Viva La Brazil

Read our article in the Cayman Financial Review Magazine, eversion 


 Just thinking about Brazil conjures images of festivity and
optimism. The bright colours and sounds of carnival brush across my mind as I
think about some of the amazing trends that the country has gone through and
what the future holds.

 Changes in demographics have
fuelled the phenomenal engine of growth in this vast, young and vibrant
population of 190.8 million people. Brazil boasts a median age of 29.3 while in
the US the number is 36.9 (CIA Factbook). Brazil’s population is also highly
concentrated within the Economically Active Population range – a demographic to
be envied by the aging populations of Europe and Japan. 

The rise of the
middle class and the associated consumerism that goes hand-in-hand with such
developments has created what is currently another envy of the developed world:
a thriving domestic demand story. 

While the middle
class continues to expand, it continues to spend. According to Banco do Brasil,
between 2003 and 2009, an estimated 35.7 million people entered the middle
class and 20.5 million people moved above the poverty line. The amount of rural
Brazilians living in absolute poverty has fallen to 15.2 per cent of the
population from 28 per cent in 2001. See Figure 1. São Paulo consumer
federation, Fecomercio, anticipates a further 36.1 million people to enter the
middle class by 2014.  




The consumerism that
often accompanies demographic shifts up the social ladder has spurred on a
demand for consumer credit as the growing middle class stocks up on the status
symbols and domestic comforts that were once out of their reach. Demand for
everything from health foods to property has seen dramatic increases.   

According to
Euromonitor International there were an estimated 233 million debit cards and
191 million credit cards in circulation in Brazil in 2009. Credit Card debt
grew 28.8 per cent in 2008 alone. Brazil’s consumer credit expansion not only
allowed Brazil an enviable domestic demand-led recovery, but also helped
Brazilian GDP grow by 7.5 per cent in 2010 (the fastest growth experienced in
24 years) to US$2.1 trillion. Brazil overtook both France and the UK to become
the world’s seventh largest economy, the fifth largest economy among G20

The contrast between
Brazilian and US consumers could not be starker. Last year, US consumers
reduced their credit card balances by 7.5 per cent, while Brazilian consumers
saw their credit card debt increase by 15 per cent.  

According to
provisional data from BCB (April 2011), total individual credit advanced 29.6
per cent over the last 12 months (Apr ’10-Apr ’11). Personal credit represents
48 per cent of total consumer spending and advanced 22.2 per cent over the same
period. Vehicle-related loans have been the fastest growing consumer loan and
are now the second most significant component of total consumer credit. Vehicle
loans accounted for 34 per cent of total credit, after a 44.2 per cent
advancement seen over the last 12 months.  

Total consumer loans
now represent 46% of gross domestic product, while in 2003 the figure was only
24%. See Figure 2. 




While the seemingly
persistent double-digit growth in credit has certainly supported growth via
private consumption, it has also brought attention to some of the risks that
are associated with any growth in debt. Beneath the glowing growth figures are
underlying murmurs of worry about “overheating” and the possible advance of
non-performing loans.  

So far, though,
Standard & Poor’s believes that Brazilian consumers are managing their
increasing debt levels relatively well and keeping their debt compositions
well-balanced (across personal and auto loans, credit cards and overdraft lines
of credit) given the country’s current economic conditions. According to their
calculations, the average Brazilian household’s non-mortgage debt service ratio
was around 20.4 per cent in February 2011, which they believe is lower than
what they consider a level that could lead to a larger household’s propensity
to be delinquent.  

Brazil has amazing
strength in agriculture and ranks as the world’s top exporter of coffee, orange
juice, sugar and beef, and the second-biggest exporter of soy. In addition,
Brazil can boast to being the biggest exporter of iron ore in the world. 

China is Brazil’s
fastest growing trade partner, responsible for 15.2 per cent of Brazilian
exports at the end of last year, from as little as 6.2 per cent as recently as
2003. In the same time frame, exports to the US have fallen from 18.2 per cent
to 9.6 per cent. See Figure 3. 




The combination of
strong internal consumption and the strong external demand for Brazilian
resources fuelling exports has lead to significant price increases. The
government targets inflation of 4.5 per cent, plus or minus
two-percentage-points to accommodate price shocks. The April 2011 reading of
6.39 per cent has therefore caused some consternation amongst policy makers and
consumers alike. 

average Brazilians, the price of the amazing growth they have observed has been
felt in their pockets. According to Euromonitor (July 2010) data, the
percentage of household final consumption expenditures spent on food in Brazil
was 24.7 per cent. This number compares to between 6.2 and 6.9 percent for
American consumers. The rampant rise in food prices on the back of the surge in
commodity prices is thus felt strongly at the family level. Housing prices have
also surged, with apartments in Sao Paulo’s nicest neighbourhoods apparently
having risen 40 to 50 per cent. 

chasing higher yields, as well as the country’s strong economic growth, have
buoyed Brazil’s currency, the Real. The appreciation of the currency has fanned
the flames of the domestic demand story as consumers have taken their
more-valuable reals on shopping sprees abroad. While consumers have celebrated
their purchasing power, exporters have reeled under the pressure of their
exports becoming less and less competitive. Policy makers have paled in light
of the resulting widening of the current account gap. See Figure 4. 




Not to detract from
the amazing growth story that is Brazil – with it’s astounding natural beauty,
abundance of natural resources, favourable demographics and zest for life not
often rivalled, there remain headwinds on the horizon that policy officials are
seeking to manage actively, with the objective of supporting, as
opposed to jeopardizing, the amazing growth story witnessed over the last

The concerns include
a strong and arguably overvalued currency, rising consumer inflation, high
levels of consumer debt as well as significant demands on infrastructure in
preparation for the 2014 World Cup Soccer and 2016 Olympics 

The Central Bank of
Brazil has adopted a number of key macro-prudential measures address these
concerns. Steps taken include: 

Raising the reserve requirement ratio on time deposits and on current

Raising capital requirements on longer-term lending, in an attempt to
slow consumer lending; 

A tax on consumer credit for individuals has been doubled from 1.5 per
cent to 3 in an effort to both cool consumer credit growth and to put a brake
on inflation by reducing the availability of credit;  

Raising interest rates to 12 per cent to battle inflation with rate

Analysing the global
investment environment leaves one feeling that there is no country or region
not faced with significant challenges. As Europe attempts to settle fears of
debt default, the US battles debt ceilings, high unemployment and a flagging US
consumer. Japan is faced with rebuilding itself after its horrific natural
disaster and the Middle East continues to rage in various states of civil war,
while China and India are confronted with escalating levels of inflation.  

While Brazil has its
challenges, these need to be weighed against the phenomenal opportunities that
lie in the wait for this exuberant country. Brazil has entrenched its role as
an important player in the global economy. I would venture to say that position
is likely to get stronger over the coming years.


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Nancy Euvrard

Nancy has worked for Accenture, SCMB and Standard Private Bank. Her investment career began at Melville Douglas, a niche South African Asset Management Company. Nancy moved to the Cayman Islands in 2008 and joined Close Asset Management (Cayman) Limited where she is responsible for the day-to-day management of client portfolios.  With effect 1 August 2011, Close Asset Management (Cayman) Limited will form part of Intertrust Asset Management (Cayman) Ltd.

Nancy Euvrard, CFA
Investment Manager
Intertrust Asset Management (Cayman) Limited
Harbour Place, 4th Floor
103 South Church Street
Grand Cayman, KY1-9005
Cayman Islands

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