Keeping the balance

“SHALL we risk it? What do you think?”

Jacobus and I were not talking about putting client money into a highly leveraged micro cap listed on the secondary exchange of outer Mongolia.  It was the end of a twelve-hour day at a conference in Sao Paolo, our heads aching from trying to reconcile the sanitised versions of the interpreters with the passionate delivery of a dozen or so Portuguese speaking management teams. The taxi queue snaked ahead of us in the humid pre-dusk evening.

We were talking about the 15-minute walk to our hotel.  During the day we heard about bulletproof cars for the privileged, armed gangs arriving at secure complexes with trucks, mowing down the guards and selecting what they want before driving off. We witnessed a snappy red helicopter safely depositing a businessman on a rooftop. The CEO of an insurance company, when asked how they managed to reduce the incidence of theft, responded: "Well, we started from a very high base". 

The good thing about conferences in emerging markets is that the bags and the pens are always better – at least over the past few years. So Jacobus and I devised a plan. We put our laptops into our conference rucksacks (as if that is not screaming "foreign visitor!  Mug here!") and flaunted our empty laptop bags while confidently striding towards our hotel. I had a brief vision of a tourist walking through the Kruger Park armed with a chop in one hand to distract the lions. 

With 80’s band Spandau Ballet and Alphaville performing in South Africa in May, it is only fitting to remind ourselves that during that decade, the CPI in Brazil went from 4 to 100 000 000. The same ten years that gave us “Forever Young”, “Through the Barricades”, “Gold” and “True” also gave Brazil hyperinflation. The government financed its operation and its development projects not out of taxes or borrowing funds but by simply creating money. Not that the other two methods have turned out to be so much better for other countries.  I recall a joke from my early days in investing: "If you are traveling in Brazil, which is better – a taxi or a bus?"

Like South Africa, Brazil has a young population, with two thirds of the inhabitants between the ages of 15 and 64, and over a quarter younger than 15 years. 1985 was also a watershed year for them.  Here in South Africa we heard the Rubicon speech in the same year that Military rule ended in Brazil. They have embraced a lower inflation environment for the past decade or so, just like us, following the successful implementation of inflation targeting.  

With a population nudging 200m and GDP growth of around 5% between 2004 and 2008, Brazil’s major cities are bursting at the seams.  To put it into perspective, 3 times as many people live in urban Sao Paolo than in metro Johannesburg, and twice as many in the metro area.  Like many emerging countries, it has a fast growing middle class. 

Two thirds of the GDP is services based, much like South Africa, taking them out of the category of poor third world countries dependent on the developed world to buy their commodities.  In fact, while more than half of their exports consists of commodities, including Oil, Steel, Pulp, Soy and sugar, only 14% of their GDP consists of exports. This compares to 36% for South Africa, and 80% for Hungary.  Brazil Foods is the largest poultry exporter in the world, slaughtering 7m chickens a day, with most of this being consumed domestically.  Despite this amazing growth in protein consumption, the average Brazilian still only eats a seventh of the processed meat consumed by your average German. 

With net public debt around 40% of GDP (materially below that of the UK and US) and foreign reserves growing a whopping five times over the past five years, it is no wonder that Brazil shrugged off the credit crisis a lot quicker than the likes of the US and UK.  While the developed world is rebounding, the absence of credit growth and the overhang of debt loom as structural obstacles to a sustained recovery.  In Brazil, credit growth is alive and well as a normal part of the cycle, with consumers far less indebted than their developed counterparts. 

Imports are growing as Brazilian consumers demand more and more, but they have managed to get to a current account surplus for several years, and even with the credit crisis slowing exports, the resultant deficit is still low at around 3% - around the level of the US (which was as high as 6% a mere 3 years ago).  Brazil faces the enviable challenge of maintaining this balance. Interest rates are edging up and the government is fully aware of the privileged situation they are in, and the lessons to be learnt from their own past and the developed world. Whether they can maintain this balance remains to be seen. 

PS.  Jacobus and I got to our hotel safely. The most noxious encounter was with the piles of rubbish on the sidewalks. 

 - Fin24.com