Brazil is the largest country in size and population in comparison to other Latin American countries, and it is the seventh largest economy in the world by nominal GDP. Since the mid 2000’s, Brazil has become a more attractive global player: it has diversified its economy and its partnerships, and launched the Growth Acceleration Plan (2007) in order to increase investment in infrastructure and provide tax incentives for economic growth.
Brazil has also decreased domestic poverty through development plans: according to the World Bank, poverty (people living with USD 2 per day) has fallen from 21% of the population in 2003 to 11% in 2009. An overall view of Brazilian economy shows that the level of foreign direct investment is increasing, the wages are rising, the middle class in growing, and the unemployment rate is low, which offers a wide range of opportunities in different areas. Despite the positive scenario, Brazil is an emerging economy and faces issues and challenges to be surpassed.
Commercial and Economic Partnerships
Brazil has strong commercial and economic ties with both the developed and the developing world. To diversify partnership so that its economy is not entirely dependent on the West is not a recent action plan for Brazil. Since the 1960’s, with the Independent Foreign Policy, Brazil has searched for different markets to export primary goods. In the 90’s, Brazil focused its economy on the developed world, being the United States its primary partner. During Lula da Silva’s government, Brazil started searching for alternatives to boost economic growth and increase exports, although keeping traditional partners.
After the Goldman Sachs report on emerging economies, released in 2001, Brazil started again to diversify its partnership with other countries that were similar to it. In this context, Brazil, Russia, India and China decided to strengthen their relationships and to create a non-structured grouping called BRIC. Only in 2011 South Africa joined the grouping, turning the acronym BRIC into BRICS. Recently, the BRICS created a Developing Bank, which offers its members credit to infrastructure needs. With the traditional western partners, Brazil intensifies commercial and economic relations, mainly bilaterally or through regional groupings. In a simple analysis, Brazil exports primary and imports manufactured goods. In a multilateral level, Brazil disagrees with the West on issues that concern the International Monetary Fund (quotas) and the World Trade Organization (agricultural subsidies).
Moreover, Brazilian Foreign Minister A. Patriota proudly claimed already by 2011 that Brazil has more embassies in Africa than Britain. As prof. Anis Bajrektarevic indicated: “…in the years to come, we will see whether the current African frustrations were exploited for the geopolitical and geo-economic ends by the non-traditional players in Africa such as China, India and Brazil, and if the cost-exposure faced by the traditional ones became unbearable.
Brazil is a founding member of the General Agreement on Trade and Tariffs (GATT), guiding principle of the World Trade Organization, and has helped the establishment of the WTO itself after the Marrakesh Agreement, in 1994. Currently, the Brazilian Ambassador Roberto Azevêdo is WTO’s Director-General. His presence at the institution might mark the view of the developing countries towards world trade policies and regulations. As an active member, Brazil has utilized the Dispute Settlement Body several times. A 2013 statistics shows that Brazil used the DSB 113 times: 26 as a complaint (most remarkable cases: 10 against the USA, 7 against the European Union, and 3 against Canada), 14 as a respondent (most remarkable cases: 4 against the USA, 4 against the European Union, and 1 against Canada), and 73 as a third party. The presence as a third party (73 times) shows the willingness of Brazil to understand better free trade policies as well as influence regulations in favor of the developing countries.
The Americas has several blocs, but according to South American theorists they do not overlap each other. A Brazilian author mentions that the Central and South American blocs are concentric circles, in which each country prioritizes the most important blocs. Brazil is a member of some blocs (Unasur, Celac etc) , but Mercosur is by far the most important to the country. The exchange of goods among the members is high, being Brazil and Argentina the most important trading partners. The bloc’s objectives at the moment prioritize the strengthening of commercial and economic ties, the dialogue among businessmen of the member countries, the mobility of academics and the proper establishment of Funds in order to decrease asymmetries among its members. FOCEM is the most important fund because its goal is to develop members’ competitiveness, social cohesion, and infrastructure. Brazil, as the most important member, finances most of these objectives alone, with Argentina coming in second. At the moment, however, Mercosur faces a major challenge: the Pacific Alliance, a grouping of other Latin American countries (Chile, Colombia, Mexico and Peru) that have extra-regional agreements with important global players such as China. The competitiveness among the Latin American countries might give a reality check for Mercosur’s unsustainable ambitions, in which Brazil is its major defender.
