Brazil: The hot prospect

Once upon a time, most New Zealand businesspeople regarded Brazil as a bit of a basket case.

Despite its fruity reputation for Carmen Miranda-types getting carnal at carnival time, and for breeding more football superstars than any other nation, the enduring image many have of the Latin American giant is of a nation struggling to deal with corruption, poverty, and decades of economic mismanagement.

These days, however, Brazil is sexier than ever - in all senses of the word. While tourists still flock to its beaches and bars in the hope of partying with beauties who bear a striking resemblance to slinky supermodel Gisele Bundchen, it is the country's bankers who are super-hot right now.

Anointed by Goldman Sachs as one of the world's most promising economic powerhouses, along with Russia, India and China, and still squirming with delight that it has won the right to host the 2016 Summer Olympics, as well as the 2014 Fifa World Cup, Brazil is thoroughly enjoying its moment in the global spotlight.

For many Kiwis, the thought of getting a "Brazilian" has painful connotations. And some pundits are inevitably warning that hype about the country's turnaround - anyone want to move to Dubai? - is ridiculously over-optimistic, given its tumultuous history.

But New Zealand firms doing business in what is one of the world's most fashionable hotspots agree with most of the superlatives and say they can't believe so few Kiwi companies are giving the market a go.

Back in 2001, Goldman Sachs economist Jim O'Neill raised a few eyebrows when he predicted Brazil would become one of the world's top five economies by 2015 and that it would join Russia, India and China to overtake developed states like Britain, Germany, and France by 2050. Chindia and Russia, sure, but Brazil?

While blessed with an extraordinary abundance of natural resources - including land so fertile that it reaps at least two harvests a year - Brazil has generally managed to squander its good fortune in its recent past. After a Rogernomics-style shakeup in the mid-90s, however, it is showing every sign of finally delivering on its potential.

In November last year the Economist featured Brazil on its cover - with an illustration of Rio de Janeiro's famous statue of Christ the Redeemer blasting off into space, like a Nasa rocket.

That same week, one of the country's top business officials happened to be in Auckland for a conference organised by AUT University and the Latin America New Zealand Business Council.

Mario Marconini is a former Brazilian trade official who these days heads the international arm of a prominent business lobby group, Fecomercio. He was clearly chuffed at the Economist's coverage.

"Brazil is Disneyland all of a sudden, because people are so interested," he marvelled. However, he warned that there were still plenty of challenges for those who are considering doing business there.

The Bric (Brazil, Russia, India and China) countries have three things in common: they each have populations of more than 100 million, more than 2 million square kilometres of land, and a nominal GDP of more than US$600 billion ($875 billion).

All four are also renowned for widespread corruption. Last year Transparency International continued to rank New Zealand as the world's least corrupt country. Brazil came in at number 75, only slightly ahead of Colombia, Peru, Suriname, Burkina Faso, and China.

Brazilian companies also have a reputation for bribery when doing business abroad. Of the world's 22 largest exporters, Brazil, India, Mexico, China and Russia are all ranked by Transparency International as the most likely to try to bribe officials in other countries.

Brazil's complex tax system - which taxes not only incomes and profits, but costs as well - and its stifling bureaucracy, are legendary. Somewhat ironically, Brazilians point out they have developed such systems to counter corruption.

But on many other measures, such as closing the enormous gap between its filthy rich and its even more filthy poor, it is clearly making good progress.

The catalyst for this stabilisation was the decision in 1994 to commit to the Real Plan, which introduced a new unit of currency known as the "real". Its central bank was ordered to target inflation, and it set about opening its economy and privatising many state assets.

Alexandre Pundek, a senior adviser to Brazil's central bank, also attended the Auckland forum at AUT and was frank that Brazil had "exactly copied" New Zealand's Reserve Bank Act with its decision to target inflation. In Brazil the target rate is 4.5 per cent, with 2 per cent leeway either side.

Like New Zealand and many other countries that were benefiting from the boom in commodity prices, Brazil was struggling with a high exchange rate as a result, Pundek admitted. But he argued that tinkering with monetary policy was not an option.

"I very much do not favour any intervention on these things, and this is very much the mentality of the central bank as well. If you have an inflation target, you should not have another target as well," he suggested.

Pundek, like many others, believes the international solution is to convince China to float its currency. However, natural economic ebbs and flows are also playing their part.

Last year the real rallied by 33 per cent, making it the best performer among the world's major currencies. But this year it has fallen sharply. And last month Brazil posted its first trade deficit in 12 months, after its strong currency increased demand for imports.

Brazil's privatisation of telecoms was the biggest in the world, and a lot of the standout performers in the private sector these days, such as mining company Vale, aeronautics company Embraer and steel company CSN, were once state-owned.

