Brazil investments have a long, potholed road ahead

Brazil investments have a long, potholed road ahead

3:12pm EDT

By Brad Haynes and Silvio Cascione

SAO PAULO (Reuters) – If you think you’re seeing light at the end of the tunnel for Brazil’s economy, look again: it’s just brake lights from a growing line of 18-wheelers.

Investment in Brazil probably grew at the fastest pace in three years in the first quarter, official data should show on Wednesday. But as much as two-thirds of the rise may have come from the construction of heavy trucks – hardly the steady capital spending that Brazil so badly needs.

If anything, the new trucks highlight one of the country’s great weaknesses: paltry investments in rail and waterways are forcing more and more goods onto a crumbling patchwork of highways. As more vehicles crowd the same lousy roads, shipping times have lengthened – which perversely creates a need for even more trucks.Brazilians spend more on trucks in a year than the government plans to invest in a decade on new railways, according to economists at Bradesco Asset Management. They compare the investment pattern to spending on diesel generators for lack of a decent power grid – another example of capital spending that is a symptom of poor infrastructure, not a solution.

“We’re skeptical of a really strong rebound in investments during the rest of the year,” said economist Leandro Padulla of MCM Consultores.

The rebound comes after new emissions standards wiped out 40 percent of production last year and new safety rules slowed down truckers’ trips.

The recovering output from truck makers should be enough to lift investments, measured by capital formation, from just 18 percent of gross domestic product in 2012, lagging behind all major economies in Latin America.

Brazil’s meager growth since 2011 is due in large part to that dismal investment rate, which President Dilma Rousseff is struggling to boost toward her goal of 25 percent of GDP. While consumer spending has kept the economy plodding along, a lack of capital spending and a host of transportation bottlenecks make it hard to satisfy demand without stoking inflation.

The good news is that Rousseff’s government has identified many of the infrastructure investments that Brazil most desperately needs and is setting an agenda to make up for lost decades.

Last year she announced more than $100 billion in private road, rail and port concessions – a clear shift in strategy from the cumbersome state programs that disappointed in recent years.

The privatizations have drawn ire from parts of the ruling Worker’s Party but reflect a clear recognition of the potential for private initiative. Landmark concessions at three major airports last year, for example, have accelerated construction of new terminals ahead of the 2014 World Cup.


But industry leaders say that, trucks aside, they’re not expecting a burst of spending on new infrastructure concessions any time soon. Such investments are notoriously slow-moving in Brazil where a contentious bidding process and a thicket of red tape can delay projects for years at a time.

Road and rail plans have already been slow out of the gate.

Despite hopes for bidding to start in December 2012, the first round of highway auctions have been pushed to the second half of this year. Losing bidders may then freeze a project with appeals that can drag on for a year or more.

Once investors have a concession in hand, they must confront an inefficient permit process and an array of environmental regulations that empower local officials and prosecutors to stop a project in its tracks.

For example, the expansion of a winding mountain interstate in Sao Paulo state – nicknamed the Highway of Death for the dozen or more lives it claims per year – resumed last month after a full decade of haggling over permits.

As even Brazilian heavyweights like mining company Vale and billionaire Eike Batista’s EBX Group watch major investments languish due to regulatory snags, foreign investors with fewer inside connections have more reason to be skittish.

“We’ve got various companies with projects they want to invest in, but they don’t because the regulatory risk is very high,” said Jose Augusto Fernandes, the head of policy for national industry group CNI.

A few years ago Brazil could tempt investors to look past those risks, with economic growth as high as 7.5 percent in 2010, but growth has averaged 1.8 percent since then. Interest rates in more developed economies are also expected to rise in coming years from record lows, competing for the attention of foreign investors.


Eventually, if Brazil is serious about boosting investments, it is going to take more than just foreign capital.

Reshaping the economy for investment-driven growth will require a steep rise in Brazil’s savings rate – currently the lowest among Latin American peers and major emerging markets.

“This will require a radical shift in Brazil’s economic model that we fear will be harder to achieve than many seem to expect,” Neil Shearing, head of emerging markets research at Capital Economics, wrote in a recent note.

If Brazil shoots for Rousseff’s investment target without increasing domestic savings, Shearing estimates it would have to run a current account deficit of nearly 10 percent of GDP, leaving the country vulnerable to a currency crisis.

If the money to finance infrastructure investments is going to come out of Brazilians’ pockets, though, something will need to convince a young, upwardly mobile population to stop buying their first cars and start stashing away savings.

The most effective approach would be to scale back Brazil’s generous pension system, Shearing and other economists say, giving more incentive to save for retirement. Judging by the uproar over tweaks to public pensions last year, such reforms would be wildly unpopular. Nobody expects an overhaul soon.

“Given the political resistance to the recent changes, we are not holding our breath – particularly with elections looming at the end of 2014,” Shearing said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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