Adventures of a Gringa

Brazil's Economy and the World Cup

Yesterday marked a year until the World Cup begins, while the Confederation Cup kicks off on Saturday. So from here on out, it's "will-Brazil-be-ready," imagina na Copa, on full blast. But the most interesting story to watch long-term in Brazil is quite another, though the mega-events do play a role.

The image of Brazil's booming economy has been slowly eroding, and not just in the international media. The promise of sweet-talking politicians and the illusion that everything is fine seem less likely to outsiders; in the past few years, I've lost count of how many officials and politicians I've heard painting the same rosy, though not entirely accurate picture. But for Brazilians, too, confidence has been falling and they're spending less. It's not just slower growth, or delays in infrastructure projects. It's also creeping inflation, the possibility of stagflation, and a gradual rise in consumer debt along with higher costs of living. Unemployment, which has been at historic lows, has been increasing slightly.

In Brazil for the last few years, perception and hype have been an important part of Brazil's economic story. Inflation has been one of the big drivers of revealing a reality the government has been eager to downplay. The massive sums of money the government is spending could be coming under closer scrutiny. 

This month, protests broke out in São Paulo and Rio, as well as Goiânia, Natal, and Florianópolis, over a rise in bus fares. It's not only a sign of growing discontent with the increasing cost of living, but also a reaction to a lack of a convincing policy response to growing inflation. As El País pointed out: "Not even in the face of big political corruption scandals did people [protest] in the streets. Once again, what's happening here is the famous quote attributed to Bill Clinton: 'It's the economy, stupid.'" While it's not true that Brazilians haven't protested corruption scandals, the manifestations are another sign that the cracks are beginning to show in public perceptions of the economy.

Also, the idea that an improved economy would bring down crime levels is one that has yet to be seen, especially in the country's two biggest cities. Ahead of the mega-events, Brazil launched its biggest border security operation ever, bought anti-aircraft tanks, and plans to fly drones over stadiums in Rio and Brasília. But the head of Abin, Brazil's intelligence agency, said last month that regular crime is a bigger concern than terrorism during the mega-events. Certainly, for Brazilians on a day-to-day basis, that's the case. In Rio state, murders, muggings, and car thefts all rose in April compared to the previous year. In São Paulo, robberies followed by murder increased 74 percent during the first four months of 2012; crime and insecurity are hot topics in the city.

So now the big games are coming, a time for the government to continue promoting this vision of a booming Brazil. But with much of the infrastructure for the mega-events funded by the government, some Brazilians may cast a critical eye on the investments being made. The cost of stadium construction and renovations alone stands at $3.3 billion, and could go up more. Could these same stadiums remain as a symbol of the golden days of the boom and misguided public spending? Economist Luciano Sobral, also known as the Drunkeynesian, thinks so.

"Evidently, it won't only be the 'arenas' that will have screwed the country, but I see them as the main symbols of a combination of arrogance, exaggerated optimism, poor planning, and swindling that are bringing Brazil down," he wrote. "The decision to put money (much of it public) into football stadiums will be seen as the sign marking the height of a cycle in which Brazil imagined itself to be on an inevitable path to becoming a rich country, only to realize a few years later that we'd had little more than luck to produce, for a time, what the Chinese wanted to buy in large quantities." He ends on an even more pessimistic note. "In the future, when I walk through the ruins of those arenas with my future grandchildren, I'll use the stadiums to tell...the story of how during my generation, Brazil screwed itself over."

I'm a bit more hopeful. I'd like to think that the bus fare protests are actually a good sign--that people are more invested in accountability. It's a little too late to cut the costs of the already overbudgeted stadium projects, but with an election year ahead, it remains to be seen if bread and circuses will win out.

Image: Renovations on Maracanã in Rio. Portal da Copa.

