By Rodolfo Spielmann
Managing Director, Head of Latin America, CPP Investments
São Paulo, Brazil
Following approval of the pension reform that will provide Brazil with R$800 billion in savings in the next ten years, the government and Congress are deliberating on a far-reaching reforms agenda that could foster more growth and new investments in the country.
These reforms, from the rationalization of the government administrative apparatus to simplification of the tax code and a new sanitation bill, would mark the start of reopening of the road to economic growth. Paving it, however, will require the participation of long-term private investment in infrastructure.
Even with reforms to address the country’s tight fiscal situation, the inconvenient truth is that Brazil still needs to build big, given an infrastructure deficit that could approach R$2 trillion. To develop the roads, airports, ports, sanitation, and the energy chain, the country needs to invest at least 3.2% of its yearly GDP in infrastructure, according to the World Economic Forum.
At CPP Investments, we see this as a promising time. As an institutional investor in Brazil, serving a long-term purpose, our global investments in many ways contribute to building this nation’s future.
The approval of fiscal measures already introduced is crucial to setting the national production machine in motion and, in so doing, attracting the next generation of foreign investment needed to help develop the economy in general and infrastructure in particular. Discussions are important, but now action is required to grow the GDP.
There is, however, no “silver bullet” for the economy. There is no one reform more important than others. It is the entirety of the reforms that will make an impact and lead to a stable economic environment. And it is this – a stable and predictable regulatory framework, a robust project pipeline and the guarantee of the rule of law, including the sanctity of long-term contracts – that attracts long term investment in any country.
It is undeniable that the conditions for doing business in Brazil have improved, but there is much room for the country to advance, as shown by the various competitiveness rankings.
For example, a strong pipeline of infrastructure projects is lacking. While there are relevant investment opportunities in renewable and fossil energy, in transport and mobility, the challenge is to make these investment opportunities viable.
The bar is very high if Brazil is to compete with the growth projection in other emerging markets, such as China and India.
For Brazil, as unemployment rates fall and the economy reaches growth of 3% or 4% per year, investors could also see opportunities in traditional sectors such as consumption, retail, education and services. This level of growth can be achieved, so long as investors have confidence based on changes in laws, regulatory frameworks, privatizations and concessions.
Another positive sign is low interest rates and low inflation, which focus companies on growth and production. This decreases the return on fixed income, which in turn attracts resources to the productive sectors. History shows that while some volatility can be concerning, it best not to be held back by short-term thinking.
For us, it is important that in the countries where we invest, institutions are strong and independent. Brazil’s reforms have the potential to attract long-term capital and promote economic growth. Now is the time to drive those reforms forward.
This article was originally published in Portuguese by O Estadão de São Paulo, on December 27, 2019. View the original article here.