Brazil, bad behaviour and the challenges ahead

Roberto Lampl, head of Latin American Investments at Alquity comments on Brazil’s long overdue problems and how the nation ignored the warning signs

Brazil’s currency depreciation has been long overdue. In the Alquity Latin America fund, we have had among the lowest exposure to Brazil of all our peers within the Latin America equity universe. The reason due to our view that Brazil has done nothing to improve their competitiveness.

Its government has been too reliant on China’s insatiable appetite for bulk commodities, when this started to subside, they resorted to stimulate growth via credit. They have failed to improve the country’s infrastructure, an important cause of its high cost of transaction, they have failed to improve the ease of doing business, it ranks among the worst, they have failed to introduce meaningful economic reforms and they have failed to simplify the tax code.

Now they are dealing with a crisis of confidence following the unscrupulous behaviour of civil servants and executives at Petrobras who have actively participated in a grotesque multi-billion dollar corruption scheme using Petrobras investment program as their ATM. In the meantime we are also witnessing a political crisis as the blame game has paralysed politicians from acting responsibly. Instead a risk is growing that Brazil inches closer to a credit downgrade leaving it a hair from losing the coveted investment grade rating.

A weaker currency helps its exporters, the agricultural sector will thrive, the manufacturing sector will get some breathing room. Ultimately, we could see a cyclical recovery aided by the currency, however a structural recovery will only occur if the political leaders step up to the plate and introduce meaningful economic reforms to unleash its potential. There is some value emerging in Brazil, however there is also  a rising risk that it may remain a value trap.

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