Q&A with the Drunkeynesian: Brazil's Food Inflation

Earlier this month, I reported on Brazil's tomato crisis, with prices of tomatoes and other vegetables rising. Soon after, the international press also began covering this issue (see Beyond Brics, FT, Bloomberg, AP, NPR, and Quartz). There were even reports in the Brazilian press of tomato smuggling across the Argentine border. One of Brazil's most popular TV personalities, Ana Maria Braga, wore a "tomato necklace" on TV and joked she was wearing gold. This weekend, two of Brazil's largest weekly magazines put tomatoes on the front cover. Much of the coverage, both domestic and international, focuses on the threat of inflation, and what rising inflation could mean for next year's presidential election. There's also the issue of consumption. Valor reported last week that due to rising food prices, supermarket sales fell 2.1 percent in February, though families spent 9.3 percent more than in February 2012. In the last week or so, tomato prices have started to go down, though prices of other vegetables--namely onions and potatoes--increased by 15 and 25 percent, respectively. Onions, too, are being smuggled across the Argentine and Paraguayan borders.

To determine what is really going on with food inflation, I talked to São Paulo-based economist Luciano Sobral, also known as the Drunkeynesian, to get his views on whether this a long-term trend, a short-term problem, or a symptom of other economic forces at play.

Tomatoes, onions, and other vegetables and food products have risen over the last year. There are climatic reasons (drought, rains) and agricultural reasons (less area planted), but what are the bigger economic forces at play?

I don’t think there are other bigger economic forces acting here, since demand for those items is pretty much stable. As you mentioned, there was a supply shock caused mainly by climatic reasons (heavy rains in the Southeast, a severe drought in the Northeast), and since arbitrage is not possible for several products (there’s no international market, at least not a liquid one where players can hedge or speculate), prices skyrocketed. Curiously, the prices of exchange listed agricultural commodities have been falling consistently since last September, so if there’s any external factor in foodstuff items it should lead to lower domestic prices.

How is food inflation going to affect inflation overall? The economy overall?

Of course the first effect is a spike in headline inflation. The infamous tomato story caused a frenzy on local media (two of the largest weekly magazines in Brazil are currently running cover stories about inflation and food prices), and called attention to a deeper, more structural problem: headline inflation is so sensitive to food prices because ex-food inflation has been quite high. Service prices are rising more than 10 percent per year. There’s a huge adjustment in relative prices going on, and it’s not favourable to capital or investments. Thus the conundrum: the current situation is very desirable politically (low unemployment and real wages rising), but it doesn’t seem sustainable, since overall profit margins look already quite weak and don’t attract new private investments. Dilma has the political incentives to postpone an adjustment until after next year’s elections, but, as a long term growth strategy, Brazil cannot rely only on state-lead, profit-insensitive capital investment.

Do you think food-driven inflation will continue into next year? Or is this a short-term issue?

I don’t see a major global uptrend in food prices, so I’d bet this is a short-term issue. Shocks related to climate are pretty much random, impossible to forecast. What’s been more or less established is that they tend to dissipate quite quickly, as soon as the climate turns favorable or higher prices attract new producers or importers to the market. An example: tomato prices hit R$12/kg a couple of weeks ago; this weekend I bought beautiful tomatoes at a supermarket for less than R$4/kg.

What does the price spike of certain foods reveal about the Brazilian economy?

Despite all the progress of recent years, Brazil remains a (somewhat) poor and (very) unequal country. The substantial weight of food prices in the average consumption basket (and, consequently, in price indexes) is an evidence of that: everytime certain food prices rise, there’s a national concern. This is similar to what happens with tortilla prices in Mexico or rice prices in some poor Asian nations. Another interesting aspect is the dependence of Brazilian food markets on local producers, since importing is not a viable emergency solution (think of taxes, red tape, complicated logistics). This tends to make supply shocks more frequent and persistent. Finally, it shows the old obsession of the country with inflation, as if it were part of our collective conscience, and how there’s little space in current inflation to accommodate shocks within the established inflation target range (2.5 percent to 6.5 percent, with a center of 4.5 percent). Brazil indeed has an inflation problem, although I don’t think it’s as dramatic as the media and some economists are painting it; only it serves as an important alert to more complicated structural issues.

Image: Courtesy of Drunkeynesian

Brazil's Tomato War

Brazil has a tomato problem. In recent weeks, the price of tomatoes has skyrocketed, making it as expensive as meat and chicken in some cases.

