Keep Calm and Navigate Brazil’s Waters!

As economists again cut growth forecasts for Brazil this year, investor sentiment is truly being tested. For the last 15 years, every one has had their eyes on Brazil. It rose to become the world’s seventh largest economy, with 50 million people emerging from poverty to become consumers. It is arguably the most resilient economy to overcome the 2008 global financial crisis, being the last country in and the first out due to its strong internal market, consumer spending and investor confidence. Investors liked that it was the "most western" of the BRICs.

That was before, but what about now? Though foreign investors saw Brazil as the center of the international catwalk, locals knew all along that protectionism, over-taxation, and corruption worked like a handbrake, impeding the economy to fully thrive.

Today, everyone still seems to be looking at Brazil with a critical set of eyes:

  • Growth has ceased, the country is divided, and the political environment has lost its credibility
  • Inflation is up, currency plummeted, interest rates are up, energy bills have doubled, and water shortages plague several important cities
  • Petrobras, once the world’s fifth largest company, now ranks in the low hundreds
  • Millions of citizens dress in green and yellow protest the streets on a monthly basis
  • Any mention of the president’s name provokes cries for impeachment

This is an internal ordeal. The international environment is not to blame for Brazil’s standstill, and only began taking a share of the blame when unrest became so loud internally that investors lost their confidence. This is the situation Brazil lives in today.

On the bright side, Brazilians want change and are determined to have it. This population has overcome difficult moments in the past while dealing with four huge counter-tides:

  1. Hyperinflation
  2. A tortuous regulatory environment
  3. Corruption
  4. Social disparity

Though hyperinflation is no longer in place, the other three points remain and in essence, the population’s fight for change is predominantly focused on dealing with the regulatory environment and corruption.

Navigating through such turbulence requires creativity, skill and exceptionally hard work – and many companies and individuals have been successful at doing just that. Traditionally a country of conglomerates on the commodity and construction side (think Votorantim, Vale, etc.), Brazil also has a strong foothold in cosmetics as the third largest market in the world. In the manufacturing technology sector, it also boasts companies like Embraer and has its private equity groups buying out the Burger Kings and Tim Hortons of the world. All these companies have bolstered the country’s success despite very difficult regulatory conditions; some via privatization, others via acquisitions and others through sheer hard organic growth. Many well established multinationals have also navigated to successful growth through extremely turbulent waters. One can only wonder how much stronger these companies, and hence the economy, could be with a more favorable regulatory environment in place.

People have begun to become more aware of this regulatory reality, and more than 50% of the population is advocating for this favorable change, to help the country pick up its pace again. As a socially divided country, there still remains a substantial, though decreasing, proportion of the population that is comfortable living with the more populist regime that is currently held – but what nobody wants to see is the continued governmental corruption leading to Brazil’s collapse.

What does this mean to multinationals?

For one, it means that change is inevitable. It will happen, but it will not be immediate. When it happens, the outcome will be even brighter than the last decade. If the green and yellow protestors have their way, a change in government will yield a big short term hiccup, but the economic recovery will be visible – quickly instilling investor confidence and snowballing the path to economic progress. If protests do not result in a change in government, there will be a much slower and gradual recovery, and real change will only happen in 2018 after the next elections. International investors may want to take a closer look at the way they operate in Brazil in the short term, but they should consider very carefully before pulling out.

Things will recover and the only ones that will benefit from this recovery are those who are present and have the patience to do their homework while they wait.

  • Look at your competition: when a market doesn’t grow, some players’ heads are going to roll”¦ Competitors will try to eat each other’s share, so your customer base must be protected.
  • Look at your supply chain: when suppliers feel the heat, they tend to cut some beef… Watch very closely for any changes in supply chain due to suppliers attempts to shortcut any losses. This can affect compliance.
  • Don’t forget your customers: the louder they shout, the faster you are out”¦ Customers are more demanding than ever and behaviour should be closely understood through both primary research and media monitoring.
  • Look at the opportunity: wherever there is rain, there’s got to be some gain”¦ with the depreciating currency and the creative talent the country has to offer, Brazil is becoming less expensive for foreigners and you may want to consider utilizing resources in Brazil for some activities that were produced elsewhere.

In short, the house is in for a major cleaning. If you enjoyed Brazil’s boom in the last decade with all of its obstacles in place, you want to make sure that you are prepared for Brazil’s next boom, this time with a leaner and cleaner system in place, one that is more business-friendly and eager for growth.

Is the downturn affecting you? Are your competitors biting into your share? Are you sure of your suppliers’ compliance? Do you really know what changes are happening with your client-base? Do you want to explore opportunities for local production?

Call us at M-Brain. We can help you.

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