Key takeaways from our Brazil executive event

Brazil is heading toward faster growth in 2018. Recently released Q4 statistics showed the Brazilian economy grew by 1% in 2017 (following contraction of 3.6% in 2016), and data from December and January continued to point to accelerating growth.

Nonetheless, the country has still not addressed its largest structural challenge that dragged the economy into recession (it’s pension deficit), and an all-important presidential election looms large in October.

In our recent executive event in São Paulo, FSG discussed the implications for multinationals of faster growth but continued uncertainty generated by the October election and unpassed pension reform. Here are a few key takeaways.

Key takeaway 1: Avoiding complacency and preparing contingency plans for a sharp acceleration in growth is critical

  • The current economic recovery in Brazil is very weak compared to recovery at the same stage following past recessions (see graph below). This is largely due to the fiscal and political drivers of the recession, and the fact that these still haven’t been addressed. However, following the recent events involving former president Lula in January, FSG’s forecast bias is now to the upside as uncertainty should tend to trend lower. Furthermore, there is considerable slack in the economy, with industrial capacity utilization and the labor market showing a great degree of underutilized resources, meaning there is space for very rapid acceleration if everything goes right

Key takeaway 2: Making the case for Brazil today will be challenging, but being in position to take advantage of the upside growth is critical

  • Despite Brazil moving toward growth of near 3% in 2018, and further acceleration in 2019, many corporates are unsure if now is the correct time to pull the trigger on the market. 42% of local executives said that their best opportunity to make the case for the market today, and secure the necessary resources to take full advantage of faster growth, would be to demonstrate a clear plan to grow strongly even in the downside scenario. Only 25% believed it would be sufficient to demonstrate the long-term market potential

Key takeaway 3: Election years show a consistent pattern of higher FX volatility in Brazil, and MNCs need to be prepared

  • The BRL:USD exchange rate shows clear spikes in volatility in election years (see graph below), resulting in greater challenges in managing FX risks and working with customers to close business when pricing in dollar terms. To confront these challenges, 34% of executives said they would work to increase their company’s pricing flexibility and responsiveness in Brazil in 2018, while 21% said they would work to improve management of working capital, and 18% said they would look for opportunities to create natural hedges against increased volatility

Key takeaways 4: Customer demand patterns also show significant divergences from the norm in election years, presenting both risks and opportunities for MNCs 

  • It’s not only the exchange rate that shows higher volatility in Brazil during election years, but also customer demand (see graph below), with retail sales showing a clear spike in the immediate months prior to the election (likely caused by government stimulus to demand). Not only do consumers show disrupted demand trends, but FSG has also identified similar patterns in industrial investment as well as government spending (at each level of government). To overcome this expected volatility in 2018, 66% of executives said they would prioritize efforts to sell into customer segments that are less exposed to the drivers of volatility

For our latest updates and insights, FSG clients can visit the client portal or contact their Client Services Director for more in-depth briefings. Not a client? Please contact us to learn more about upcoming events near you.

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