But here comes another reason to love the dude. Published last week, the following analysis on Brazil gives a much-needed counterweight to the permabull, Brazil-Is-Economic-Miracle sheep bleating of our current era. Kouyoumdjian’s view is essential reading for anyone interested in Brazil’s economic (and political, for that matter) future. I have been given permission to reprint his analysis here on the blog. I also recommend that you use the mail address included in his title line, shoot the great man a mail and ask nicely if you can join his free mailing list.
As the “Hadji Yatmaz” Country Inflates its Image
kouyvina (AT) cmet.net
October 2, 2009
Once again, Brazil is riding the top of the wave in terms of world consideration. Comments one reads describe it as leading the recovery in Latin America in the short-term, flexing its regional and international muscle on the diplomatic stage, and even on the road to becoming a “new Saudi Arabia” for oil production. When you point out that in a 33-year career covering Latin America, you have all heard it before, several times over, your cynicism is countered by the comment: “ah, but this time, they really have got it right!”. How many times I have heard that one as well. Unfortunately, many of the analysts and journalists behind this enthusiasm were not even born when I started looking at Latin America in November 1976.
This is one of the main problems in not only analysing, but also putting across any contrary views on Brazil. The fan club is so large and militant that they will not hear anything against the subject of their undying love and admiration. Moreover, even with the evidence under their nose, they will not even look at it. “A virtuous circle” as one London analyst described it to me some years ago. The other problem is that, fully conscious of this goodwill, Brazilian authorities themselves take advantage and put across a positive image in an unparalleled decades-old exercise in cosmetic dressing-up.
Though I am fully capable of it (once I see the colour of your money), I am not planning here to undertake a detailed Country Risk analysis of Brazil, but just to underline some cautionary aspects which are always ignored.
WHAT IS A HADJI YATMAZ? I normally do not translate foreign expressions used in my reports, because even though I have little faith in the cultural level of much of my readership, I think it is a job for foreign embassies in Santiago. After all, there is something they should spend their time on, because updating their websites, managing their invitation lists and organising proper catering does not seem to be much of their concern. However, in this case, the concept of “Hadji Yatmaz” is fundamental to this report, so I shall have to explain it.
In the Beirut of my childhood, before it was destroyed by the invading vandals of the territory to the South, there used to be a toy called a “Hadji Yatmaz”. Probably a result of the Ottoman occupation, the expression used is Turkish. It means roughly “the Hadji that won’t lie down”. It consisted of a small plastic figure, with a piece of lead in its base. If you bent it downwards, it always stood up again, because of the heavy lead base. Such a toy was probably available in other countries, though nowadays the lead content would be illegal because it is poisonous. I had several of them, and my playing with lead probably led to the imbecility with which I generously send my reports for free.
So most people regard Brazil as a “Hadji Yatmaz”, which will quickly stand up after falling down. The problem with the toy, as with Brazil’s image, is that it was made of very cheap plastic, and it was completely hollow inside.
INFLATING THE PRESTIGE Having had two emperors (Pedro I & II) for a total period of 67 years after independence (1822-89), and contrary to Haiti (Dessalines and Faustin) and Mexico (Iturbide and Maximilian), whose flirtation with imperial status was shorter and unedifying, Brazil never recovered psychologically from losing that status. In fact, soon after a military coup sent Pedro II into exile, they sent a delegation to woo him back (which he refused to do). So the country had to make do with its own imperial size, embassies that are palatial (the one in Santiago has its own chapel), and flexing its muscle from time to time among its smaller neighbours (it shares a border with all but two of South American countries, Chile and Ecuador).
Flexing your muscle is not difficult when you are the size of an elephant. Brazil is only 11 % smaller than China (though it has less than a seventh of its population). Elephants have small brains but powerful muscles, and their mere presence is intimidating. One has to say that Brazil has used its size in a generally benign and certainly “softly softly” fashion, rather than in an openly aggressive way.
Following a long period of crises, and after thinking that their economy had been “stabilised”, the country actively embarked on making its mark on stage. This has gone into overdrive in recent years. It started modestly enough with a bid to represent Latin America in a potential permanent seat of an enlarged Security Council (a UN debate that is far from being resolved anyway). Its only likely contender, Argentina, though pretending that it is still in the running, does not appear to have much of a chance, to put it mildly.
