Belize horizons At the end of March, prices on the Brazilian stock exchange jumped. The Brazilian real also appreciated. The government had announced new rules for the national budget. By 2026, she wants to earn more than she spends. The economist Samuel Pessôa, otherwise rather critical of the spending-friendly left-wing government, says: “Lula has now created the conditions for the entrepreneurial climate to improve significantly.”
Luiz Inácio Lula da Silva has ruled the country for around 100 days. Actually, he is not considered a man of business. But hopes are high that Lula will boost Brazil and attract Western companies looking for alternatives to China.
“The government wants to strengthen Brazil as an industrial location again,” says Siegfried Russwurm, President of the Federation of German Industries (BDI). Russwurm was recently at the German-Brazilian Business Days in Belo Horizonte. “Many exciting things are happening at the same time in Brazil,” he told the Handelsblatt there. The country has a good chance of setting the course for successful development and is also attracting a lot of attention internationally.
Lula’s strategy: He wants to initiate a new industrialization. When he last ruled 20 years ago, industry’s share of gross domestic product was just under 18 percent. Now it’s eleven percent.
German companies also reduced their involvement in Brazil. The country has increasingly sealed itself off with tariffs, says Russwurm. And the Brazilian market has not grown sufficiently.
Automakers lost interest
In the meantime, Brazil was one of the most important locations worldwide for the automotive industry. Meanwhile, vehicles made in Brazil are less and less competitive. The presence of the German car manufacturers is stagnating, the capacities are only half used.
The proportion of software in cars is increasing rapidly, says Russwurm. It makes no sense to develop your own software code in Brazil instead of relying on global platforms. “The more economies of scale played a role, the less the current model, which massively pushes for local value creation, works.”
Germany’s economy is looking for cooperation with Brazil.
(Photo: dpa)
This trend has not stopped yet. Morgan Stanley, for example, has just lowered this year’s growth prospects for Brazil to one percent. One of the reasons for this is that Lula always seeks confrontation with the central bank. He wants a rate cut, but the central bank insists on its independence. Lula often doesn’t seem to care about the opinion of the financial markets.
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It is crucial that the government now acts prudently and decisively to overcome the setbacks of the past few years, says Russwurm, who was a member of the board of Siemens AG and now chairs the supervisory boards of Voith and Thyssen-Krupp. Then he is confident that the process can be reversed.
The reorientation of the West is helping. Multinational corporations are currently withdrawing investments from China and shifting them to western countries. “Friendshoring or nearshoring is already a reality,” said Marc Melino, global director for multinationals at Citi. Alongside Mexico, Brazil is already benefiting most from this in Latin America. “Brazil is a friendly country and that is currently an important location factor.”
Business with China and the West
At the same time, the country is also in lively exchange with China and can benefit from growth there. “Are you optimistic about China? Then buy Brazil,” said US financial investor Rajiv Jain to the stock market experts at Themarket from Zurich. Jain has invested around $10 billion in Brazilian equities through his investment fund GQG, including as one of the largest single investors in Petrobras. The Morgan-Stanley analysts also see China’s recovery as stabilizing for Brazil’s economy.
There is “a lot of political noise” in Brazil, says Jain. However, Lula is pragmatic. In addition, Brazil’s fundamentals are convincing: the banking system is solid, inflation is lower than in Europe or the USA.
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According to Russwurm, Brazil has never completely given up on industrial and market-economy thinking. “In terms of quality, you will find technological competence and people who are experienced and creative here – on a par with locations in other countries,” says the 59-year-old, who has a doctorate in engineering. “It’s a country that sees export opportunities coupled with modern technology and that has natural resources that many only dream of.”
The growing confidence in Brazil can be seen in foreign investments: last year, foreign companies invested around 80 billion dollars in Brazil. This made Brazil number four worldwide as a location. This year it should again be 70 billion dollars, according to JP Morgan.
Trade deal could give a boost
A whole range of framework conditions speak for Brazil, says Russwurm. “It’s a stable democracy, albeit with large swings of the pendulum.” The risk is now always taken into account when making investments. “Companies are no longer putting all their eggs in one basket, but are positioning themselves broadly in their supply chains and value-added networks.”
For the Brazilian economy, it is now a question of bringing more added value into the country. An opportunity for this is the agreement on the EU-Mercosur free trade area. Under Lula’s predecessor, the right-wing extremist Jair Bolsonaro, the EU could not bring itself to ratify the agreement. If she now decides to do so, Brazil’s industry would benefit from the cheaper imports of capital goods. Industry plays a less important role in the other Mercosur countries Argentina, Paraguay and Uruguay.
Russwurm hopes that Europe and Mercosur will put the agreement into effect in the next few months. 85 percent of European export duties to the region and thus several billion euros in taxes for companies could be avoided. The concerns in Europe would be met with high standards of environmental protection and employee rights.
In addition, the South American countries are obliged to implement the Paris climate protection agreement effectively. Russwurm warns: “We must not miss the opportunity to implement one of the most important projects on our bilateral trade agenda.”
More: Brazil’s foreign minister: free trade agreement with the EU ready for signature in the summer