Business and Investment
Since the beginning of the 2000’s, Brazil’s objectives are to promote economic growth and to fight poverty, although along the years the country has faced many adversities, such as having to reduce foreign debt and to implement measures so to tackle inflation, including the adoption of high interest rates, affecting therefore the political and economic stability. The economic uncertainty has directly affected investment to Brazilian businesses, which were unable to modernize and to become more competitive. Brazil is emerging and becoming a more solid place to foreign investments. The government welcomes foreign investment, as long as it represents a long-term commitment to economic development, which focuses specially in the areas of agriculture, technology and industries and manufacture of goods that are currently being imported. Brazil is known as a global commodities powerhouse, exporting a great variety of products such as animal produce, grains and sugar. Moreover, its economy includes several types of industries, including state owned companies, private and foreign companies, semi-state companies etc. It can be bureaucratic to do business in Brazil, but the local market welcomes foreign investment.
Brazil is a thriving economy that welcomes foreign investment that is aligned with its main principles. It is also a global player in economic terms and in global and regional issues. The 2014 elections are coming and the unpredictable political and economic scenario is once more arriving. The commercial and economic partnerships should remain both diversified and traditionalist, with Brazil’s national interests set as priorities.
China’s Descending Rise
China is in a sustained economic slowdown. This is causing malignant unease among the political and economic leadership of the communist party in Beijing that governs China. Investing in China will be different, because:
“The country’s first sustained economic slowdown in a generation. China’s economic conditions have steadily worsened since the 2008 financial crisis. The country’s growth rate has fallen by half and is likely to plunge further in the years ahead, as debt, foreign protectionism, resource depletion, and rapid aging take their toll.”
Chinese social structures are under duress over their aging society. Formerly in the 1990s-early 2000s: “China had the greatest demographic dividend in history, with eight working-age adults for every citizen aged 65 or older.”
Once societies age, marital numbers decrease, and overall productivity plunges. China’s explosion of older citizens versus working-age will bring unique circumstances for global consumers. Factual evidence of slower productivity is evident throughout China, and will have to be considered for any financial or economic decision for decades ahead. The Chinese economic miracle bursting is largely due to aging demographics.
No one in western or eastern economic analysis circles or think tanks realistically saw this coming former President’s Deng Xiaoping opening of China. This was termed, “Socialism with Chinese characteristics (and/or) ‘socialist market economy,’” still ongoing. This slowdown will have deep ramifications for the global investment community, liberal order in place for over seventy-five years, and Chinese financial wealth that now spans the globe.
When countries age, and use reproductive rights to control populations, they become more assertive abroad, and repressive to its citizenry; this describes China’s social, political and economic philosophies that govern over a billion people. Since its one-child policy was enacted, Chinese economic productivity will plummet, “because it will lose 200 million workers and young consumers and gain 300 million seniors in the course of three decades.”
Suppressive economies have difficulty innovating, producing enough goods domestically, and integrating into world economic mechanisms that intends to distribute wealth globally. But this isn’t the first time these warnings have been made publicly.
Former Premier, Wen Jiabao gave a prescient declaration in March 2007 during the long march of economic progress when Mr. Jiabao had misgivings about China’s growth model by stating, “(Chinese growth had become) ‘unsteady, unbalanced, uncoordinated and unsustainable.” Recent numbers indicated China’s official GDP “has dropped from 15 percent to six percent – the slowest rate in 30 years.”
Expansionary Chinese growth hasn’t experience this level of downturn since the end of the Mao into post-Mao era. What this does for the Belt and Road Initiative that is paving the way for investments into Central Asia up to the Arctic Circle is uncertain? Deep investment difficulties could witness China stopping the flow of billions of infrastructure projects into countries and continents such as Africa desperate for growth.
Public figures from the Chinese government generally have the economy growing at six percent, but many analysts and economists peg the number(s) at “roughly half the official figure.” China’s GDP has consisted of bad debt that typical financial institutions and western governments will transfer from the state to public sector and ultimately costs passed onto consumers. For China’s wealth to increase when so much domestic wealth is spent on infrastructure projects to increase GDP these official numbers need context.
China has bridges, and cities full of empty office and apartment buildings, unused malls, and idle airports that do not increase economic productivity, and if that isn’t the case then infrastructure increasing economic measurements will decrease. Unproductive growth factors officially known are: “20 percent of homes are vacant, and ‘excess capacity’ in major industries tops 30 percent.” According to official Chinese estimates the government misallocated $6 trillion on “ineffective investment between 2009-14.” Debt now exceeds 300 percent of GDP.
What’s discovered is the amount of China’s GDP growth “has resulted from government’s pumping capital into the economy.” Private investments have trouble overtaking government stimulus spending, and Foreign Affairs ascertains “China’s economy may not be growing at all.”
Chinese economic growth – post-Mao – saw the country’s self-sufficiency in agriculture, energy, and water almost complete by the mid-2000s. Through economic malfeasance, population control, and resource decimation, “water has become scarce, and the country is importing more food and energy than any other nation.” Environmental degradation is destroying the basic necessities for every day survival.
