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 combat them.
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
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 GDP.
Fraga says the severity of the downturn in Brazil is largely
self-inflicted – the result of bad policies, more than
any external factors.
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 efficiency.
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 says.
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 perspective.
"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 done." LF