’s first port, Sudeste, will be operational by the end of 2011 and Açu Superport by the following year. OSX’s first shipyard is also due to commence operations by 2012.
Batista jokes that he is delivering his own private PAC to Brazil – a reference to the government’s flagship accelerated growth programme, designed to deliver the infrastructure Brazil so badly needs. It is not a bad assessment. – JW
André Esteves
The youthful face of André Esteves has been spotted at some of the main events within Brazil’s fast-growing capital markets recently.
He was there when Cosan, Brazil’s biggest sugar and alcohol group, announced its $4.9bn merger with Royal Dutch Shell – one of 13 mergers and acquisitions worth roughly $12.5bn that Esteves’ investment bank, BTG Pactual, has been involved in over the past nine months. During the same period it has also taken part in initial public offerings that raised a total of $24.5bn for 11 clients, including Spain’s Santander, whose IPO of its Brazilian subsidiary was the world’s biggest last year.
Formerly as media shy as most Brazilian investment bankers, Esteves has emerged as the public face of the country’s meritocratic investment banking culture, and he is expected by many to challenge billionaire entrepreneur Eike Batista (left) for the position of Brazil’s wealthiest individual.
But although Esteves admits to having more money than he can spend, he says getting rich was never his main motivation. “I never worked hard so that I could sell up and go to the beach,” he told the FT shortly before the Santander IPO. “I have always worked to be part of something bigger, to be a driver of change.”
His pace of activity suggests he is already there. Esteves first joined BTG Pactual as a 21-year-old systems analyst in 1989. He rose quickly and, in 1999, he and younger partners wrested control from its founders, leading Pactual through one of the fastest periods of expansion in Brazil’s capital markets.
What happened to Pactual between 2006 and 2009, when it was owned by Swiss bank UBS, is the stuff of modern legend. UBS claims it bought it for $2.6bn in 2006 and sold it back to Esteves and partners in a fire sale forced on it by the global crisis for $2.5bn. People in Brazil give different figures: they say Pactual was sold for $2.9bn with equity of $300m (after capital had been shared out to partners) and bought back for $2.2bn with equity of $2.1bn. As one person put it: “Sometimes you can have your cake and eat it.”
Either way, it left Esteves in charge of one of Brazil’s most powerful investment banks. A force for change indeed. – JW
Nizan Guanaes
Nizan Guanaes views himself as an ambassador for his country. The chairman of Grupo ABC, Brazil’s largest advertising and marketing services group, believes the expansion of ABC abroad is helping to promote Brazil and, as such, to transform the country’s economic role.
“Brazil is an emerging market,” Guanaes says. “We need to be seen as an emerging culture. We have to move from being a commodity country to building world brands from Brazil.”
Born and raised in the city of Salvador, the young Guanaes also spent some of his formative years in the UK. After returning to Brazil, he built a reputation as a skilled advertising copywriter. In one memorable television advertisement he worked on, entitled “Hitler”, for newspaper Folha de São Paulo, a camera pans out from an extreme close-up of the German dictator while a voice recounts his achievements. When the infamous face becomes clear, another voice says: “It is possible to tell a heap of lies while only speaking the truth.”
In 1989, Guanaes took over the DM9 agency with business partner João Augusto “Guga” Valente. In 2000, DM9 was acquired by DDB Worldwide for $111m, and Guanaes left advertising as part of a non-competition agreement to launch internet portal iG. Two years later, he returned to take over DM9DDB with Valente, and founded the advertising agency Africa.
These companies were the first in what later became Grupo ABC, a holding company that comprised 18 companies with operations ranging from ads and branding to promoting Brazil’s beach fashion events and putting on musicals.
Now the world’s 20th-largest communications group, with annual revenues of $277m, Grupo ABC’s international clients include Peugeot, Wal-Mart and Procter & Gamble.
Dividing his time between New York and São Paulo, Guanaes remains committed to expanding operations further, particularly into businesses with a digital focus. In the past two years, Grupo ABC has acquired two Californian agencies, Dojo and Pereira & O’Dell (the latter voted California’s best digital agency), while another of his companies (he declines to say which) has signed a contract with LucasArts.
An eager participant in the Clinton Global Initiative who boosts his own image by attending events such as Davos, Guanaes argues that Brazil should seize the opportunity and do the same. “Brazil wants to know, and be known,” he says. – VB
Edemir Pinto
Edemir Pinto has seen remarkable changes since he took over as head of BM&FBovespa, Brazil’s multi-asset exchange. He became chief executive in 2008, shortly after BM&FBovespa was created by the merger of the country’s futures exchange and the São Paulo stock exchange.
