In January 2024, Brazilian President Luiz Inácio Lula da Silva addressed an audience at the Planalto Palace in Brasília. He gave a statement of intent for Brazil’s future: “International markets are very competitive. It’s a war. We need to get over—once and for all—this problem of Brazil not being a definitively great and developed country.”
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The Brazilian economy is the 11th largest in the world by GDP1, and the largest in South America. It is already ‘great’ on many measures, having grown steadily on the back of its abundant natural resources and strong trading relationships with the US and China. However, the next phase of its growth is likely to be more exciting, as it becomes a consumer, technology and sustainability powerhouse.
The President made his statement at the same time as unveiling a national strategy for economic transformation, aimed at moving Brazil on to the next stage of its development. The package includes grants and loans for areas such as green energy, drug manufacturing, and farming productivity by the end of 20262. It is part of creating a new, modern economy for Brazil.
Sustainable investing
Sustainability has become a central issue for Brazil in recent years. There is an understanding that as one of the world’s largest commodity producers, and guardian of 60% of the Amazon rainforest, it has both responsibilities, and the power to effect real change.
Da Silva came to power with a pledge to deliver zero deforestation by 2030. The country has also updated its climate change commitments to the United Nations. In 2016, it had proposed reducing emissions by 37% by 2025 and by 43% by 2030 (over 2005 levels)3. It has extended its ambitions, pledging to cut emissions by 48% and 51% respectively.
For the time being, these are just pledges, but there are signs of them being matched with action. In December 2023, Brazil made its debut in the sustainable government bond market4. The $2bn bond issuance, sold at a yield of 6.5%, aims to help fund the sustainability ambitions of the government. Demand for the bond exceeded supply, with three-quarters of buyers from Europe and North America.
There are other areas of focus. The country has had its Forest Code in place since 1965, which requires landowners in the Amazon to maintain 35-80% of their property under native vegetation. This is designed to preserve the rainforest, but has proved difficult to enforce, due to the size of the area and the resources required to police it.
Recognising the problem, the Brazil government has made it mandatory for all rural properties to be mapped and registered through a government system5. This has proved a crucial first step in enabling all rural property owners to meet their Forest Code obligations. More recently, the government has proposed extending cheap credit to incentivize farmers to use more sustainable practices6. This is helping Brazil build its sustainability credentials in global markets.
The government also plans to launch a regulated carbon market. Lawmakers are debating a bill that would establish a “cap-and-trade” system, where decarbonisation activities would generate tradable permits that could be bought by other companies to cover emissions. The aim would be to encourage polluting companies to decrease greenhouse gas emissions over time. Those who continue to pollute would need permits, raising money for the Treasury, which could then be ploughed back into green initiatives. The International Chamber of Commerce in Brazil said it could raise as much as $120bn by 2030 from the initiative7.
Economic diversification
While the country is striving to re-establish its green credentials, it also needs to diversify beyond commodities. Lula made global trade one of his top priorities in office and promised to move on from being an “eternal exporter of raw materials”8. That means looking at areas such as technology, consumption and finance to create new avenues of growth in the Brazilian economy.
There are early signs of success. For example, Brazil is a regional trailblazer on digital payments9. In a recent research paper, the World Economic Forum said: “The explosion of digital payments in Brazil has created an innovative financial ecosystem that works for ordinary people. This progress is the result of a combination of an overhaul in the payments regulatory framework, intensive use of technology, entrepreneurship and a focus on creating products that address the needs of Brazilian customers.”
Financial inclusion has been another significant success story in recent years. 85% of Brazilians now have access to financial services, with 16 million people enfranchised into the financial system since 2020. This has brought innovation fintech groups into the market and broadened the banking system.
Brazil has an attractive and expanding consumer market, with an increasingly wealthy and growing middle class. It is ranked as the 9th largest consumer market in the world10, with leading global companies recognising the opportunity there. In November 2022, Chinese e-commerce giant Alibaba’s logistics arm Cainiao announced it would open its Latin American headquarters in Sao Paulo11 with plans to extend package and food delivery to 10 cities by 2025. Domestic consumer giants such as AmBev are the backbone of the consumer economy in Brazil.
