Brazil: giant of a new economic world order

The 'Bric' economies have captured the headlines, but India and China have so far won the lion's share. What about the other half of the acronym? Brazil used to get through finance ministers like Italy got through presidents. Now, buoyed by its wealth of raw materials and the world's best-performing stock exchange, it seems to have found stability
Zoe Wood in São Paula
The Observer,
Sunday May 25 2008
Article history
The sun is coming up over São Paulo and testosterone levels are running as high as they do on the terraces of the famous Morumbi stadium. As the minute hand ticks closer to 8am, the drumming begins, the players pounding on huge samba drums as local sales manager Fernando Correa takes to the floor.
Correa's rallying cry is part Haka, part Wal-Mart chant as he revs up his team of 30 salesmen, who work for Latin America's biggest brewer, AmBev, setting targets for the number of bottles of beer and soft drinks they must hit that day. They sing back, banging the tables and whooping with such intimidating force you don't know whether to join in or hide. Drumbeats echo in the corridor as other teams chime in, a daily chorus repeated in every state as the company's 30,000-strong sales force limbers up for the day.
This is motivation Brazilian-style and the B of the Bric countries (Brazil, Russia, India and China) has a lot to sing about. The Bovespa is the world's best-performing stock exchange, surging more than sixfold since 2003. The index has outperformed the 20 biggest equity markets this year, achieving a record close of 73,526 points last Tuesday.
A sign of investors' enthusiastic view of the country's prospects is that the Brazilian companies that floated last year sold shares at a racy average of 40 times earnings, compared with 22 in China and 17 in India, where the economies are growing twice as fast. Its financial credibility was also given a boost by ratings agency S&P, which last month gave it an investment-grade credit rating for the first time.
By 8am, AmBev's army of vendedores are weaving through the gridlock of São Paulo's motorways on company-issue Honda motorcycles, distinctive in their blue fleeces and helmets. They spread across the city, making sales calls to shops and family-run businesses in affluent parts of the city such as Vila Madalena, where Abercrombie & Fitch-wearing twentysomethings sip designer beers, but also venturing into the favelas, which are answering the strong call to consume as incomes rise in a sprawling city of 10 million people.
The AmBev distribution centre is in Diadema, São Paulo's bustling industrial quarter, home to car manufacturers such as Fiat and Mercedes-Benz, which are enjoying brisk trade as an emergent middle class takes to the already clogged roads. Diadema is where the country's popular President, Luiz Inácio 'Lula' da Silva, began building his union power base. Lula has surprised everyone by placing a steadying hand on a country that had previously been accused of serial failure to deliver. But analysts question whether the country has really put its economic ills behind it or is simply enjoying a bom momento the likes of which have previously been spoilt by debt and crippling inflation.
Much of Brazil's industry is linked to agri-business and other primary ingredients, with rising demand for sugar, steel and oil boosting profits for commodities producers. Foreign investment reached a record $34.6bn last year, with the recent mega-oil find by state-run exploration firm Petrobras bringing further grounds for optimism.
The boom has propelled domestic companies such as Vale, flush with cash from surging iron ore prices, and AmBev, which merged with Belgian group Interbrew in 2004 to form InBev, onto the global mergers and acquisitions stage. This year Vale tried unsuccessfully to buy Swiss rival Xstrata to create the world's biggest mining company, and InBev is now at the centre of fresh deal speculation. Its bankers are said to be working on a $46bn takeover of American brewer Anheuser-Busch. The companies already work together in the the US, where Anheuser sells European InBev brands such as Beck's, Bass and Stella Artois.
AmBev chief executive Luiz Fernando Edmond declined to comment on the prospects of a deal, stating only the current agreement was a 'huge opportunity for both companies.' Edmond admits to personal reservations about the resilience of the Brazilian economy, particularly over inflation, but is confident some things have changed for good. He recounts an anecdote of the old Brazil: a new finance minister got into a lift, only to be told by the operator that he was the country's 78th finance minister. 'What has really changed over the last 12 years is that the economic policy-makers have become more responsible,' says Edmond. 'The last three ministers have stayed for four years each and that has introduced a lot of discipline into the economy.'
AmBev has been lobbying the government to collect taxes more rigorously, as it claims its prices are higher than rivals' because it pays more tax. 'If you don't pay taxes you have a benefit, but welcome to Brazil,' says Edmond. 'The first wave of IPOs forced companies to become formal; some are paying 300 per cent more tax than three years ago.'
Ambev's sales in Brazil, which climbed nearly 6 per cent in 2007, dropped back in the first three months of this year. The company blamed the decline on the early date of the carnival and a 'softness' in the consumer economy. This week the FIPE index, which tracks consumer prices in São Paulo, rose 0.89 per cent in the four weeks to 15 May, while Brazil's general price index, known as IGP-M, jumped 1.54 per cent in the four weeks to 10 May. Food inflation is running at more than 11 per cent, well ahead of the national rate of 4.7 per cent. Observers suggest the desire to drive global cost synergies out of a slowing business could be the rationale behind a potential move on Anheuser.
There are other discouraging signs, more company flotations have been pulled in Brazil this year than in any other country barring the US, after shares in two-thirds of last year's debutants sank below their offer price. The sharp decline in initial public offerings is a global phenomenon but so far this year only three Brazilian companies have floated, raising 780m reais (£241m), compared with 59 issuing 53.2bn reais of new equity in 2007. Interest rates are expected to reach 14 per cent by the end of this year but Erica Fraga, Latin America analyst at the Economist Intelligence Unit, remains positive about the outlook. The unit predicts growth of 4.6 per cent in 2008, more than double the 2 per cent managed in the 1980s. 'Things have changed; we have had 10 years of economic stability,' says Fraga. 'Brazil is enjoying its best moment in a decade.'
Brazil in numbers
Population: 190 million
GDP: $1.3 trillion
Income per capita: $9,695
Consumer price inflation: 4.5pc
Growth rate: 5.4pc