As this matter was dragging on, Brazil thought up another role for itself, closer to home. It convinced the USA, busy killing babies in Iraq and Afghanistan, that it could be its proxy “regional stabiliser”. That was not really Brazil’s real intention. It did not want to be a proxy for anyone, but have a role for itself. So it thought up UNASUR, making sure membership was limited to countries south of the Panama Canal, and more importantly, its offshoot, the South American Defence Council (or CDS). The latter had a double purpose: give a military dimension, and provide an outlet for its growing defence industry. Massive acquisitions of modern weaponry mainly from France, at various stages of confirmation, all insisted on “technology transfer” clauses. One hopes that the quality of training in their armed forces has improved to the point of handling nuclear submarines and U$ 200 million a piece state-of-the-art combat aircraft. During WWII, the Brazilian Navy had the dubious record of a destroyer sinking itself (a badly positioned machine gun fired a “training burst” into ammunition stored on the deck below, causing an explosion from which only two crew members survived to tell the story). There is no limit to the ambitions. Vice-president Alencar recently expressed the wish that Brazil would become a “nuclear power”. Contrary to people’s attitude to Iran, not a single voice protested around the world (not even when the country’s authorities refused access to an IAEA inspection team to an army facility known as IME, where nuclear research is carried out).
Among its immediate neighbours, Brazil played godfather to the start-up Bolivian gas industry, and put pressure to stop a break-up of that country sponsored by local business interests with Israeli help. With Paraguay, after playing an unusual game of toughness and carrying out live ammunition exercises on its borders, it accepted to renegotiate iniquitous agreements on revenue from the joint Itaipu hydroelectric project, trebling the sum paid to its small neighbour.
More recently, Brazil became even more proactive in terms of diplomacy by the crucial role it is playing in trying to restore democratic rule in Honduras, having arranged for the deposed president to return in secret and take refuge in their embassy of Teguchi-galpa (as French TV called the Honduran capital, probably thinking it was a provincial town in Japan). Though the gathering was held in Venezuela, Brazil was a strong voice in the recent African-Latin American summit. It had previously flirted actively in the continent, particularly with the Portuguese-speaking former colonies like Angola and Mozambique. It has also nibbled at the Palestinian problem, the G-20 group and the Doha trade round. Last April, in another fit of panache, the country lent U$ 10 bn to the IMF.
Brazil is not a member of the OECD, but holds observer status there since 1994, and some time ago became the first OECD country to join a trade pact norm with its members. Last but not least, Rio de Janeiro’s just became the seat of the 2016 Olympic Games, the first to be held in the region. This is despite the fact among the four finalists, it had the lowest “suitability” score in the evaluations. The honour will cost the country another U$ 5bn in investments.
POLITICS AND THE LULA PHENOMENON There is exactly a year to go until the October 3rd 2010 elections, which will mark the end of two terms of Lula presidencies. That day will also mark the renewal of all the Lower House and part of the Senate. Lula cannot stand again on this occasion, but he is said to be already eyeing the one election after next, in 2014.
In the meantime, his personal popularity still stands at an incredible 65 to 70 % or so, a score only bettered by Chile’s Ms. Bachelet, also coming to the end of her single term. What can the explanation of such popularity be, after years in power and in the midst of a severe crisis? Unassuming agreeable personalities, trying to stay above daily occurrences (”blindaje” as they call it in Chile), whilst appearing like the person next door (which in a way they both are).
The problem with such popularity is that it does not rub off on an heir, anointed or not. Lula has hand-picked his rather dour chief of cabinet Ms. Dilma Rousseff, a Bulgarian from his own PT party, as heir apparent. It did not help that soon afterwards she was diagnosed with cancer, but the fact is that, exactly a year ahead of the polls, she has only 15 % backing in the polls, running virtually in third position in a field led by the PSDB’s Jaime Serra.
One eyebrow raiser has been the formal announcement on September 30 that Central Bank president Henrique Meirelles would bid for the governorship of Goias state, in alliance with Lula’s PT party, thus putting a question mark on the real independence of the Central Bank ( a concept which in any case rarely goes beyond the theory in Latin America)..
THE DEBT OVERHANG I have often referred to the conspiracy of silence, for there is no other word, surrounding Brazil’s fiscal situation, which everyone appears to wantonly ignore, to the great joy of the authorities. Whereas it might be true that the way their finances currently look, France, Spain and the United Kingdom may declare bankruptcy sooner than Brazil, it is amazing that on September 22, Moody’s joined Fitch and S&P to give the country an “investment grade” rating.
