Our 3 Predictions for 2022 with regards to Brazil will be:
1-Carnaval is back with a vengeance!
2-The Perfect Storm conditions exist for further devaluation of the Real and deterioration of the economy in 2022.
3-Why is this all good? Well as Warren Buffet would say buy low and sell high if there is value there. So next year is a good time to get into the market in Brazil investing with Dollars. Buy, Buy, Buy.
1-Carnaval
Carnaval is back on again in 2022. This is almost a stamp of approval that ´´everything is back to normal´´ in Brazil. Today in Sao Paulo city COVID fatalities were down to 1 person, as it was for the last 2 days. On a night walk on Sunday the main center for pubs and restaurants in Sao Caetano do Sul was overflowing onto the streets. So the first months of the year will be the usual first quarter end of summer holidays and carnaval as the main card event. Read up more on the carnaval on Globlo TV station that normally reports live on the different carnavals.
Brazil is open for business.
2-The Perfect storm conditions are in place for 2022 in Brazil
Election year
Firstly 2022 is a election year for the president. Its notorious that in election years nothing gets done. No major policy making or significant economy changes can get approved. Any progress is seen by the various parties as a guarantee that the incumbent will be re-elected. Bolsonario has no political party nominated yet. The other parties are all in disarray and hoping to elect their own candidates.
In the fragmented fight we believe Bolsonario will be re-elected.
No changes to the Tax Regime
The country has been suffering for decades under the heavy burden of excessive taxes with no real cut in government spending. Some tidying of the house was seen during the first part of Bolsonario´s first term. But with so many vested interests in the different local and central government tax contributions the parties did not want to see any change or much needed simplification of the tax regime. We have 6 different product and service taxes that need to be calculated for each sale and different for each type of company and also varying according to the different states. To see more click on the link below to our tax site.
Its not only the complexity of local tax but also the extent of taxation. We are almost a reference case for the famous Laffer Curve. It explains the effect of increasing tax with the consequent increasing government tax revenue. Except we are on the downward slope. The more tax we have in Brazil the less the government has tax revenue.
In brief no much needed tax relief for businesses and economical stimulation in 2022 to improve the ongoing crise´s dated pre-COVID from 2014.
Global Inflation
Brazil accumulated inflation for last 12 months is running at about 10,25% (IPCA). In reality most prices are up 20% to 40% across cars, groceries, construction and even services. With the global effect of inflation due to logistics problems and demand/supply issues affecting USA and Europe this will in turn affect the local economy further. Although Brazil is a big exporter and R$ devaluations increase dollar fixed pricing profit, most that is exported is commodities still. While most that is imported is value added goods suffering supply related inflation from for instance the global shortage in microchips.
So with local inflation increasing rapidly for local reasons and global inflation moving in, times will get tougher.
Economic recovery not started before COVID further depleted resources
Brazil has been in an economic slump since 2013. Unemployment is high and lack of investment extremely low in all areas of the economy. Perhaps agriculture and tech firms being the exception.
The government was already with huge budget problems - hence ex-president Dilma suffering an impeachment for spending over the budget without the necessary legislation allowing so. With COVID decimating whole sections of the economy and further lending being done to just survive COVID the scenario is terrible. No real stimulus packages were approved to help companies although individual stimulus was released. The Auxilio Emergencial really just covers very limited food expenses per month for poor families.
If you look at the below graph indicating the effect of Purchase Power reduction for the Middle Class C segment the effect has been huge:
Credit
Credit locally for most small to medium businesses is extremely expensive and also generally unavailable. While the banks have been reporting in 2021 and 2022 good times profits as the economy struggles. Companies pay 70% p.a. interest on over-draft facilities and about 20% on operating credit, while personal credit for credit cards and cheque over-draft goes from 200% to 300% p.a.
The bill has arrived and Brazil needs to pay up, or default, or change drastically fast. 2 Crises have joined to drive the economy backwards.
Lack of Law
Recently most criminals convicted in the Lava Jato scandal have found ways to revert their convictions. Companies fined to repay money and pay fines are also finding ways to not pay these amounts through changing name, continued appeals and asking for "Recuperacao Judicial" (financial recovery scheme). Brazil is setting locally an example that not respecting the law pays. This has a huge effect on civilization and day to day business. It also breaks confidence for investors.
Brazil is almost literally the new Wild West where lawmen are few and the lawless are many. But the gold rush lives on if you know where to go.
3-Buy low and sell high on value verified investments
On our Homepage for AA RISK we indicate some segments that we believe are worth looking at to invest or for doing business in Brazil. About half way down the page. These are all still relevant. You can see them on the below link:
If Bolsonario gets re-elected, which is probable if you look deep into the realities of how elections work in Brazil and his growing support locally, there should be some fast changes seen after re-election. A short list of parastatals for privatizing includes the Correios (postal service) and Petrobras (petrochemical).
The 5G tenders are being awared and negotiated in October opening a huge demand for infrastructure on these systems and related services. Implementation will probably only start early 2022.
The labour law is in for a second revision - the last time was in 2019 being already about 30 years overdue. This is to make contracting more flexible and to also reduce the huge volumes of litigation because of vulnerabilities that allowed employees to process without care or due diligence in their claims. Ford Motor company being a classic example, it was a heavily unionized and monitored company that had best labour relations practices in place and yet suffered 4930 labour processes between 2014 and 2021 before it decided to finally close production of cars. These amounted to R$897 million. With these changes a lot of companies will be able to look at growth again and striving for more efficiencies.
Digitechs and the Agro segments continue to grow and open new fronts of opportunity also.
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Summary
In 2022 the country will be surviving a huge political storm and economical crises caused by all the factors mentioned above. We believe finally bottoming out on the economic downward cycle and ready for rebuilding and thus presenting opportunities to invest.
The new government will need to make changes fast. The new 5G licenses were awarded today on R$9 Billion in tenders. Brazil needs to go forward. With the Real (R$) heavily devalued to the Dollar ($), even with exports at a high, and local credit very expensive, now is the time to BUY, BUY, BUY.
Let us help you get setup, and take you to the market in Brazil. Click on our site below:
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