Over the past few weeks, there have been foreboding blips in the media about Brazil's economy. There's one story about the problems with Brazil's dependence on China, and another about the commodity slowdown and "the end of Brazil's magic moment." There was a bleak Foreign Policy piece called Carnaval is Over, predicting that Brazil's boom is coming to an end. There was also an oddly named op-ed in The Telegraph called Swimming naked in Brazil's bubbly waters, warning about possible credit and housing bubbles. And there was also a brief note in today's Estado de São Paulo that says Brazil is getting close to its consumer debt limit. It's not the first time analysts have predicted bubbles in the Brazilian economy, which some economists have assured won't happen. But there are signs the economy is slowing, despite strides that ensure Brazil will remain one of the world's largest markets.
When trying to figure out what's going on with Brazil's economy and understanding the dynamics of how things work, I've found that one of the best places on the web is a blog called Brazilian Bubble. There, you can read realistic, concise, and entertaining coverage of Brazilian economic, financial, and business news. Plus, it's way beyond bubbles, with everything from how Brazil's development bank works to the latest mergers to analyzing inflation numbers. It's not all gloom and doom; they focus on all aspects of the economy, both good and bad. Run by a small group of Brazilian and American business professionals, they'll change the way you think about Brazil's economy. (Because they like to keep their day jobs separate from the blog, they prefer to keep their names anonymous.) Even if you don't agree with everything, their perspective is invaluable to figuring out a market which, like the country, is not for beginners. I spoke to the Bubble guys about the blog and their thoughts on a number of critical issues affecting Brazil's economy.
What's the idea behind the blog, and why did you decide to start it? What kind of feedback have you received?
The blog started as a joke between friends: some of us thought Brazil was experiencing a real estate bubble and some didn't. So we bought the domain for fun and started re-posting cool articles about Brazil from other websites. All in English, as we didn't want to limit ourselves to the Brazilian border. It started with real estate, but then it went to stocks, economy, culture...pretty much a mix. It's important to not take life too seriously. Serious subjects like business and finance should also entertain the readers, so we like to treat everything with a flair of humor. The truth is that we love our Brazil, and we criticize things that most Brazilians do: high costs, bureaucracy, politics, corruption. But at the end of the day, our focus is business and finance, and we feel our site plays in a niche market not explored by others. The feedback we get from our audience is the best possible... we receive emails from avid readers (including high-profile economists) who tell us that they love the site and all. That is good fuel to keep us going, despite a couple of naysayers.
What's your outlook in terms of high costs of living and real estate in Brazil?
Our thought is that there is in fact a real estate bubble in Brazil, but it doesn't mean it will pop tomorrow. As long as there is credit flowing into the system, it can keep going for a while. But the truth is that real estate prices in Brazil have been increasing at a faster pace than inflation for about 50 months in a row. And as the economist Robert Shiller says, although there are moments of euphoria and depression in any housing market, in the long run prices adjust to inflation. Hence, in our opinion, a price correction will take place; it can take 6 months, or it can take 5 years, who knows. Regarding high costs in Brazil, we always discuss this at the blog. It gets more expensive by the day, but Brazilians seem to be willing to pay the price, as long as they can pay for the monthly installments. A friend told me recently that her housemaid makes about R$650 a month and, surprisingly, she was approved for a motorcycle loan that has monthly payments of R$270! Isn't that crazy?
You've written quite a bit about the BNDES. What's your take on it, and is this kind of lending sustainable in the long term?
BNDES is a tool used by the government to lend to businesses and get the economy going...fine. In theory, that role would have been better played by the private sector, which is more efficient, as you don't get the public machine to play politics. But the major private banks in Brazil won't lend...they are too lazy to take risks as long as they keep making money out of high interest rates. They simply have no incentive to lend more. So that's why the government in Brazil plays a crucial role in lending; just ask Guido Mantega how mad he is at the private banks because they resist lowering their lending rates. So, for now, BNDES, Caixa and Banco do Brasil should keep playing that role. Our criticism comes when politics are at play. Why keep lending to Odebrecht, OGX, and Petrobras at less than 5 percent, and not to millions of small businesses? Why keep making the same guys rich over and over again, when there are so many savvy entrepreneurs in Brazil that need that extra push? Brazilians are incredibly creative, but there is no money for them to explore these possibilities. I think it is easy for Eike Batista to write a book saying how Brazilian entrepreneurs could be like him, but no entrepreneur has the leverage in the government that he has. An average entrepreneur doesn't play politics - he is just worried about growing his business, and for that he needs to borrow at low rates. Is there a "Bolsa Familia" for that?
There's a lot of promise in the oil and gas sector but it seems there's going to be a lot of delays in terms of exploiting the pre-salt reserves. How long will it take for Brazil to become a global oil power?
Brazil is already an oil power: it is self-sufficient. How many countries can afford to have that? It is just that (again) the government is in the middle of it, which makes the whole system inefficient. And the government is also dictating how it wants Petrobras to explore its reserves. It gets very hard to get the right execution, efficiency and costs if you have the public machine dictating how to do your job. The market forces cease to exist, costs go up, and delays become a common trend. The government needs to get out of the way and let Petrobras run the show. It is great company but its biggest shareholder is the government. I think Brazil will have its challenges, but if it manages the process well, it can get it right. Only time will tell. It needs to be a private initiative, with some help from the government, not the opposite. It is that famous question: does Brazil wants be more like Norway or Nigeria? One of them is totally market-driven, super efficient, invests wisely, and puts its oil revenue in a well-managed sovereign fund. The second, Nigeria, needless to say anything. Same for Venezuela.
Productivity seems to be one of the biggest economic hurdles in Brazil that isn't discussed as often (though you guys do, of course). What do you think keeps productivity low in comparison to other developing markets?
We've talked a lot about this; it is a sensitive issue to us. Believe it or not, over the past 30 years, worker productivity in the Brazilian manufacturing industry fell 15 percent. When we read these kinds of headlines it makes us wonder what the hell happened to our Brazil... it almost seems like a group of people that should be worried about this were sleeping at their jobs for 30 freakin' years. While these guys were sleeping, China's productivity rates went up 808 percent in that same period. The main issue, besides the urgent need for investments in education and infrastructure, is that Brazil is a closed country. If you don't open the country, the local companies will have no incentives to invest, educate the workforce, trim costs, and make better products. Competition is everything: it is good for consumers, it is good for companies, it is good for the market. Just see the Americans - they have access to good quality products at low prices, while in Brazil is the complete opposite. Brazil needs to be more open, but it seems to be doing the exact opposite by taxing every import. Sincerely, that's a huge turn off.
Taxes and bureaucracy are among the most talked about economic hurdles in Brazil. Which realistic steps could be taken to alleviate Brazil's tax burden?
Shrink the government and fight corruption...but of course it won't happen in our lifetimes. Brazil needs reforms, but there is not a lot of people in the government with the energy and the will to do that. They will prefer to focus their efforts on making the most for their own self-interests, period.