NOTEWORTHY

What’s wrong with Brazil?

This post was originally published in the Washington Business Journal’s WBJBizBeat Blog. | Washington Business Journal

For investors, over the last few years, Brazil has consistently underperformed its Andean neighbors, disappointing many investors who jumped on the BRIC (Brazil, Russia, India and China) bandwagon.

Underperformance has been due to several factors including the slowing economic growth. For the period of 2007-2011, Brazil has averaged GDP growth of 4.2 percent (compared to unheralded Colombia and Peru which have averaged 4.4 percent and 7 percent growth over the same time period). Similarly, Brazil has underperformed on the inflation front, posting a five year average inflation rate of 5.2 percent. During the same time, Colombia’s inflation rate has been 4.5 percent, while Peru’s has been 3.1 percent.

Also troubling for some investors is the Brazilian government’s increasing role in the economy. The government has forced the replacement of the CEO of Vale, one of the world’s largest mining companies and placed criminal charges on Chevron executives for an oil spill of 3,700 barrels. The government- owned state development bank, BNDES, distorts credit markets by funneling funds to favored state champions. The government has followed protectionist policies, slapping tariffs and taxes on imported autos. Finally, Brazil’s bureaucracy is notorious, leading to Brazil’s low ranking (126 out of 183 countries) in the World Bank’s Ease of Doing Business Index. In comparison, Chile is ranked No. 39, Peru is No. 41 and Colombia is No. 42.

These conditions are not typically found in investor-friendly countries. Without policy changes in Brazil, opportunities in the Andean countries of Colombia, Chile and Peru may be more compelling.

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