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Brazil's now a hot commodity

From aviation to agriculture, it's an economy on the upswing

December 31, 2007|Chris Kraul | Times Staff Writer

SAO JOSE DOS CAMPOS, BRAZIL — For years, the joke in this country was that Brazil's economy was the economy of the future. The morose punch line, of course, was that the future never arrives.

But finally, it seems, the future is now.

Just peek into Embraer's Hangar F220 in this city north of the capital, Brasilia, where this month the highflying commercial aircraft maker was putting finishing touches on a dozen gleaming planes being readied for delivery to airlines around the world, including Northwest, Air Canada, Tame of Ecuador and Virgin Australia.

Or visit the Odebrecht construction company, in Salvador in Brazil's northeast. It is managing billions of dollars worth of international public works projects, including its second $1-billion bridge over Venezuela's Orinoco River and a piece of the Panama Canal expansion.

Then there's Petrobras, the quasi-state oil company, whose engineers have launched deep-water drilling projects in places as far afield as Angola and close to home as Colombia and the Gulf of Mexico. Petrobras announced last month that it had discovered what may be the world's largest oil find in 25 years, in Brazil's offshore Tupi field. If that pans out, Tupi could propel Brazil into the ranks of significant oil exporters.

For The Record
Los Angeles Times Tuesday, January 01, 2008 Home Edition Main News Part A Page 2 National Desk 1 inches; 37 words Type of Material: Correction
Brazilian economy: An article in the Business section on Monday about Brazil's economic growth said Sao Jose dos Campos is north of the capital, Brasilia. It is north of Sao Paulo, the capital of Sao Paulo state.

After several boom-and-bust cycles in recent decades, Brazil is in the midst of its best sustained economic growth since the 1970s. Optimism is high that the country may have turned the corner on the road to stability. And the emergence of companies like Embraer, Odebrecht and Petrobras on the world stage is one major factor in Brazil's improved fiscal health.

"The Brazilian economy is probably at its best moment in 25 years," said Paulo Levy, economist at a Rio de Janeiro-based think tank known by its Portuguese initials IPEA, citing four years of good economic growth.

Exports of manufactured goods and services have given Brazil's economy balance and helped foreign reserves climb to $167 billion, double the figure of September 2006. The country has paid down its debt, lowered interest rates and kept a lid on spending. Economic growth will come in at 5.3% this year, lower than the hemisphere's 5.7%, but quite a feat for a country that over the previous 10 years averaged only 2.5% annual expansion.

Foreign investors have taken notice, evidenced by the 44% increase in the Bovespa stock index this year, the fifth year of growth. That's a bigger percentage gain than in Russia, Chile or South Korea, even though Brazil's GDP growth this year will fall short of those countries. Brazilian companies have done a record 100 initial public stock offerings in 2007, five times the number of last year, with 70% of the money raised supplied by foreigners.

"That's good for Brazilian companies because it's a cheaper source of financing," said Reginaldo Takara, senior director in the Sao Paulo office of the Standard & Poor's credit rating agency. "Now they have partners instead of creditors."

Investors' improved perceptions of Brazil are also evident in the $30 billion that foreigners have plowed directly into Brazilian companies this year, a 60% increase over last year. The flood of foreign cash has helped spur the currency, the real, to double in value against the dollar in four years.

Also giving Brazil an enormous boost is the jump in commodity prices in recent years. The country is the world's leading exporter of chicken, coffee, sugar, soy, beef and orange juice.

Much of the foreign money now flowing into Brazil is coming from investors who expect the country's debt to receive an investment-grade rating from major firms such as Standard & Poor's over the next couple of years, said Gustavo Franco, a former head of Brazil's central bank and now an executive with Rio Bravo Financial Services in Sao Paulo, the country's financial center.

"If the experiences of Russia, Chile and Mexico are an indication, a ratings upgrade will produce a boost in equity prices, stock [price-to-earnings] multiples and earnings," Franco said. "That's what investors are anticipating."

Some institutional investors, such as pension funds, can only invest in countries with top debt ratings, Franco noted. If Brazil is able to secure that, it will drive demand and raise prices, he predicted.

About a quarter of Brazilian stock offerings this year have been launched by real estate investment companies targeting a housing deficit estimated at 7.5 million units by ABN Amro economist Zeina Latif in Sao Paulo. She expects a short-term boom in housing construction, fueled by long-term fixed-rate mortgage credit, which was not available in Brazil until recently.

The red-hot quality of Brazilian markets is all the more stunning considering the situation just five years ago. In 2002, leftist Workers Party leader Luiz Inacio Lula da Silva won the presidency by campaigning on promises to renationalize utilities that had been sold to the private sector. Investors fled, and stocks and the currency plummeted.

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