By Taimur Ahmad
For more than a decade, a credit-driven consumption boom helped
fuel Brazil's economic expansion, swelling the ranks of its
middle class and lifting the hopes of a nation.
It was a story on which many pinned their hopes - not just
households, but companies and investors, too, drawn in by what
seemed an ever-expanding marketplace.
But that story began to fray two years ago, amid sharply
slower growth. Brazil's economy grew by only 0.9% in 2012.
Although it is expected to expand by more than 2% this year,
it's still a far cry from the 7.5% growth of three years ago.
Consumer confidence has also since plummeted, as concerns grow
over rising prices and the higher interest rates needed to
Where Brazil goes from here is the subject of intense
debate. Arminio Fraga, a former governor of Brazil's central
bank, says the economy has hit a wall - and that without deep
structural reforms, its prospects will remain bleak. "This is a
bad moment for Brazil," he tells LatinFinance in an interview.
"Here is a country that has done reasonably well over the last
12 years or so, but which has struggled to invest more. As a
result, it is now unable to grow very fast."
The founder of Gávea Investimentos, a Brazilian asset
management firm with $7 billion under management, Fraga says
the consumer-driven boom is over. "Consumption is going to
continue growing but at a much lower pace," he says. "It will
not be as exciting [to investors]."
Between 2006 and 2012, low unemployment, rising salaries and
abundant credit gave rise to unprecedented household spending.
Retail sales in Brazil grew about 90% over that period, while
the industry almost doubled in size. But today, levels of
household debt are sharply higher while defaults are running at
record levels and retail sales are starting to falter.
"The consumer play was the hot investment topic here for a
few years," says Fraga. "This was a consumer focus. Or rather,
macro policies emphasized consumption here, more than
investment in recent years. That meant that many companies in
these sectors did very well. I don't believe that we're going
to move back to that [level of consumption growth]."
For a man who invested heavily in the consumer boom -
setting up private equity funds specifically to tap consumer
growth - such a verdict matters. It matters too for an economy
in which household consumption accounts for more than 60% of
Fraga says the severity of the downturn in Brazil is largely
self-inflicted - the result of bad policies, more than any
While slower growth in China, an important market for
Brazilian exports, has weighed on its economy, the main problem
is Brasilia's own failure to stamp out inflation and put a lid
on government spending, Fraga says.
"Brazil's policies have become more interventionist, more
focused on public government lending and less capable of
mobilizing private capital," he says. The government has
"turned away" from a model focused on macro stability and
What's required, he says, is for the government to bring the
inflation rate down to its 4.5% target. At the same time, there
needs to be more fiscal discipline and a focus on addressing
supply-side bottlenecks. "It is important for Brazil to at
least stabilize the ratio of government expenditure to GDP," he
Not so bad
Fraga, who as central bank governor from 1999 to 2002 saw
Brazil successfully through a financial crisis, says pessimism
today towards the country is justified - but must be kept in
"The mood is negative and there's reason for it to be
negative," he says. "But you also have to keep in mind that in
2010 the mood was probably unjustifiably optimistic as
He says that today's downturn is not bad enough "to
characterize a longer, deeper dive into trouble as we had in
the 1980s in particular. I don't think we're anywhere near
that. We'd have to really continue on the wrong path for much
longer for us to go back to those days."
"We just need to be cautious of how bad it was back then in
order for us to avoid repeating those mistakes," he says.
Brazil's 2013 street protests emerged from a popular
campaign against bus fare increases. But the price of
transportation is just one example of the challenges Brazilians
face on a daily basis. "Recent events - protests and the
troubles with infrastructure - all suggest that uncertainty
will be here for a while," Fraga says. "This tends to dampen
the animal spirits."
Yet Fraga is nevertheless hopeful that Brazil's economy can
be put right. "Sometimes the fear factor kicks in and allows
things to happen," he says. "It's never easy, but it can be