Brazil’s Economy Stumbles Towards 2014

By Doug Gray, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – The government celebrated the confidence-fuelling auction of two of the country’s biggest airports last week, but the economy continues to show signs of volatility. With the end of what has been a difficult 2013 in sight, the prospect of political uncertainty in the year to come has forced some economists to cut back their growth forecasts for the last twelve months.

Last Friday’s auction of Rio’s Galeão and Belo Horizonte’s Confins airport was sufficiently competitive to draw the winning bids into paying a huge premium for the 25-year rights. Not that the R$19 billion agreement will pose too much of a problem for Brazil’s construction giant Odebrecht, or Singapore’s Changi Airport Group, the company behind one of the most luxurious airports in the world.

The untapped potential of Galeão has made it something of a uniquely appealing case, with passenger numbers set to triple over the contract period and a World Cup and Olympic Games making it one of the most important airports in the world in the next three years.

The good news was timely in a year largely bereft of such tidings as the treasury struggled to keep the global slump at bay. The much-vaunted auction of the pre-salt Libra oil field attracted just one bidder in October, while other infrastructure projects seen as crucial for the country’s progress have been postponed while the government looks at ways to make them more attractive to investors.

It is the political uncertainty of an election year that may provide the biggest obstacle in the country’s effort to bring the economy back to it’s previous strength however. Last year’s growth of just 0.9 percent sent a chill through investors and the outlook for 2013 was cut to 2.2 percent during last week’s announcement by the Organization for Economic Cooperation and Development (OECD).

President Dilma Rousseff’s once rock-solid re-election bid has begun to look shaky as confidence in her administration dips along with the economy. The upheaval of the year’s popular protests have hardly contributed to the creation of an attractive investment picture.

“Investment is the indicator of future growth, and investment today is at a fraction of what it should be,” said OECD Secretary-General Angel Gurria at the announcement of their 2013 forecasts. “Globally, trade is growing at 2-3 percent, which is well below trend and should be 6-7 percent in a recovery period.”

Direct foreign investments look set to hit the US$60 billion mark this year, down from US$76 billion in 2011 and even then only following the timely boost of several key privatization auctions.

After Moodys credit outlook for Brazil dropped from ‘positive’ to ‘stable’ in early October, the fear of a rating downgrade in 2014 took a step closer to reality. The treasury responded by reducing its contributions to the National Development Bank (BNDES), whose huge loans to the private sector, including those tied up in OGX, have been a cause for concern.

As for the ups and downs of Brazil’s currency, in September the sliding real was boosted by the Federal Reserve’s decision to maintain its US$85 billion monthly stimulus in the U.S. but looks set to weaken when the predicted tapering of the package begins next year.

Should the dollar strengthen and Brazil’s credit rating take a hit, the consequences on the country’s economy could prove sufficient to reduce the GDP predictions even lower in 2014, despite the estimate R$25 billion expected from the FIFA World Cup.