enter a recession.” His company is continuing plans for strategic investment throughout the country.
Vara’s optimism is not limited to growth in the electronics sector, where Avnet operates. He believes there is opportunity for “companies in all kinds of business.”
“Brazil remains healthy, and economically is one of the best countries in the world,” Vara says. The electronics distributor has been in Brazil since 1999, expanding through acquisitions of local companies.
Before 1990, according to Vara, it wasn’t easy for international companies to expand into the region. But the government has been working hard to reduce barriers to international trade, including increasing exports and keeping inflation low. (The Monetary Policy Committee has an allowance for the rate to stay between 4.5 percent and 6.5 percent.)
Those actions made doing business in Brazil attractive to many global manufacturers. “Our customers – like Ericsson and Xerox – were there, and they began asking us to come down and provide them with support as well,” Vara says. “So we saw an opportunity and followed it.”
The majority of the distributor’s business is in the southeast and north regions of Brazil, but “if our customers decide to expand to other areas, we will definitely follow them,” he says.
Brazil is rich in natural resources, including iron ore and nickel. Vara suggests that sectors that are tied to this sector will see some of the greatest opportunities, even as other parts of the world struggle to maintain growth.
Non-metallic mineral products may also show resilience, Sedano says. But, that is largely dependent on the continued growth of infrastructure projects.
Through the Program for the Acceleration of Growth, the Brazilian government has implemented public infrastructure projects – primarily roads – and has announced plans to continue.
Agriculture and agriculturally related businesses will also continue to see growth, Sedano says. The food and beverages sector likely will lead manufacturing growth for the first half of 2009. “In times of crisis, people cut spending on durables but not on basic needs,” he says.
In addition, production of biofuels likely will continue to expand as global demand increases. The biggest challenge to taking advantage of these opportunities is not economic, according to Vara. It’s the cultural barriers that exist.
One such barrier is language: Portuguese is the official language of Brazil. For most Latin American countries, the official language is Spanish.
To offset this challenge, Avnet has established an operations center in Argentina and Colombia to support businesses in the north and south of the continent. But the central operations for the region are in Brazil. “The key to success in this country is to respect the culture, respect the people,” Vara says.
While current forecasts predict a tough first half of the year, the outlook for the second half of 2009 is fuzzier. The performance of the country’s economy will depend on many external factors.
Many of the products produced in Brazil are exported to China. If China’s economy goes into recession, the impact on Brazil could be significant, Sedano says. But the converse is also true: If China’s economy stays solid, Brazil may not suffer as much.
Because of the key role natural resources plays, deflation of global commodity prices would drag down the health of Brazil’s economy. And probably the most significant factor in the uncertainty of forecasting for 2009 are unknowns related to the global economy as a whole.
“The longer and deeper the downturn, the harder the economic consequences for Brazil,” Sedano says. Most analysts continue to predict slight growth for Brazil’s GDP in 2009. Vara says Avnet is working from an estimate of growth between 2 percent and 2.5 percent.
The government is trying to present a more optimistic look, maintaining the outlook for growth for the year will reach 4 percent, according to the finance minister. Other analysts predict that growth could slow to almost stagnant.During the first part of 2008, the Brazilian economy experienced high growth in most sectors with an outlook for that expansion to continue. The first nine months saw loosened credit conditions, rising internal demand and strong export activity despite unrelenting currency appreciation.
But the fourth quarter was a different story. Growth slowed at an alarming rate.
Though the country is still in positive territory, the fourth quarter of 2008 was surprisingly on the downside, according to Fernando Sedano, an economic consultant for Manufacturers Alliance/MAPI based in Brazil. “I expect a tough first half of 2009.”
On the other hand, international companies that are already doing business there are seeing continued opportunities for growth – albeit at a slower pace.
“The government has made significant progress in the last 15 years to strengthen the macroeconomic conditions there,” says Jose Vara, area director of Latin America for Avnet Electronics Marketing Americas, an $18 billion electronics distributor based in Phoenix, AZ.
“As such, GDP is still growing, and there is a lot of potential in the country.”
While a variety of companies are announcing major cuts to their global workforce, Vara says Avnet plans to continue building its base in Brazil and grow market share. “We have no plans for business to get so bad that we have to consider changing that model. If it happens, we’ll have to sit down and revisit that strategy, but for now, we just don’t see it.”
For the first three quarters of 2008, conditions in the U.S. seemed to have little impact on the economic environment in Brazil.
Growth continued its strong pace, with GDP growth averaging 6.38 percent for the first nine months, and 6.81 percent for the third quarter, according to the Brazilian Institute of Geography and Statistics (IBGE).
However, when the U.S. financial markets collapsed, led by the failure of Lehman Brothers in September, economists began predicting a bleaker picture for the country.
The result is that industries that are traditionally reliant on credit for operations will have a more difficult time obtaining it, Sedano says.Growth likely will slow significantly in those sectors.
The Brazilian government is taking some steps to fend off a recession from tightened credit conditions. It recently announced a US$2 billion fund to subsidize credit lines for auto purchases, for example.
Additionally, the state reduced the Tax on Manufactured Products (IPI) by 6 percent for car purchases with engines up to 1 liter and 3.5 percent for larger engines.
In January, fears of inflation eased and worries about the slowing economic growth prompted the Monetary Policy Committee to cut short-term interest rates to 12.75 percent.
Interest rates had remained steady in the country at 13.75 percent since October. The inflation rate itself actually declined nearly half a percentage point in December, from 6.39 percent to 5.9 percent.
And unemployment reached its lowest level since 2002 when it was measured at at a year-end 6.8 percent.
In that positive figure is a bleak spot: Industrial employment dropped by 0.6 percent in November when compared with employment figures in October. From January to November 2008, industrial employment recorded growth of 2.4 percent.
Another negative indicator: Brazil’s purchasing managers’ index began declining in October after more than two years of steady growth, as output, new orders, and employment declined, according to the Latin America Manufacturing Outlook: 2008-2009, a report authored by Sedano for the Manufacturers’ Alliance/MAPI.
Opportunities and Challenges
“A slowdown is not a recession,” Avnet’s Vara says. “We certainly see a slowdown, but Brazil will not
After Strong 2008, Brazil’s Growth Slows
But the fourth quarter was a different story. Growth slowed at an alarming rate.
Though the country is still in positive territory, the fourth quarter of 2008 was surprisingly on the downside, according to Fernando Sedano, an economic consultant for Manufacturers Alliance/MAPI based in Brazil. "I expect a tough first half of 2009."
On the other hand, international companies that are already doing business there are seeing continued ...
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