This is where the world community and financial resources of east and west can meet needs, and grow interconnected, global economies. Energy is one of the biggest areas that China will engulf global energy supplies
The U.S. Energy Information Administration believes China will continue being the largest natural gas user in non-OECD Asia, and by 2050:
“Expects that China will consumer nearly three times as much natural gas as it did in 2018. China’s projected increase in natural gas consumption is greater than the combined growth of natural gas consumption in all other non-OECD Asian countries.”
Opportunities for liquid natural gas (LNG) facilities to be built globally, and in China to spur domestic and international economic activity are unlimited. As China goes, so goes Asia, and the world is now in the “Asian Century.” Investors, geopolitical strategists, and anyone concerned with global security should never believe it is wise to let China continue to falter economically and societally. Setting up investment mechanisms and diplomatic vehicles that benefit China, and the world community is a prudent choice.
When military choices defeat sound fiscal and monetary polices, the past 150 years have brought “nearly a dozen great powers experienced rapid economic growth followed by long slowdowns.” Normal, civilized behavior was pushed aside. What’s needed for Chinese economic growth is the free flow of information, managed wealth, consumer goods, and research/innovation.
Decades ahead, and current economic realities point to China being a great power that is under pressure, but still needs capital. A weak, unsecure China who isn’t satisfied with its place in the Asian hemisphere or global economic system isn’t good for continued prosperity. It would be smarter to engage and invest within China in the areas of energy, water, agriculture, and electricity where opportunities still abound.
Agribusiness: Africa’s New Investment Frontier
Authors: Mariam Yinusa and Edward Mabaya*
In the past decade, a stroll along the aisles of any African supermarket is revealing: there is a new wave of home-brewed brands that are fast becoming household names. Products like Dangote rice from Nigeria, Akabanga pepper oil from Rwanda and Tomoca coffee from Ethiopia attest to the gradual but persistent evolution towards greater agro-processing and value addition in the domestic agriculture sector.
Africa’s agribusiness sector is expected to reach $1 trillion by 2030, so there is certainly cause for optimism. Consumer demand for food in Africa is growing at an unprecedented rate. But what is fuelling this growth?
First, size matters. At a population of 1.2 billion people, Africa is currently the second most populous continent in the world, superseded only by Asia. According to United Nations projections, Africa’s population could reach 2 billion by 2030 and 2.5 billion by 2050. This means that one in five consumers globally will be African.
Second, quality counts. Sustained GDP growth rates in several countries across the continent have translated into rising incomes for some segments of the population. According to the African Development Bank’s African Economic Outlook Report, the middle-class population is expected is projected to reach 1.1 billion by 2060 which will make up 42% of the population. The average African middle-class consumer is becoming relatively more affluent, sophisticated and discerning in the food they choose to buy and eat. Concerns about price/quality trade-offs, convenience, nutritional content and food safety, amongst others, are central in their minds.
Third, concentration can be powerful. Although most growth poles are small to medium cities, megacities with populations of over 10 million inhabitants, such as Cairo, Lagos and Kinshasa, have gained increased prominence. These metropoles offer ripe opportunities for investment, as a result of the triad of high consumption, concentrated spending power, and agglomeration (i.e. lower and fixed distribution costs).
On the supply side, there is significant untapped potential. Over 60% of the world’s uncultivated arable land is in Africa.
Policy makers recognize the huge opportunities these trends present and are making concerted efforts to create and maintain an enabling business environment to attract both local and foreign investors. The African Development Bank is at the forefront of this coalition of the “ready” to transform African agriculture.
Under its Feed Africa Strategy, the Bank is supporting its regional member countries to address both demand and supply side constraints along agricultural value chains. Through initiatives like the Technologies for African Agricultural Transformation (TAAT), the Bank is boosting historically low yields in priority commodities such as rice, maize and soybeans. In Sudan for example, the TAAT-supported heat-resistant wheat variety has increased wheat self-sufficiency from 24% in 2016 to 45% in the 2018-2019 farming season.
At the same time, Special Agro-Processing Zones (SAPZs) are attracting both hard and soft infrastructure and creating value addition to increased agricultural produce. Together with partners, including Korea-Exim Bank and the European Investment Bank, the African Development Bank has invested $120 million in SAPZs in Guinea, Ethiopia and Togo, which will significantly expand local agro-processing activities along numerous agricultural value chains.
Along with these key investments in Africa’s agricultural value chains, the continent is starting to consolidate its wins. A case in point is regional integration, exemplified by the recent ratification of the African Continental Free Trade Area (AfCFTA), which has the potential to make Africa the largest free trade area in the world.