In supermarkets in parts of São Paulo state, Brazil's second-largest tomato producer, the price of tomatoes rose by 346 percent, from R$1.90 to R$8.49 per kilo. Wholesale prices there have also risen above 330 percent. In states like Mato Grosso do Sul and Pernambuco, prices spiked above 200 percent. In Goiás, the country's largest tomato producer, tomato prices hit an all-time high of 150 percent in April.

Nationwide, tomato prices increased 17 percent in the last week alone. Prices went up 70 percent from January to March, and rose a total of 150 percent in the last 12 months.

For an international comparison: At my local grocery store in New York, vine tomatoes are on sale for $1.97 per pound, or about R$8.61 per kilo. In São Paulo, vine tomatoes at Pão de Açucar are selling for R$14.39 per kilo--67 percent more than in New York. Even in Alaska, tomatoes cost less than in some Brazilian cities.

A number of factors are at play. Areas of tomato cultivation were reduced nationwide, in part due to heavy rains in the South and a record drought in the Northeast. There was also overproduction of tomatoes last year, which led to fewer areas of cultivation this year. In total, the area covered by tomato fields fell 16 percent in Brazil; in Goiás, by nearly 42 percent. The result of falling supply? Higher prices.

On the agricultural side, there were other factors. Some crops were hit by diseases. Agricultural labor doesn't come cheap. Small-scale farmers are often unable to invest in high-tech equipment, opting to pay for workers instead. Another theory is that the lack of policies to guarantee a minimum price based on production costs has also had an influence. Then there are the overall economic causes. High production costs, as well as high price of diesel, contribute. There's also the "Brazil cost," which includes expensive transportation costs and high taxes. 

The price spike has led to jokes in the media and on the internet, spawning political cartoons such as a robber demanding tomatoes instead of a wallet, and a woman complaining that tomatoes are too expensive to throw at politicians. It's inspired Facebook memes, showing TV host Silvio Santos giving away tomatoes as a prize, an engagement ring made with tomatoes, and an image of a robber saying: "ATMs are over with. The game's in boxes of tomatoes now."

Some people are simply cutting back on tomato purchases. But others, like an Italian restaurant in São Paulo is fighting back and "declaring war" on tomatoes. Nello's Cantina and Pizzaria announced on Facebook earlier this week that it would stop buying tomatoes and serving dishes using tomatoes until the price goes down--a fairly extreme decision for an Italian restaurant. Today, though, the restaurant posted a video showing owners negotiating 25 boxes of tomatoes at a wholesale market. (Incidentally, this is the same restaurant that, like several other upscale restaurants in São Paulo in recent memory, saw armed thieves invade the premises and rob 60 customers about a year ago.)

Some say prices will come down soon, though it's not likely to come down to previous lows. Other vegetables, like onions and carrots, have also become more expensive, hitting the highest prices in 14 years. Is this just a price flux? Or is this a sign of more inflation to come--which could have a bigger impact ahead of next year's election? We'll have to see. For now, Brazilians may just have to cut back on salad.

**Updated 4/6 with additional info on Alaska prices, corrected tomato cost per real in NYC.

Image: Angela Leese

Favela Consumers: The Invisible Market?

With the expansion of Brazil's middle class, something has become increasingly clear: favelas are home to a vast and growing number of consumers. Though this was apparent to companies like Coca Cola and Nestlé over a decade ago, the purchasing power of favela residents has risen due to a jump in salaries, a decrease in unemployment, and greater access to education.

Brazil's so-called "C class" grew by 50 percent in urban favelas over the last decade, according to a new Data Popular study. Now, around 65 percent of favela residents are considered middle class, versus 37 percent in 2002. Brazilian favela residents--around 12 million people--earn around $28.4 billion a year, the equivalent of Bolivia's GDP. "This used to be an invisible market, because it was right under our noses," says Data Popular Director Renato Meireilles, "but people only saw favelas through the perspective of violence and drug trafficking."

