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Arminio Fraga: A price to pay

Sep 1, 2013

As Brazil’s prospects take a turn for the worse, its much-touted consumer growth story has come to an end, says Gávea Investimentos chief Arminio Fraga. A less exciting world will replace it

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 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 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 well."

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

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