It has also embraced free trade. Since 1991 it has struck trade agreements with Argentina, Paraguay, Uruguay, India and South Africa, and blames the US' aversion to liberalising agriculture as the only reason the Free Trade Area of the Americas didn't go ahead. Although there have been few deals more recently, it is prominent in the WTO and the G20.

Marconini believes that contrary to what Barack Obama's spin doctors say, the United States is not likely to free up trade with countries such as New Zealand any time soon.

Obama had more than enough big issues on his plate without risking the ire of the unions that supported him by opening up its borders, he suggested.

"I think by the time he deals with these other big issues, he's not going to have time for free trade... They're going to make it look as if he's in favour of free trade, but don't believe it."

While foreign trade still makes up a low percentage of Brazil's GDP, it is well diversified, and in recent years has reduced its exposure to the United States and greatly increased trade with other Latin American countries, and with Asia.

Since 1964 manufactured goods have increased from 5 per cent of exports to 60 per cent, contributing to healthy trade surpluses of tens of billions of dollars in recent years.

By the same token, Brazil, like Australia, has greatly benefited from the commodity boom, and it believes there is still huge potential to increase its productivity. It has enormous mineral wealth and nearly 90 per cent of its arable land (some 350 million hectares) remains unused.

Marconini says it has been estimated that within 10 years Brazil will supply 61 per cent of the world's beef, 21 per cent of its pork and 90 per cent of its chickens.

"Brazil is clearly going to be feeding the world," he enthused. "If you just look at better use of livestock, and confinement systems for rearing livestock, and if you get a little more efficient with how you do this instead of this whole thing about whether you use the Amazon or not, not only would you avoid having to go into the Amazon, but you can triple the existing area without deforestation."

Other things you may not know about Brazil: it is not only the world's biggest producer of clean energy, such as ethanol and hydro-electric power, but two years ago it discovered potentially huge oil reserves several kilometres below the sea which could see it pass Arab states as a leading oil producer.

Marconini has coined his own term, "Brazilience", to sum up this extraordinary good fortune which had also, he insisted, been the result of a lot of homework.

Brazilience, he explained, was a mixture of old vices that became new virtues once the global financial crisis hit - like its traditional reluctance to allow many foreign banks into Brazil, and its aversion to credit.

There were some things it didn't do well, he conceded. Its infrastructure had been badly neglected "and we have the best weather but the worst logistics".

As far as industry was concerned, taxes were high and labour laws strict. He also warned that patience was definitely a virtue for anyone keen to do business in Brazil. It was the Brazilian way to take their own sweet time to decide something.

"The fact is that Brazil has gotten to the front page of the Economist carrying this piano on its own head. The moment we get rid of that piano, the sky is the limit and then [Brazil] is really going to go into outer space."

Despite all that progress and potential, and despite some notable Kiwi success stories (see next page) New Zealand's trade with Brazil is modest. Last year New Zealand exports to Brazil were just over $151 million, says NZ Trade & Enterprise. However NZTE's manager in Brazil, Jessica Acherboim, believes there will be opportunities for Kiwi companies to cash in on the estimated US$65 billion to be spent getting Rio ready for the Olympics.

Other opportunities she has identified include its enormous agrifood and technology market, its food and beverage sector, aviation technology and the marine industry.

She warns that in agriculture New Zealand faces stiff competition from European, Canadian and US companies. But she notes that companies such as Flo-Dry, Waste Solutions, Glidepath, FrameCad, Mobile Mentor and Tait have all found lucrative niches in Brazil.

Gavin Haworth, head of trade and supply chain for HSBC in New Zealand, says a recent survey of 3500 small and medium enterprises in Brazil showed business confidence was high, and 16 per cent indicated they were keen to trade with Australia and/or New Zealand.

"Brazil is clearly one of those countries we need to be thinking about."

According to Marconini, all the solutions to the world's problems will somehow have to pass through Brazil in the near future, whether the issue is water, food, energy, raw materials, democracy, human rights, social development, macroeconomic stabilisation or agricultural R&D.

"All of these things are somehow going to have Brazil very engaged and very involved whether we like it or not. I do hope to see more Kiwis in Brazil."

Did you know?

* Brazil is the world's largest exporter of sugar, coffee, frozen orange juice, beef, tobacco, alcohol and chicken.

* It is the second largest exporter of soy, the third largest exporter of corn, and the fourth largest exporter of pork.

* It is about the size of Australia, with a population of nearly 200 million, making it the world's fifth most populous country.

* It has 14 per cent of the world's water.

* Between 1980 and 1997, prices rose by a factor of one trillion. In 1990 the inflation rate was more than 30,000 per cent (last year: 4.3 per cent).

* It has nearly 2500 airports.

* Huge offshore oil reserves discovered two years ago could turn it into one of the world's largest oil producers.

* It is a world leader in cosmetic surgery and a top destination for nip-and-tuck tourism.