Rise of Brazil and the Beautiful Games

Think Brazil, think soccer, then think the 2014 FIFA World Cup. Could the stars possibly be more perfectly aligned?

For a nation whose lifeblood is soccer, that was nascido para jogar (born to play) and is one of the fastest growing economies today, probably not. Add to that the 2016 Olympic Games, to which Brazil is playing host and which will, like the World Cup, greatly increase Brazil’s standing in the international community, and there’s little doubt that Brazil is on course to a far sweeter spot than the one it’s in now. Pulling off both events with aplomb will lock in the country’s many fans, international investors included, for the long haul.

Already, foreign investors have been greatly attracted by the country, which has made spectacular progress in its journey from emerging market to BRIC nation: a country where a strong fiscal picture bolstered by the right kind of political leadership—one that is apparently resolute in its commitment to lasting reform—has resulted in a solid foundation for Brazil.

Today, says Alex Ashby, a research analyst at Global X Funds in New York, Brazil can be proud of its impressive achievements, which include successfully lifting millions of people out of poverty, sustaining an extremely low unemployment rate, maintaining public debt at low levels and ensuring an open and encouraging environment for foreign investment.

Natural resource-rich Brazil has benefited immensely from the global demand for its commodities, particularly from China, but the Brazilian administration hasn’t taken things for granted. Apparently focusing on longer-term strength, the government has stuck to its reform agenda, looking to encourage privatization in different sectors of the economy, tackling important issues like corruption head on and seeking to overhaul both the public and private pension systems. Brazil’s central bank has also proved to be a real pillar for the economy and adept at keeping the exchange rate stable.

“Obviously, the growth that Brazil has experienced in recent years has changed things more or less permanently,” Ashby says.

But, he cautions, the situation can also go the other way very quickly if Brazil is not careful, which means that the country cannot digress from its chosen agenda.

Brazil has shown no sign of going down the route Argentina recently took with respect to increasing public sector involvement in the economy (in March, the Argentine government announced its decision to take a large stake in YPF, the country’s largest oil company), and it probably won’t. The country has nevertheless made significant gains that it cannot afford to lose; not just with respect to the importance of the events in 2014 and 2016, but to ensure its future as a key player in the global economy.

“Now more than ever, Brazil cannot regress, as investors want to see the kinds of reforms that would move the country forward rather than back,” Ashby says.

These include easing the cumbersome tax burdens on certain industries and promoting pro-growth policies to help Brazilian industry compete globally, he says. The government has successfully raised interest rates to combat the threat of inflation, but this has made it tougher for Brazilian companies to borrow at low rates, which is why growth has slowed.

Ensuring that foreign investors remain interested in Brazil is key. Overall, Brazil is a much easier market to invest in than its fellow BRICs, says Ryan Issakainen, an ETF strategist at First Trust Advisors in Syracuse, N.Y., who follows Brazil closely. Still, the tax rates for foreign investment are relatively high.

“Brazil sees the value of bringing foreign investment into the country, and definitely there are less regulatory burdens in Brazil than there are in, say, India, but some of the policies in place are less friendly toward foreign investment, and it would be good to see some of that revised,” Issakainen (left) says.

But for investors like Issakainen, Brazil’s greatest problem, and one that it needs to tackle properly without further delay, is its infrastructure. That should be the highest priority on Brazil’s “to do” list. Policy reform is necessary in the short term to encourage the speedy build-up of lasting infrastructure, but it’s also the platform from which Brazil can go to the next level and ensure continued growth in the long term.

Infrastructure Is a Challenge

Consider that the United States is ranked fifth in terms of global competitiveness, while Brazil is ranked 53rd. Brazil is younger and it’s growing faster, and yet, says Aaron Visse, a portfolio manager at Forward Management, it ranks far behind the United States when it comes to infrastructure.

“Brazil has been in a declining trend of investing in infrastructure compared to other BRICs, but a lack of infrastructure and the bottlenecks [it] creates are pretty big impediments to long-term growth,” Visse says.

It’s been said time and time again that all emerging market countries, the BRICs in particular, have serious infrastructure needs. In the case of Brazil, though, the need is even more pressing, Visse says; not only because the country badly needs roads, highways, train lines and ports to accommodate the onslaught that the 2014 World Cup will bring, but because for whatever reason, the government has never committed in a meaningful manner to developing infrastructure.

“China’s transformation has been largely a function of its unwavering commitment to building world-class infrastructure. Even though China also faces bottlenecks, they are more than willing to invest in that area,” Visse (right) says. “Brazil has not focused as much on infrastructure as it should have, but not addressing infrastructure will eventually hold back its potential for long-term growth.”

Brazil’s alleged lack of focus on proper infrastructure development has been a thorny issue in the run-up to the 2014 World Cup. Many—most importantly the head of FIFA, the international soccer governing body—have contended that nothing is being done to alleviate existing infrastructure bottlenecks and to ensure that all the requisite new facilities are in place before the big event. The Brazilian authorities have, of course, countered the allegations, but it goes without saying that the events of 2014 and 2016 serve up the perfect excuse to address Brazil’s infrastructure needs for the long haul, Visse says. By encouraging and enabling proper infrastructure development through policy and planning, Brazilian politicians can help provide a platform for long-term economic growth.

“Brazil has to make infrastructure a larger percentage of its GDP because if a country underinvests in infrastructure, it’s capping its long-term growth potential,” Visse says.

Brazil has recently proposed a $17 billion commitment to building up mass transit in some of the major cities that will be hosting the World Cup matches. Sticking with the plan and seeing it to its fruition will only be to the country’s benefit in the long term, Ashby says, not only because they will greatly enhance day-to-day life in Brazil long after the World Cup is over, but also because these are the sorts of moves that will make foreign investors keen to invest in Brazil.