Brazil is very good at pulling the wool over the eyes of the average analyst and journalist, concentrating on the totally irrelevant “primary balance”, and the size of the debt as a percentage of GDP. Debt is a precise figure, which your creditors can calculate down to the second decimal. GDP is a nebulous concept. A quotient of the two is meaningless. In any case, debt is not serviced with GDP (nor with trade surpluses), but with fiscal revenue over and above other needs.
With the just published fiscal results for January-August (the amazing thing is that these figures are available for anyone to see on the Central Bank’s website), we have the following results:
The treasury generated a primary surplus of U$ 23.5 bn over 8 months, but this only covered 40 % of an interest bill equal to U$ 58.5 bn (U$ 241 million in interest per calendar day, or U$ 10 million per hour). The resulting overall deficit was U$ 35 bn in 8 months, nearly SIX TIMES the figure for the same period of 2008. If that is an “investment grade”, I’d hate to see the figures for a junk bond issuer. Total debt as of August 31st stood at U$ 1,055 bn.
The most worrying aspect of this is that the deterioration of public finances took place in a context of falling interest rates, and in particular the benchmark SELIC rate at which around a third of the debt is denominated. A year ago, SELIC was at 13.75 %. It is now at 8.75 %, down by over a third in just a year, but a reversal is expected, with some local forecasters thinking it may go up by 4 points by the end of 2010.
Relax, more statistical games are planned in the cosmetics field (it is time that L’Oréal transfers its corporate headquarters to Brasilia). The authorities, having already taken out a U$ 10 million an hour interest bill from its fiscal deficit calculations, they are now pondering whether to also exclude the cost of reactivation packages.
In late July, Brazil managed to place a 28-year bond issue for U$ 500 million, with a coupon of 7.125 %. Admittedly this is more than Citibank is paying us on our time deposits, but at least these are guaranteed by Uncle Sam (why are you laughing?). There was actually demand for U$ 7 bn and the bonds were placed at 108.63, still giving a yield of 6.45 %. The question is whether they can keep up the coupon and pay the principal in 2037. Look at the past 28 years and you may find the answer.
SOME OTHER STATISTICS Brazil was the Latin American country with the largest stimulus programme, much of it unfortunately directed to consumption, with some going to housing. Credit card use is at a record level, and bank credits for that purpose are up. This will add debt accumulation to the population. Even though they are at a 14 year low, average interest rates on consumer credits are at an average of 7 % A MONTH (that is 125 % per year, unless you are a Chilean economist, and think it is actually 84 %).
In fact, one wonders where this lead in recovery that Brazil is supposed to be taking in Latin America can be seen (“The Clear leader of the region’s recovery”, as JP Morgan described the country in late July). One would have hoped that the shit they put us in over the past year would shut up all these investment bank twits. No, they still talk, write, get invited to speak at seminars and even insist on getting bonuses! Only retail sales and car sales recently showed positive growth, helped by all sorts of incentives. Passenger car sales to September rose by 5.5 %, but the lack of real investment is better reflected by the 20.2 % drop in truck sales over the same period. Industrial Production in the first 8 months was down 12.1 %, and second quarter GDP was a negative 1.2 %, after a first quarter drop of 1.8 %. Passenger car output to August was 10.7 % lower and that of trucks 34.6 % down. The August urban unemployment rate of 8.1 % was the same as in June, and 0.5 points above a year earlier.
On the external front, the 8 % rise in the January-September trade surplus (to U$ 21.28 bn), was only due to imports (-31 %) falling faster than exports (-25.9 %). Capital goods exports alone were down 46 % in January-August. This helped shrink the first semester’s Current Account deficit (- 52.5 % to U$ 9.56 bn).
External reserves as of end September were at a comfortable record of U$224 bn, so at least (thank heavens for small mercies) we do not have to fear a good old fashioned external sector crisis (which used to cause most Latin American disasters in the past, hence the fact that for many psychologically frozen analysts), Country Risk is limited to a study of the external sector.)
Inflation is also under control (under 3 % in the first 8 months, accumulating a 12-month total of 4.4%).
SAUDI ARABIAN MIRAGE? Those familiar with the works of French fabulist La Fontaine, himself inspired by older writers of morality tales going back to Greek literature, may remember the one about Perette et le Pot au Lait. In it, Perette, a carefree milkmaid, is walking with a pot of milk on her head and she starts daydreaming about how she is going to benefit from the milk she is transporting, ending up as the head of a major farming operation. Unfortunately, she fails to see an obstacle on her way, so absorbed she is in her fantasies, that she stumbles and all the milk is spilt, putting an end to her dreams.
