Quantfury Gazette

Big Brazil wants to be bigger, but the South American giant keeps getting in its own way

by
Nathan Crooks
Quantfury Team
brazil

Brazil, the seventh most populous country in the world and eighth largest economy, rolled out the red carpet last week for an investment conference hosted at the opulent Copacabana Palace hotel in Rio de Janeiro. Foreign investors who visited were pitched on the South American country’s vast potential to emerge as an economic and political powerhouse in a re-aligning world, but they also got a taste of the domestic complexities that can get in the way.

In front of assembled billionaires including Nubank (NYSE: NU) co-founder David Velez and tech entrepreneur Marcelo Claure, President Luiz Inácio Lula da Silva outlined his plans to take Brazil from big to bigger by consolidating its position as a global leader in food production, aerospace, energy and mining. He then spooked the foreign exchange market with a single sentence.

“The increase in tax collection and the decline of the interest rates will allow the reduction of the public deficit without compromising the capacity for public investment,” Lula told a packed ballroom, where massive chandeliers hanging from the ceiling had been complemented by futuristic murals painted especially for the event hosted by the trillion-dollar Saudi wealth fund through its FII Institute. Markets quickly interpreted the comments as a sign of easing fiscal discipline that could reignite inflation, and the Brazilian real—the country’s currency—plunged in real-time before he finished his speech.

Despite the market jitters, Lula—who came to power in the country for the first time two decades ago alongside contemporaries like Venezuelan strongman Hugo Chavez in a so-called “pink tide” of left-leaning governments across the region—had actually used a significant portion of the speech to try and assure potential investors that they could trust the country’s institutions to protect their capital, even as he made an emphatic plea to use economic development to reduce inequality and fight hunger and extreme poverty.

“I always say that the most important thing for an investor is stability, and of this Brazil has plenty to offer,” Lula said. “Brazil is seeking to become, not only an emerging market, an emerging country, or a developing country. We are fully determined to become a big country…Brazil will not throw out this opportunity to become a great economy.” His vice president and other ministers tried to do damage control in their own speeches that followed, stressing the government’s commitment to sound fiscal policy and the fight against inflation. 

While some conference attendees thought the market may have overreacted and said Lula’s comments about increased taxes and social spending were characteristic of his usual discourse, investors have good reason to be suspicious with the massive economy caught in the middle of polarized politics and a government known for red tape and a heavy hand. The new CEO of Petrobras (NYSE: PBR), the country’s massive state oil company that’s also traded on the New York Stock Exchange, sidestepped a question during a panel discussion at the conference about the competing pressures to fuel the social development demanded by the left-wing government and generate returns for investors. It’s not clear there’s a good answer to that conundrum, had she tried to give one. 

Indeed, Petrobras shares have declined 16% this year even though oil prices have risen. The country’s benchmark Bovespa Index, meanwhile, lost 10% over the same period, with mining giant Vale (NYSE: VALE) falling 29% and banking behemoth Itau Unibanco (NYSE: ITUB) plummeting 14%. Brazil wants to be big, but its markets are falling behind as the very real question of just how much the government should be involved in the economy continues to ratchet up uncertainty and country risk.

It’s not all bad news, though, and excitement about Brazil and the broader region was palpable. A theme that emerged throughout the event was one of using the country’s complex problems to create unique solutions, and when they work, they can be massive. Nubank, a banking upstart whose shares have surged 45% this year, is proof of just how much a company can grow when allowed to disrupt the market.

Amid all the expected chatter about AI, renewable energy and the region’s vast lithium reserves, another central theme that dominated discussions was the benefit of Brazil’s non-aligned positioning as the global schisms involving China, Russia and Iran grow. For all of that talk, however, Vale’s CEO said the company is looking toward “exponential” growth in the US market to help it get out of its rut. The country is due to host the upcoming G-20 summit of the world’s largest economies in Rio de Janeiro later this year, and it’s also a founding member of the so-called BRICS group that includes Russia, India and China. Lula plugged the so-called “global south” cooperation between emerging markets and said it had even become chic. “We can’t spend another 100 years relying on the north. We don’t want to take anything from them. We just want the same opportunities.”

Sir Martin Sorrell, a British advertising magnate, said the region was well positioned to take advantage of all the emerging alliances, which have mostly left Latin America as a sort of neutral ground. “If I was trying to run a South American country, whether it was Brazil or Argentina, what would I do? In this new order that we’re talking about, in a new world order that President Lula touched on, I think I would play both ends off against the middle, meaning I would seek to find the most advantageous position for my own country,” he said during a panel discussion, noting the potential for increased trade with the US and Canada despite China being the largest partner of most countries in the region.

Sorrell also touched on the very real human capital that exists throughout the region. “The quality of the technology talent, and the quality of the creative talent is as good as you will find anywhere in the world,” he said. “Latin Americans have an inferiority complex about their abilities. They are superb technically. Companies like Nubank, like Globant (NYSE: GLOB), like MercadoLibre (NASDAQ: MELI), which were born in Brazil, born in Argentina. These are companies that are now becoming world players, and the quality of the talent, in cities like Mexico City, Bogota, São Paulo, Buenos Aires, Montevideo—huge populations of very well-qualified engineers, particularly in tech. The Latin American creative is as good as you can get anywhere in the world.” It was an optimistic tone that permeated the entire event. 

In that massive ballroom, shortly before Lula took the stage at the opening, the three-day event was formally inaugurated by a solo ballet dancer who performed to a rendition of the famed bossa nova anthem “The Girl from Ipanema.” It served as a fitting metaphor for Brazil at this exact moment in time: strong, tiptoeing, and beautiful—grace under pressure, moving to an alluring rhythm all its own and impossible to ignore.

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