Brazil defies sceptics as trade puts economy on track for growth

Serious Money: Brazil, Russia, India and China - the so-called "Bric" countries - look set to capture a greater share of the world economy in the future. Within two decades, the four combined could surpass the economic importance of the United States, the world's largest economy. Not surprisingly, the grouping has become a popular destination for investors' money in recent years.

Of the four, Brazil receives least credit for its credentials and some, such as Morgan Stanley's senior economist Stephen Roach, question its inclusion in the group in the first place.

The scepticism is understandable given the country's erratic growth record.

Labelled as the "country of the future" several decades ago, Brazil has endured hyperinflation and periodic bouts of financial crisis.

Economic growth averaged almost 7 per cent in the three decades to the end of 1981, only to drop below 1.5 per cent through the mid-1990s.

Although it has jumped by one percentage point in the last decade, it is vastly inferior to either China or India. But, perhaps, a leopard can change its spots.

Brazil is the world's ninth- largest economy and emerged from military rule two decades ago, although political instability remained high until now.

Luiz Inácio da Silva, affectionately known as "Lula", was elected in 2002, the country's first left-wing president since the return to democracy. He recently secured re-election to serve another four-year term.

Labels don't seem to matter much in Latin America and the so-called socialist has made gargantuan efforts to put his country on a more stable growth trajectory.

Lula's administration has made considerable progress in lowering the country's financial risk. Net public sector debt to GDP has dropped from almost 80 per cent four years ago to 50 per cent today.

Furthermore, the proportion of debt that is denominated in foreign currency has been substantially reduced, as has the amount of floating-rate debt, while the maturity profile has been extended.

More needs to be done, but current trends suggest that Brazil will be awarded investment- grade status within the next 12 months.

Brazil's low growth in recent years relative to other influential emerging economies is not surprising, given that its interest rates are among the highest in the world.

Both short-term and long-term interest rates are above 8 per cent in real terms. However, the perennial demon of inflation has largely been defeated and the most recent release shows an inflation rate of just 3 per cent.

As the global economy slows, the monetary authorities have considerable room to lower interest rates to boost domestic demand.

Brazil's growth in recent years has occurred largely on the back of expanding trade with the rest of the world. External trade has increased from just 11 per cent of GDP in 1990 to almost 25 per cent today.

Nevertheless, the economy is still relatively closed and ranks just five places above Ireland on a list of the world's largest exporters. The economy should become more open in the years ahead given the export opportunities in other emerging markets, most notably in China.

China's efforts to secure supplies of energy and other industrial materials are well documented and Brazil is already the country's third-largest supplier of iron ore.

Less is written about China's increasing hunger for food. Its rapidly growing middle-class will increasingly demand more meat and protein.

However, increasing urbanisation, soil erosion and a chronic shortage of water means that its agricultural sector will not be able to meet the challenge.

Indeed, China's long-standing agricultural trade surplus turned to deficit in 2003 and is set to deteriorate. China's food challenges are Brazil's opportunity - it could become the lion in the export market for agricultural products such as soy, soybeans and meat.

Contrary to the views of Stephen Roach, Brazil does belong among the emerging countries that will command greater economic importance in the future.

Its population is young, with a median age of 28 years, while the opportunities described above are large.

Long-term economic growth of 4 per cent per annum is achievable. The opportunity has not gone unnoticed by the investment community. Stock prices recently hit an all-time high and are up almost 75 per cent over the past 18 months and almost five-fold since 2002.

A strategic position in this market is advisable. Its financial sector is among the most profitable in emerging markets, while lower interest rates and a re-rating to investment-grade status are on the way.

Charlie Fell is an independent consultant and lectures in finance and investment at UCD and the Institute of Bankers in Ireland