Over the last ten years, access to goods for favela residents has exploded. The number of those with washing machines doubled to over 50 percent. Nearly 90 percent have cell phones, and 40 percent have computers. Around 45 percent are regular internet users. While most daily purchases are made within favelas, larger purchases, like electronics, are made in stores outside the community. About 70 percent of favela residents go to the mall every week, and 50 percent eat out on a weekly basis. Around half said they plan to buy furniture within the next year, and 36 percent plan to buy home appliances.

Some companies have taken note. Casas Bahia, one of the country's largest retailers, opened a store in Rio's Rocinha in November. On opening day, the store sold 10 times as much as the average store, and the chain plans to open a third favela location in 2013. Vai Voando, an airfare vendor, has 70 stores in favelas alone, largely in Rio and São Paulo. The company counts around 3,000 passengers a month, with 43,000 customers since the company started two years ago. The company's owner, Tomas Rabe, plans to open 50 more stores this year.

Now, plans are underway to build Rio's first favela mall, in the "pacified" Complexo do Alemão. The $10 million investment aims to open 500 stores, at least 60 percent of which will be run by local favela residents. All maintenance, security, and janitorial work will also be done by locals in order to create jobs, especially for youth. A branch of Caixa Econômica bank will offer microcredits for small businesses within the mall itself. The mall also plans to house local street vendors. The project is due for completion later this year. Elias Tergilene, a former street vendor who runs a series of malls, is behind the initiative. He hopes to invest $253 million over two years in favela malls, aiming to open similar shopping centers in São Paulo and Belo Horizonte.

However, not everyone is happy about the new favela consumers, who along with buying computers and washing machines are also frequenting some of the same public spaces once reserved for the wealthy. "The C class put an end to the exclusivity of the A class in that the new middle class began to consume products and services that it didn't buy before," Meireilles told me in November. His company found that around 50 percent of upper class consumers only want to be around people from their social class, and over half believe that products should come in different versions for the rich and the poor.

A salient example of this recently emerged in Rio. A new beach club in Copacabana opened, offering a private strip of sand on one of the city's public beaches. For an entrance fee of between $45 and $126, beachgoers can get into the exclusive club--where safety and a clear separation from so-called favelados (favela residents) are considered selling points. "I stopped going to Ipanema and started coming here every day because it's a much more select crowd," sociologist Camilia Diniz told VEJA. "I can drink champagne out of a glass and brush my hair afer swimming." The manager of the beach club noted: "Everyone can come here without being afraid of wearing a Rolex or bringing a Louis Vuitton bag."

Image: Rocinha favela in Rio, Memorias do PAC.

Brazil In The Year Ahead

The big story making headlines as we get closer to 2013 is that of Brazil's slowing economy. While that will continue to be an ongoing issue to watch, here are a number of other things to keep your eye on in the year ahead.

Issues to Watch: Brazil

• Oil and gas. With the first oil concessions in five years due to take place in 2013, this is the industry to watch next year. But the ongoing royalties fight in Brasilia isn't over yet, and the royalties law could end up in the Supreme Court again if Congress overturns Dilma's partial veto.
• Brazil's new middle class. As one of the most compelling tales of Brazil's growth, this group is the one to watch--especially to see if it can be sustained or grow amid sluggish GDP growth and rising consumer debt.
• Airport and port privatizations. Travelers eagerly await airport upgrades; businesses hope for more efficient ports. The process could be long, but there should be movement in this area next year, especially after the recent announcement that Rio and Belo Horizonte's international airports will also be privatized.
• Construction and housing. In spite of slower growth, this is an area that continues to chug along. FipeZap estimated that real estate prices rose by nearly 14 percent this year and doubled within the last 3 years. The government also hopes to use this sector to boost growth, and the subsidized housing program Minha Casa, Minha Vida is full speed ahead.
• BNDES. Brazil's development bank lent nearly $60 billion through November of this year and could lend up to $73 billion by the end of 2012. Keep an eye on where BNDES is spending, particularly the Brazilian multinationals and major domestic projects, like the controversial Belo Monte hydroelectric plant.
• Government corruption. Will the mensalão defendants actually go to jail? Will Dilma continue to show no mercy for those accused of wrongdoing? Will new transparency laws help uncover new scandals?

