Analysis: Brazil investment trends show consumer clout

Thu Feb 23, 2012 2:41pm EST
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By Guillermo Parra-Bernal

SAO PAULO (Reuters) - Slow profit growth is prompting Brazilian commodities companies to slash capital spending plans, making growth in Latin America's largest economy even more dependent on consumer spending.

Pulp producers, miners and steelmakers that missed fourth-quarter earnings estimates are trimming investment as Europe's debt crisis and China's slowdown weigh on global demand for their products. Profit growth at eight of 14 companies surveyed by Thomson Reuters slowed about 7 percent from a year earlier.

In contrast, card payment processors, retailers and telecoms companies are picking up the slack, planning to invest more in hopes that government steps to lower borrowing costs and taxes will revive Brazil's economy later this year. Such promises came despite a weak quarterly performance for most.

"Large-scale investment in cyclical sectors is gaining a secondary role," said Dany Rappaport, who manages $150 million in assets at InvestPort in São Paulo. "Brazil is becoming a consumption-based economy more rapidly than many of us thought."

What first looked like a business cycle-oriented move may be further evidence of the deep changes that the $2.3 trillion Brazilian economy is undergoing. One aspect, in particular, looks worrisome: the shrinking role of industry as services take center-stage.

At the end of 2011, the share of services rose to 67 percent of Brazil's gross domestic product, from about 55 percent ten years ago. In contrast, the weight of industry fell to about 28 percent of GDP from roughly 35 percent in the same period.

Brazil, the world's fourth-largest democracy, is poised between being an industrialized economy and a commodity powerhouse that still depends upon raw materials.

As miners and factories scale back capital spending, the progress that Brazil has made in terms of increasing investment as a percentage of GDP could be at risk. Investment represents 20 percent of GDP, up from 15 percent in 2002 but below the level of many other emerging-market nations.   Continued...

Visitors look at the stock price monitors at the BM&FBOVESPA Stock Market in Sao Paulo August 10, 2011. REUTERS/Paulo Whitaker