BRAZILIAN ECONOMY GETTING OUT OF RECESSION
The Brazilian economy is reacting and the crisis begins to weaken. The International Monetary Fund (IMF) has improved its forecast for Brazil´s gross domestic product (GDP) in 2016. The expectation now is that the GDP declines 3.3% this year and grows 0.5% in 2017. In April, this expectation was 3.8% for 2016 and zero growth in 2017 (Globo.com/ July 2016).
According to the International Institute of Finance (IIF), the initial forecast for the Brazilian economy was a fall of 4.5% GDP in 2016, the institution now projects a decline of 3.3%. For 2017, the estimate of GDP is a 1% increase, due to the expectation of the fiscal adjustments and the relaxation of the monetary policy by the Federal Government.
Still according to the IIF, the interim president Michel Temer brought together a competent economic team proposing significant measures to adjust the Brazilian economy, such as the reform of social security; setting of a ceiling for the increase in public spending from 2017 on; and increased private sector participation in infrastructural projects.
For the Minister of Finance Henrique Meirelles, the economy has shown clear signs of recovery in recent months, including the recovery of the industrial activity (in June increased by 2.1%) and an increased confidence level in the economy. The government’s forecast for next year is an increase of 1.2% (Portal Brazil, August 2016).
Ramón Aracena, IFF´s economist for Latin America, comments that a successful outcome of economic policies will increase the level of confidence in the economy. This factor combined with the current idle capacity of the Brazilian industry will allow for a rapid economic recovery generating a growth of around 1% in 2017.
According to the study of the Institute of Applied Economic Research (IPEA), the crisis which started in the second quarter of 2014, is losing strength and the recovery of the Brazilian economy is near. The first signs of recovery come from companies operating in foreign markets. The strong adjustment in company inventory levels is a great stimulus for the resumption of domestic production (ESP, June 2016).
With the strengthening of the domestic currency (Real) and the expected decline in inflation, Brazil’s Central Bank should reduce the interest rate from the current 14.25% to 13.25% in December 2016 and a projected 11% in the second quarter of 2017.
The increased confidence will contribute to the resumption of growth, comments Maurício Molan (chief economist at Banco Santander). This increased level of confidence is reflected in the stock market which is up to nearly 30% this year and in the country risk that yielded a level close to 500 in January to 292 points (FSP, July 2016).
In July, according to the Industry Survey of FGV Transformation / IBRE, the industry confidence index increased 3.7 points reaching 87.1 points, the highest level since November 2014. Part of this increase can be attributed to better expectations regarding the future of the Brazilian business environment.
After the sector’s recovery, the labor market should return to hiring. However, the improvement of industrial production along with rising unemployment shows that the economy’s recovery occurs at a time when the industry is at idle capacity. According to the FGV survey, the capacity utilization was 73% below historical industry standards (above 80%) (FSP, August 2016).
For the Institute for Studies in Industrial Development (IEDI), the industrial sector will hire staff at a slower pace because entrepreneurs intend to invest in the modernization of their production lines, in order to cut operating costs permanently (FSP August 2016).
In 2015, the largest business groups in Brazil had revenues of 720 billion dollars (7% more than the previous year). However, the credit restrictions, the high inflation and the rising unemployment demanded of company management a great effort to adapt their businesses to the economic moment and to seize the opportunities created by the crisis.
Brazil’s GM is an example of this, despite the crisis the company takes the time to implement changes and maintains its investment plan of R$ 6.5 billion by 2019 in product renewal and reform of factories in the country, the third largest market of American automaker in the world (Exame, July 2016).
In the Grupo Pão de Açúcar (GPA) the focus is on restructuring the store model that combines characteristics of wholesale and retail (atacarejo). Last year the group sold US$ 6.5 billion and invested R$ 2 billion, including the opening of 118 stores (Exame, July 2016).
The crisis was also an opportunity for large companies to expand their operations abroad. This was the case of WEG motors manufacturer. The company increased its international operation by 40 %, it has expanded its factories in Mexico and opened an industrial park in China.
Cielo (operator of multi-brand cards) opened three stores and has diversified investments in new areas such as: software for financial management, health and education. The plan for 2016 is to invest R $ 450 million, especially in innovation.
The petrochemical industry Oxiteno started to invest in more specialized products, which have a higher profit margin and is building a new plant in the United States, with an investment of US $ 113 million.
Natura (company of hygiene, beauty and cosmetics) works with door to door sales with a staff of one million consultants. To face the crisis, it opened its first physical store and aims to sell a new product line in 1,200 stores of the chain of drugstores Raia Drogasil until the end of this year.
Ipiranga, network gas stations, invested R $ 820 million in 2015 and plans to invest R $ 887 million this year on acquisitions and new business. Rede D’Or São Luiz (health group) intends to increase hospital beds from 4,900 to 8,000 by 2020. PRODESP (public company of technology) will automate 48 public hospitals by 2018.
Renner (clothing retail company) with more than 350 stores is aiming in 2016 to invest R$ 550 million in opening 25 stores of Renner, 15 of Camicado and 20 of Youcom.
The poor performance of the economy did not interfere in the projects of Votorantim Cimentos, which announced in 2015 an expansion plan of around R$ 5 billion by 2018. Telefonica maintains its investments of over R$ 8 billion aimed at quality and expansion.
Although the country is going through political difficulties, the expectation of the companies is that growth will happen later this year. Many, however, did not give up investment plans that had already been announced and they showed they were not intimidated to create good prospects for the medium term.
The new Foreign Minister has intensified the participation of Brazil in Mercosul. Currently, the economic block participates in the negotiation of seven commercial agreements, including the agreement with: European Union (the most complex and largest impact, the Brazilian government hopes to conclude the negotiations by the middle of next year); China; Canada; and India.
If the increase in the confidence level continues and the government gets successful in implementing a fiscal policy over the next two years, then the economy should recover in the coming years. According to Banco Fibra, the economy will even grow 2.1% in 2017 and 3% in 2018.
In the survey conducted by FGV / IBRE, the confidence index increased in 18 of 19 main segments surveyed. This factor associated with an increased level of capacity utilization (74.3% in July) shows that the industrial sector can accelerate production in the second half of this year (Valor Econômico, August 2016).
It is certain that the way to recovery will be long, however, the Monthly Industrial Survey – Physical Production (PIM-PF) IBGE shows that the long downward trend in industrial production is coming to an end (ESP, June 2016).
Finally, in times of crisis, there are companies who choose the alternative to accelerate the business to seize opportunities. According to research institute IBRE, many interviewed entrepreneurs expect to grow during the crisis. It may sound contradictory, but in some sectors, a bad scenario as the current one offers opportunities for expansion.