Issues to Watch: Rio

• UPPs. Violence has flared up in several of the city's "pacified" favelas, and most of the on-duty military police that died this year died in UPP favelas. Keep an eye on how current UPP favelas are faring in terms of security, as well as plans for new UPPs in other favelas.
• Transportation construction. The bus rapid transit system is underway and operating in a section of the city, with four new stations inaugurated last week. Four more stations are due to open in January with ongoing construction throughout the city. But getting the system online isn't the only challenge; people keep getting hit and killed by the BRT and many have complained about overcrowding. Expanding Rio's metro system is also underway with a price tag of $3.6 billion.
• Militias. The government has focused much of its security strategy on combatting drug traffickers and bringing a permanent police presence to favelas. Will it finally turn the heat up on the city's paramilitary groups?
• Favela removals. Forced evictions from favelas to make way for mega-event construction and urban renewal have stirred controversy on an international scale. Keep an eye out for how these removals play out.
• Mega-event preparations. From stadium construction to training programs, this is an ongoing area to watch. Maracanã Stadium renovations are due to conclude by the end of February, likely over budget. Maracanã is also due to be privatized next year, so keep an eye out for who wins the prize.

People to Watch

• Guido Mantega: Will he hang on as finance minister? If an Economist article won't be his downfall, could more disappointing growth numbers be the final straw? Or will he stay on until the bitter end?
• Joaquim Barbosa: The new president of the Supreme Court became something of a national hero for his hard-line approach during the mensalão trial. But he also decided against immediate imprisonment for those convicted in the trial. Beyond the mensalão, keep an eye on Barbosa and major STF trials next year.
• Lula: The heat recently turned up again from mensalão accusations, though it seems likely he'll remain unscathed for now. But with presidential elections in 2014, will he decide to become a candidate or let Dilma run for reelection?
• Eduardo Campos: The governor of Pernambuco looks like a likely presidential candidate in 2014. Watch for campaign announcements next year.
• Marco Antonio Raupp: Brazil's minister of science, technology, and innovation could be the spokesperson for some of the government's most interesting new initiatives. In November, he announced the launch of Start-Up Brasil, a $40 million project aimed at Brazilian startup companies.

People to Follow

• Brazil's economy - Luciano Sobral, the Drunkeynesian
• Brazil's new middle class - Renato Meirelles of Data Popular
• Brazil tech news and startups - TNW's Anna Heim
• Government transparency - Observing Brazil's Greg Michener
• Everything Rio - RioReal Blog's Julia Michaels
• Rio mega-event preparations, favela removals - Christopher Gaffney of Hunting White Elephants

Photo: Charlie Phillips

Consumption in Brazil: What's Really Going On?

With Brazil due to grow by only 1 percent this year, one of the big questions is how the economy will affect the average Brazilian and consumption, if at all. In reality, this is an ongoing debate, especially one that's been hashed out in the foreign press. Brazil has been growing slower for the past two years, so what does that mean on the micro level for consumers? In a country where an estimated 80 percent of the GDP is linked to consumption, it's an important question.

If you just read about the economy slowing, you might think things look pretty grim. The country's third quarter growth numbers literally surprised economists it was so low--half of what they expected. Dollar flows are way down: $22.16 billion so far this year compared to $66.98 billion during the same period last year. Exports have decreased, imports are up. Demand for consumer credit dropped 7.6 percent last month. Requests for U.S. visas were down 29 percent in São Paulo and 64 percent in Recife last month compared to November 2011. A December CNI/Ibope survey found that 60 percent of Brazilians plan to reduce consumption due to fears about the economy, while 41 percent report that they're in debt. (Hat tip to Dow Jones Brazil bureau chief Matthew Cowley who posted all of these numbers on Twitter recently.) The IMF estimated that 23 percent of disposable household income in Brazil is spent on paying off debt--which is much more than in neighboring Latin American countries.

