Brazil: country of the future, or has its time come?

Brazil’s economy has grown and receded in recent years. Adjustments in economic and social policies are now needed to make the country more competitive and increase its growth potential, writes Inês Filipa


Brazil has always been considered the country of the future. With a large, low-income consumer market, and a wide variety of industrial and natural resources, Brazil’s promise lies in the ability of its government to control inflation and strengthen the economy. In the last 20 years, it has undergone major economic reform, leading to price stability, increased purchasing power and investment-grade status.

The stabilisation process began in the 90s with the Real Plan, followed by a re-organisation of public administration, and the privatisation of vital sectors such as energy, telecommunications, mining and banking. In this period (1994-2007), the country went through a severe international crisis, exacerbated by a lack of infrastructure, and suffered speculative attacks against real and internal problems, such as the energy crisis. Even so, despite all the adversity and some inflation spikes due to external shocks, the stabilisation process was consolidated.

The inflation-targeting regime introduced in 1999 has been fundamental to the stabilisation of inflation, and resulted in substantial adjustments to the official Selic rate (the central bank’s overnight lending rate) to keep inflation below the target ceiling. As a consequence, Brazil has experienced big swings in GDP growth, which to some extent has mitigated the sustained growth in domestic investment (which was needed to make the country stronger and growth more sustainable).

Even so, the country has modernised its public administration, and finally appears to have stabilised – a development that helped it secure investment-grade status. Another relevant process introduced by the government has been an upgrading of the minimum wage, which raised the income of the poorest and allowed the consumer market to expand.

In the 2008 crisis the government and the Central Bank were forced to provide a strong stimulus to the economy through fiscal and monetary policies. These measures boosted the labour market and strengthened domestic demand, the principal driver behind the country’s 7.5 percent GDP growth in 2010. The subsequent downswing in GDP growth in 2011 was to a large extent a response to policy measures introduced to contain rising inflation. Brazil’s growth potential is estimated between 4.0 and 4.5 percent, a rate that was predicted for the year 2011, but is being revised to between 3.0 and 3.5 percent.

A volatile market
The curious thing about Brazil is that its economy can move through extremes in a very short period of time. It appears very responsive to the fiscal/monetary policy mix which can produce a strong acceleration or reversal of growth from quarter to quarter.

Although the country still maintains strong domestic demand, the industrial sector has been losing strength in recent years due to the impact of an unfavourable exchange rate on the export sector; greater uncertainties about both the domestic and global economy; low investment, high interest rates and inflation; and strong competition from imports.

Even with GDP growth below potential expected for this year, the prospects for Brazil are positive. The central bank has eased its monetary policy stance, the labour market has strengthened and the consumer market still shows plenty of potential to grow further. The economy is heading towards maturity and has achieved much in the last two decades.

Brazil’s high interest rate environment, compared to other emerging countries, reflects a number of factors: the lack of infrastructure, low private investment, low external competitiveness in some industries, outdated regulation, low employee productivity, a wide variety of taxes (and high rates), and low investment in technology and education. The country needs to shake off these shackles to complete the transition from an emerging to a fully developed economy – but much of this journey has been completed.

The future is now
The future has arrived for Brazil. We are an economy that is heading towards maturity, having achieved a stable economy and modern society in just two decades – but more is needed. It takes a long-term plan to correct deficiencies that were only corrected in the short term and need to be improved.

Brazil is an active economy, earning the respect of its partners. The country needs to shake off the shackles that prevent the reduction of interest that keeps inflation down every time the country is growing rapidly and well above potential. Adjustments in economic and social policies are still needed to make the country more competitive and increase growth potential.

The country still needs to take important steps, taking advantage of its stronger economic base. We need to take action to secure our move from an emerging economy to a developed one, but we still need major renovations, an expansion of technology, and foreign investors mindful of our unique investment opportunities.

About ICAP & ICAP Brazil
ICAP is the largest securities broker in the world dealing in intermediating operations with voice broker and electronic systems. To keep the average volume over $2trn traded per day, ICAP employs approximately 4,500 people worldwide, including in the three vital markets of London, New York and Tokyo.

ICAP’s businesses are distributed across more than 70 locations in 32 countries worldwide, with a strong presence in all major financial centres in EMEA, the Americas and Asia Pacific. Our largest offices are in the UK, the US and Brazil. Our business is organised across three divisions: voice broking, electronic broking and post-trade risk and information services.

ICAP is a publicly held company with shares traded on the London Stock Exchange. It is part of the FTSE 100 index. The London branch is globally present with 60 percent of its employees and 54 percent of its revenues derived from outside the European Union.

Despite the financial crisis of 2008, ICAP has closed its fiscal year with record revenues of £1.5bn. This fact is explained by the ‘fly to quality’ phenomenon: during the crisis, investors moved to bigger and stronger institutions to run their operations.

The goal of ICAP is to be a global leader in over-the-counter market intermediation, maintaining as much as 35 percent of total market revenue. Its energy is focused on the transfer of business to higher-growth markets, innovating and maximising the potential for conversion to electronic transactions.

Brazil is considered by ICAP as a strategic market. Boosted by growth in recent years, the country has the potential to represent more than 80 percent of the company’s revenues in South America. Supported by these figures, in November 2008, ICAP held its first strategic acquisition in the country: the purchase of a 100 percent stake of Arkhe, one of the top five brokerages in the BM&F.

In April 2009, ICAP began negotiating with Bovespa and established its Home Broker, named MyCAP (, and received the award for Best Online Broker of the Year, Latin America, 2011 from Mrassociates. Today, ICAP has also become a major broker in the Brazilian market in equities, futures, foreign exchange, bonds, commodities and energy.

Overall, including futures and equities, ICAP is the biggest independent (non-bank owned) broker operating in Brazil today.

Inês Filipa is ICAP’s Chief Economist in Brazil. For more information –
Email: [email protected];