Agribusiness has already caught the eye of investors. Last year, it was one of the main attractions at the inaugural Africa Investment Forum conference, which is becoming the continent’s premier marketplace for global and pan-African business leaders, and an innovator in accelerating deals.
Agriculture was one of the nine sectors that attracted investor interest at the 2018 Africa Investment Forum. The sector held its own against big hitters like financial services, infrastructure, energy, and ICT. One such transaction was the Ghana Cocoa Board (COCOBOD) deal in which $600 million loan financing was mobilized from the African Development Bank and other investors to boost annual production of cocoa beans from 880,000 tons to 1.5 million tons. Within the next three years, the project is also expected to promote growth in the domestic cocoa value chain by increasing processing capacity two-fold from 220,000 tons to 450,000 tons per annum.
Africa’s expanding consumer base will undoubtedly lead to more spending on food and beverages on the continent. This should be enlightening for would-be investors in food processing and value addition ventures.
The front door to these opportunities is the Africa Investment Forum, scheduled for November 11-13 in Johannesburg, South Africa.
*Edward Mabaya, Principal Economist and Manager, respectively, in the Agribusiness Development Division of the African Development Bank.
Asian Reserve Managers Navigate Increasingly Complex Risks
Reserve asset management in Asian economies is becoming more and more complex.
There has been a marked shift in the reserve currency asset markets over the last year. Central bankers in developed markets have moved from policy normalization to an easing bias mainly due to macro-economic risks. This has resulted in a downward trend in yield curves of traditional reserve assets, and some asset markets have even sunk deeper into negative yield territory. The stock of negative yielding debt has doubled globally to $17 trillion as of August 2019 from $8 trillion as of December 2018.
The US Treasury market is one the last remaining positive yielding traditional reserve asset markets. Given this environment, reserve managers have ventured into “riskier” asset classes, including equities, exchange traded funds, corporate credits, and commodities for greater diversification and expected returns.
In fact, gold as a reserve asset has regained popularity. According to IMF data, central banks held 34,000 tons of gold as of Q1 2019, making it the third largest reserve asset in the world.
The current environment is marked by economic uncertainty as the effects of deepening trade tensions between the United States and the People’s Republic of China are being felt across Asia. Other risks—including the potential for a sharper slowdown in major advanced economies and rising geopolitical tensions in some other regions—have intensified investor anxiety and increased financial market volatility. This uncertainty has exacerbated the several challenges already faced by reserve asset managers in the previous years.
Foreign exchange reserves are a key component of the monetary and exchange rate policies in most countries. Developing economies have accumulated reserves at an impressive pace, after the global financial crisis of 2008 and 2009. Global holdings of reserves have grown at annualized rate of 4.8% since 2008 and now stand at $12.4 trillion. Asia has accounted for more than 55% of the total growth, mostly because of the trade dynamics in Asia and the importance policy makers place on reserve accumulation.
Traditionally, reserves are kept by emerging economies as a precautionary measure to build confidence in the currency, and as a stabilization mechanism against disorderly markets. However, reserve managers must now balance these with other motives as well. These include supporting the conduct of monetary policy; accumulating assets for intergenerational purposes; or influencing the exchange rate for export competitiveness.
Given the different motivations for holding reserves, the question of reserve adequacy and the associated cost of holding reserves assumes greater importance.
The growth of reserves has brought to the fore risk management issues like liquidity and concentration for the preservation of capital to be balanced with return considerations. Adequacy of reserves must be assessed against each objective and the portfolios segmented to address them.
Sovereign wealth funds, or SWFs, have grown as a structure to segment return objectives and provide the governance structure to achieve them. Globally, as of 2018, assets under management of SWFs have grown to $8 trillion. Governance standards around the management of SWFs have emerged as the Santiago principles set out a common global set of international standards regarding transparency, independence, and accountability for SWFs.
Reserve adequacy must consider assessments of developing risks through forward-looking scenario analysis. Such scenario analysis must consider the evolution of factors that drives reserve needs. However, each country is different. Advanced economies need different adequacy measures compared to emerging economies. The lessons from the global financial crisis has taught us that no country is immune from external or internal shocks. Reserves provide a valuable buffer in these stress events.
Reserve managers face a complex task in investing these resources. With emerging risks clouding the outlook for the global economy, balancing risks with return expectations and with the mandate to provide liquidity during market dislocations has become a more delicate predicament for them.
They must constantly monitor the operating environment as it can change quite dramatically in a short period of time with new challenges such as the emergence of new crytocurrencies. Challenges of reserve adequacy, asset concentration, and risk management will need to be assessed for sound and effective management of reserves. The role of reserve managers will assume even greater importance going forward.
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