No long ago, Brazil announced with great panache (no faltaba menos) that it had found a giant oil field under the sea bed, with such potential as to make the country a new Saudi Arabia. “A passport to our future”, described it presidential hopeful Dilma Rousseff . The money was going to go towards developing the country and eliminate poverty (why didn’t they do it when they had rubber or coffee, one wonders). Heated discussions started as to how it was going to be exploited, by whom and which proportion of earnings would the various stakeholders get. There was even talk of the “Norwegian model” in managing the bonanza.
Back in 1974, Brazil claimed similarly (soon after the first oil shock) that it had found major deposits that would make it self-sufficient in oil over the short-term. In fact, it took over 30 years and several more finds to barely reach that aim. In fact, strictly speaking, the country is not as yet self-sufficient in oil, gas and derivatives, as the sector’s trade balance in the first 8 months of 2009 was still in deficit to the tune of U$ 3.5 bn. Even if we grant the fact that the new deposits, known as “Pre-sal” exist in the quantities mentioned, there are a number of strong doubts and reservations.
-The deposits are some 5,000 metres below the sea-bed. Though the technology to extract at that depth does exist, it is very specialized and expensive.
-There is no single mega-deposit, but a series of “pockets” of oil, which have to be exploited separately. They are also spread over an area measuring 160,000 Km2. Each will need its own expensive perforation and production installations (only two companies in the world currently manufacture them), at a cost of between U$ 80 and 90 a barrel (the figures vary, and they are probably impossible to gauge until you actually get on with it.
-Due to the nature of the deposits, the recovery rate of the oil “in situ” is likely to be below 15 % of what is actually there
-There are some legal problems related to the proximity of some of the Pre-sal to existing concessions held by other firms.Even if it is true that the new discovery doubles the size of Brazil’s oil reserves, it will require a tremendous investment and technical effort to exploit it, in order to sell at a price which may or may not be economic. Hardly a boon considering the previously described fiscal constraints, particularly as in order to keep control, the authorities seem keen that most of the work will be done by the state firm PETROBRAS.
According to the company’s president, they will invest no less than U$ 111bn to develop Pre-sal by 2020, to which one has to add nearly U$ 300 bn that the private sector would have to invest as suppliers of goods and services. There are strong fears that such sums will crowd out the availability of capital for other needs in both the state and the private sectors. Before Pre-sal became the talk of the town, there was another pharaonic fantasy of building 60 nuclear power stations. Petrobras estimates that it will need 40 rigs by 2017 (there are only 80 similar ones in service today all round the world), of which it insists 28 must to be built in Brazil itself. Is it the best way to spend U$ 400 bn when the rest of the world is trying to reduce dependency on fossil fuels?
STILL AN UNDERDEVELOPED COUNTRY If Brazil wants to emulate Saudi Arabia, it might better consider a policy of cutting the hand of thieves. Even by Latin American standards, the levels of corruption and mismanagement in the public sector are abysmal, as are business manners. In the past two years, I have sent umpteen messages to various Brazilian entities ranging from the Rio Film Festival to the Defence Ministry. Not a single one has ever been answered.
The national infrastructure is seriously lacking in many ways. Ports are a big problem, and recent accidents have also turned up a disastrous situation in airports and air traffic control. Here again, the announced action is on prestige projects. The prime example is the high speed train link between Rio and Sao Paulo, originally estimated at U$ 11 bn, but now expected to cost from U$ 15 to 20 bn. If such a proven technology is difficult to cost up, imagine what can happen to the calculations for Pre-sal investment. Only a third of roads in the country are considered to be in good condition. Energy shortages also loom in the medium-term.
To that, one has to add the worst income distribution on the continent, and abject levels of poverty. Farmers, over and above the 8 % drop in output estimated for this year, have seen concentration of ownership actually worsening in the past 20 years. No less than 30 % of Brazil’s farmers are illiterate. Though some poverty-reduction programmes such as Fome Zero and Bolsa Familia have brought-in relief, rural poverty is still a huge problem.
One day, the Hadji Yatmaz may not stand up after all. If you circulate this report to third parties, I am not interested in their baseless debunking comments. This paper was very well researched, and contrary to their impressionistic opinions, is based on facts and figures, goods which are often in short supply among other scribblers. Also anyone complaining that I did not mention “the good aspects”, should remember that I am a diagnosis doctor, not a publicist.