In two years, Pinto has overseen rapid growth in Brazil’s exchange trading, and the emergence of the country as an increasingly sought-after investment destination – so much so that Brazil’s combined securities, futures and commodities exchange has become the world’s third-largest exchange by market value.
An economist by training, Pinto joined the BM&F futures exchange in 1986, becoming responsible for risk management and settlement the following year. By 1999, he was chief executive. When BM&F merged with Bovespa, he initially served as co-chief executive and chief financial officer of the new company.
As Brazil shrugged off the effects of the global financial crisis and interest rates plummeted in developed countries, capital poured into Brazil – to the point where the government imposed a 2 per cent tax on foreign portfolio investments to slow appreciation of the real.
Pinto worried that Brazilian equities were under “friendly fire” – that investors might simply prefer to buy shares of Brazilian companies listed abroad rather than at home. In the end, the tax proved largely symbolic and did not roll back BM&FBovespa’s growth. In spite of a drop-off at the beginning of this year, the Ibovespa, Brazil’s main equity index, has almost tripled in dollar value since March 2009.
Pinto says Brazil’s experience with crises has left the country with sound financial regulation, which provides stability for investors. “We did a review of the regulation of our exchange, and don’t think we have anything to improve,” he says. “We’ve done that.”
Under Pinto, BM&FBovespa has reached several growth milestones recently. In March, the number of options traded exceeded those traded on any US exchange. In May, the exchange received an investment-grade rating from Moody’s, the rating agency.
Pinto says capital markets in Brazil could stand to be less dependent on foreign money, and there is room for internal demand to grow. But he recently claimed: “By the end of next year we will be the second-biggest exchange group in the world.” – VB

A nation’s destiny
By Luiz Inácio Lula da Silva
When I look back on my seven years as president of Brazil, I have great reason to be proud of the achievements of my government.
In that time, we have returned to growth an economy that had long been stagnant, taken tens of millions of people out of absolute poverty, created more than 14m formal jobs and increased workers’ incomes. Today, most Brazilians are members of the middle class. Our internal market has also grown exceptionally, which was crucial in protecting Brazil from the worst effects of the global financial crisis.
We did this while keeping inflation under control, reducing the ratio of debt to gross domestic product and rebuilding the regulatory functions of the Brazilian state.
We set in motion a powerful process to improve our infrastructure – in energy, housing and social assets – through the accelerated growth programme. As part of this, we are eliminating the bottlenecks that have affected our competitiveness in the past – what is often called the “Brazil cost”.
I am the first president of Brazil without a university degree, yet my government has built the most universities, and ensured they open their doors to hundreds of thousands of young poor people.
Brazil has also been able to substantially reduce its vulnerability to external shocks. We are no longer debtors, but have become international creditors. There is no little irony in the fact that the union leader who once shouted “IMF out!” in the streets has become the president who paid off Brazil’s debts to the same institution – and ended up lending it $14bn.
It is particularly satisfying to have led these changes while strengthening democracy. The tough criticism I have faced from the opposition and from sections of the media are testament to the health of Brazil’s democracy.
As I near the end of my second term as president, what makes me particularly proud is the place Brazil has come to occupy in the world over the past few years, along with other emerging nations. With them, we are creating the basis of a new international economic and political geography. With them, we have sought to build a world that is more just in social and economic terms – free of hunger and misery, respectful of human rights and able to confront the threat of global warming.
But the successes my government has achieved cannot obscure the enormous challenges that still lie ahead. Most importantly, we still have significant amounts of poverty in our country. The creation of opportunities for our young people, in particular, should remain a key objective, as it is central to the future we are building for Brazil. To do this, we must address issues such as how to improve our education system, how to find effective ways of dealing with drugs and violence, and how to offer our young people real choices in terms of work, leisure and culture.
Some of these initiatives will be decisive in the construction of an economy that is based increasingly on knowledge. The great advances we have made in the field of science – which have placed us among the best in the world in this area – must continue and be translated into technological progress.
But there are also political deficits we will have to face. The reform of the Brazilian state, which we have begun, must continue and deepen, along with tax reform. The reform of our political and electoral systems cannot wait any longer – that would compromise the continuity of the advances we have enjoyed in recent years.
For myself, after leaving the presidency I want to continue to contribute to improving people’s quality of life. At the international level, I intend to concentrate my attention on initiatives to benefit the countries of Latin America and the Caribbean, and the continent of Africa. Brazil has much experience it can share. We cannot be an island of prosperity surrounded by a sea of poverty and social injustice.
I want to continue the efforts my government has made towards creating a multilateral and multipolar world that is free from hunger and poverty. A world in which peace is no longer a utopia, but a concrete possibility.