On the other hand, consumption seems to be humming along. The same CNI/Ibope study found that 63 percent of Brazilians plan to buy at least one durable good (like a car or refrigerator), a home, or go on vacation through the end of the year. Cars, computers, and construction materials were the items with the highest demand. The survey also found that 28 percent of Brazilians saw their family income rise in the last 12 months.

In August, Vincent Bevins wrote a piece for the LA Times in which he explained the "great conundrum" of an economic slowdown that didn't seem to be having much of an impact on many consumers:

The boom in demand for services helps to explain the paradox of low unemployment and low growth, analysts say. Although the industrial manufacturing sector has been suffering because of the high cost of Brazilian exports, local service businesses such as hair salons, restaurants and even banks are relatively labor-intensive, and have been buoyed — for now, at least — by freely spending Brazilians.

And that still seems to be the case. Unemployment is at an all-time low and is still falling. Real wages are rising--they rose an average of 2.5 percent last quarter, and for those without a carteira assinada (papers to work in the formal job market), they rose by 5.8 percent. Family consumption rose by 3.4 percent last quarter in comparison to the same period last year.

So like many things in Brazil, things are more complex than they might initially seem. But it looks like consumers aren't deeply affected by the slowdown, at least for now.

Brazil Under Construction

Alphaville construction site, Juiz de Fora

Driving through the dusty rolling hills on the western edge of Juiz de Fora, a mid-sized city in Minas Gerais about two hours from Rio, you'll notice bulldozers cutting away swathes of grass and the first signs of concrete. Soon, the scenic countryside will give way to a massive residential and business complex. Here is the site of Alphaville, the latest self-contained mini-city under construction in Brazil's urban areas. The complex will stretch nearly 2.1 million square meters, and is advertised as a "true planned neighborhood," perhaps a reference to favelas, which for a long time were not considered real neighborhoods. It won't just have homes. It promises a commercial center, services, leisure activities, and even a government building: a city within a city.

Originally built in Barueri outside of São Paulo city in the 1970s, the first Alphaville encompasses 3 million square meters and along with residential housing has its own schools, shopping centers, banks, hotels, supermarkets, a movie theater, and other services. Security is run by the complex and is tight. Now, there are nearly 45 Alphavilles established or under construction throughout Brazil--all the way from Manaus in the Amazon to Foz de Iguaçu on the border of Argentina.

Targeted at the upper-middle class as an escape from the dangers of urban life, these walled communities are the antithesis of favelas, with luxury homes secluded from the rest of the city and providing enough services that means you may not even have to leave. Alphavilles are "planned, self-sufficient, and sustainable centers with complete and planned infrastructure for a rational level of occupancy that guarantees harmony between urbanized space and the environment," the website reads.

And it's not just Alphaville. Eike Batista, one of Brazil's wealthiest men, recently purchased former amusement park Terra Encantada in Rio's Barra de Tijuca to turn into a self-contained neighborhood. The 700,000 square meter space will be converted into residential and commercial buildings in an area of the city that requires a car to get from place to place. "Cariocas like to do everything on foot," he said last month. "In my neighborhood, people will feel like they're in Zona Sul." He said he would live in the neigborhood, too. "It will be a development with all of the infrastructure of a planned neighborhood, but like Ipanema."

It's not just these walled mini-cities springing up in Brazil. Cranes pepper the skyline in São Paulo and Rio as new apartments are under construction, given a growing middle class and a booming real estate market. Open any newspaper and you're likely to see a dozen ads for apartments. Meanwhile, the government's Minha Casa, Minha Vida program for subsidized housing and loans for low-income and middle class buyers is in its second phase. Beginning in October, the government lowered interest rates while raising the maximum value of homes in the program. Since the program began, one million homes have been constructed.

And with the busy bees of construction at work and the sense of confidence in the country's growth, there's little evidence that people are worried about Brazil's economic slowdown, industrial stagnation, or the potential for rising inflation. With record unemployment and continued consumption, Brazilians don't seem too concerned about the economy. On the contrary: the buzz of construction sounds belies any slowdown.

Photo: Alphaville