Technology is a key pillar of Brazil's new industrial policy, with the government prioritising investment in areas such as biotechnology and chip development. It is early days, but the policy aims to stimulate productive and technological development, promote better jobs, attract investments, and increase international competitiveness. It is also focused on improving existing industries, such as agriculture, improving efficiency and productivity12.
What does it mean for investors?
Economic transformation takes time, but we believe it will lead to a gradual reappraisal of Brazil’s long-term economic prospects by investors and open up new investment opportunities in both Brazil and wider Latin America.
There are also short-term factors in its favour. Brazil has had some of the highest interest rates in the world, as its central bank acted swiftly and effectively to bring inflation under control. However, as inflation has dropped, it is progressively cutting rates, which should allow consumption demand to pick up and economic activity to improve. The OECD has already upgraded its economic growth forecasts from 1.2% to 1.9% in 2024 and there could be scope for further improvement.
As in any transformation, there are risks. The key will be to ensure that the government maintains financial discipline in implementing these plans. The concern with all these ambitious projects is that they are derailed by financial constraints. Brazil has a chequered history on fiscal responsibility and the country can ill-afford to blow out its budget deficit. However, da Silva has appointed a finance minister Fernando Haddad, with a strong track record on financial discipline. He has pursued conventional policies, setting clear fiscal rules and taking steps to reform the tax system13.
In the longer-term, we believe this economic reset will diversify the range of investment opportunities in Brazil. Brazil’s equity market has historically been dominated by commodities companies, but this has started to broaden out significantly. There are more than 100 companies waiting to come to market via IPOs in 202414. These companies are coming from a range of sectors, including infrastructure and technology.
Brazil has one final advantage in achieving these aims, we believe: Its global position is improving. The government maintains good diplomatic relationships with both Eastern and Western blocs, where the US and China are its two largest trading partners15. Both sides regard Brazil as a reliable trading partner, particularly on critical commodities. Its ability to trade freely with each of these economic powerhouses is likely to improve the country’s economic position in the next few years16.
On the BlackRock Latin American Investment Trust, we aim to understand this evolution in depth. Our investment team has a broad, domestic network, which allows for in-depth engagement with Brazilian policymakers, economists and business people. This gives us invaluable insight into Brazil's equity market, economic policy and reform agenda. We believe this is an exciting moment in Brazil’s development and we want to be on the front foot to take advantage of the many opportunities we see in this market.
1 Worldometers - GDP by Country - May 2024
2 Foreign Policy - Lula Tries His Hand at Industrial Policy - January 2024
3 Nature - Politics and the environment collide in Brazil: Lula’s first year back in office - December 2023
4 World Bank - Brazil Sovereign Sustainable Bond: Financing a greener, more inclusive, and equitable economy - February 2024
5 Nature - Brazil’s Forest Code - February 2024
6 Forbes - Brazil Already Has Its Best Tool Against Deforestation - January 2023
7 FT - Brazil debuts $2bn sustainable bond to fund green investments - November 2023
8 Reuters - Lula promises to unite a divided Brazil, seek fair global trade - October 2022
9 World Economic Forum - Brazilians are adopting digital payments faster than anyone else - May 2022
10 Wikipedia - List of largest consumer markets - April 2023
11 CNBC - Alibaba’s Cainiao opens LatAm headquarters in Brazil - November 2022
12 Forbes - Technology Takes Center Stage In Brazil's New Industrial Policy - January 2022
13 Bloomberg - Rising Revenues Only Ramp Up Pressure on Brazil’s Finance Minister - March 2024
14 White & Case - Turning the tide: Global IPOs look for a rebound in 2024 - April 2024
15 Institute of Directors - Country Trade Profile Brazil - April 2024
16 Energy Intelligence - Brazil's Geopolitical Balancing Act - May 2023
Risk Warnings
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
BlackRock Latin American Investment Trust specific risks
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets: Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
