China 4 - 0 Brazil

When Brazil was competitive

I know that I am exagerating when I say that Brazil is only competitive in football (soccer) - even though they have recently lost a friendly against Germany. 

However, after this loss they decided to cancel all "classics" (games against top teams) and only play against teams such as Ghana, Guinea and others. A recent game against Argentina in the Roca Cup ended 0-0 - the rematch will be at the end of this month.

Unfortunately this reaction is very exemplary for a Brazilian behavior style. Recently, imported cars have been flooding into the country - especially Hyundai has been very succesful and is even in the process of building a huge plant. On the lower end, the Chinese companies JAC and Chery have entered the country with a bang and riding on a weak USD, opening dealerships and advertising heavily - both are also planning on building plants. And on the upper end, Jaguar, BMW (also planning a plant), Audi, and even Mini have been extremely succesful catering to the wealthy. What was the reaction of the government?: Slap on (even) more taxes on imported cars (i.e. outside of Mercosul) and cars with less than 65% local content (local producers have 45 day grace period). This will raise the average price of most cars not qualifying for exemption by 25% or more, thus killing off the efforts of many of the new emergents. This will not help the Brazilian car industry which already sells expensive and mediocre cars - ask a Brazilian for his opinion the best that is locally produced and he will, without a blink of the eye tell you: Omega!

Where was I? Competitiveness: The World Economic Forum has released their latest competitiveness index and, surprise surprise, Brazil did not showcase well. And this is not related to the companies itself - although there are also weakness there. Brazil finished overall in 53rd place (of 142), better by 5 positions since the last time and on par with India (56th), but way behind China (26th). What drags down Brazil are

"[...] the lagging quality of its overall infrastructure (104th) despite its Growth Acceleration Programme (PAC), its macroeconomic imbalances (115th), the poor overall quality of its educational system (115th), the rigidities in its labor market (121st), and insufficient progress to boost competition (132nd) are areas of increasing concern."

Brazil is saved by market size (10th) - but even business environment (31st), financial markets (40th), technological adoption (44th) and innovation (47) are only midfield.

So overall, Brazil has improved but still is far from being a future leader and if we look very closely, indicators under strong governmental influence perform much poorer than those which are driven by the private sector... Drive on the local roads, fly into any airport, try to hire somebody with an intermediate level of English-speaking skills (or try to fire them later!) and you will know why.

Well, at least Brazil is still better than Argentina in competitiveness. Argentina is currently ranked 85th.

BTW, the top 10 this year were Switzerland, Singapore, Sweden, Finland, United States, Germany, Netherlands, Denmark, Japan, and United Kingdom.

Difficult to Digest Big Mac

Source: The Economist

The Economist released its latest Big Mac Index Study last weekend and, at least for those in Brazil or with very intensive contact to Brazil, the result is not a surprise. The Big Mac Index, according to the newspaper can be described as follows:

Burgernomics is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

If we apply this to Brazil and look at the chart above, we will see that according to this index, the BRL is overvalued against the USD by ca. 50%. Now this is fairly imprecise, as the Index does not show the relationship to GDP per person. The Economist recognized this and adjusted for GDP per person... and now the BRL seems even more overvalued...

Now I did study economics and although I have been outside of my field for quite a while, I believe that such a strong disconnect (BTW, also for Argentina) implies four things:

1. The Big Mac Index is flawed (not likely),
2. the Brazilian average GDP is set to rise to the level of the USA in a short timeframe (desireable but not likely), or
3. that the BRL is in for a huge devaluation...
4. or inflation within the next few months.

There is of course a further possibility: That the current scenario simply shows a temporary disconnect of several economic factors caused by fear of a destabilization of US and European economies, that several countries are threatened by defaults or at least rating downgrades and a flight to "safe harbors", such as Brazil is occuring.

I find it hard to believe that any of the four... five factors can explain the current scenario - but given the size of the gap I believe we are in for one severe indigestion.

Trade War Between Brazil and Argentina?

Rivalry... not only on the pitch

The current situation is not what the former presidents Raúl Alfonsín (Argentina) and José Sarney (Brazil) had in mind, when they signed the PICE (Programa de Integração e Cooperação Econômica Argentina-Brasil), commonly heralded as the precursor of the South American free-trade market Mercosur. At the time, the program even proposed a common currency, the Gaucho...

The situation has become rough. Argentina is not known for freedom of trade - it frequently figures in the list of countries with the most trade barriers and of the least free capital flows. However, this has usually been limited to evil empires such as the USA and China. But things have become more serious with Argentinas most important trade partner, Brazil.

Argentina exports 2bn USD of foodstuffs to Brazil, but Brazil also exports 500m of foodstuffs the other way around. So when Argentina started raising barriers in foodstuffs, Brazil retaliated. Things then escalated to the point when, last week, Brazil stopped emiting automatic licenses for automobiles from "neighboring countries", affecting Argentina strongly. Since then, each import process requires a separate license. Hundreds of cars are stuck at the border, awaiting licenses to be emitted.

The trade barriers today between both countries already affect, food, shoes and clothing, some machinery, some chemicals and more to come.

Alessandro Teixeira, Development Minister in Brazil and the Industry Secretary in Argentina, Eduardo Bianchi, have scheduled a meeting to discuss on how to proceed... and possibly try to figure out how all of this really started - the situation is pretty botched up and is affecting a high demand of imported goods in Brazil (due to a cheap USD and strong Real) adversely. If the situation escalates, which it surely may, large industry sections may continue to be affected.

Cooked Inflation

Everybody in South America talks about the understated inflation in Argentina. The government claims it to be 10%, but it most likely is 20+%...

Now I have seen life in Sao Paulo get more expensive over the past months. My unrepresentative list goes like this:

- Club Monthly Fees: 13.6%
- Picanha at my grocer: 45%
- Taxi fare: +28%
- Milk: +8%
- Private School: +12%
- Real estate: Do not even mention it...

Official inflation is only aroung 5-6% but prices have been creeping up beyond, mostly food - possibly a bi-product of commodity inflation. Official numbers are not confirmed at the levels above... yet. With commodity prices soaring all around the world, more is likely to come, but I am worried that there may be much more already here in the country.

My fears have been "confirmed" with two pieces of news I came across recently: This week's Veja magazine, which is running a (non-representative and somewhat populist) special and The Economist, which has compiled a Big Mac implied inflation index. This index puts inflation in Brazil at n+4%, so more around 10%... Keep your eyes and ears open.

EDIT: Where you look, more news. Here from the Brazil Institute.

Dilma meets Cristina

midiacon.com.br

Dilma on her first trip abroad - to Argentina, to meet her countertype, Cristina de Kirchner. Both large countries of Latin America are new ruled by women.

Whatband?

Now this is an interesting fact, retrieved from speedtest.net - I am pretty sure that it is not representative, because it only tallies speedgeeks - but if we compare speedgeeks to speedgeeks around the globe, Brazil, which is the 9th largest economy by GDP by PPP (right behind France, Russia and the UK), is still far behind in terms of technology.

Especially if I consider, that today it is possible to get 50mbit broadband in São Paulo (albeit for a fortune), this shows the level of technological inequality in the country. In Latin America, Brazil remains in second, behind Chile (which fits to the GDP/head picture) but on a global scale, 65th place is pretty nasty...