Economic Slowdown Won’t Stop IT Expansion in Brazil

By Luke Bujarski

Last week’s Bloomberg Latin America Investing conference in New York City was a sobering reminder of Brazil’s precarious economic balancing act hinging on foreign investment, consumption, government stimulus, and inflated commodity prices. Yet, despite mixed signals over the future macro outlook, Brazil’s IT services industry will continue to rage forward. Antonio Gil president of BRASSCOM shrugged off pragmatic panel concerns with confidence, reassuring the audience that IT will expand aggressively at ten percent annually, to reach $210 billion USD by 2020. We believe Antonio’s assertion is correct: Considering this country’s infrastructural challenges and consumption-driven expansion, the public and private sectors will turn to information technology to squeeze greater efficiency out of their operations.

This year’s Bloomberg Latin America Investing conference showcased the top brass of LatAm policy and investment experts, including our very own Alvaro Uribe who keynoted Nearshore Nexus 2012 the week prior. Two camps developed with pariah states Argentina and Venezuela in one corner, and tiger economies Mexico, Chile, and Colombia in the other. The “Nascent Giant” Brazil took center stage driving the conversation around macroeconomic stability and domestic market investment opportunities across the region.

Brazil’s Long-Term Macro Outlook Uncertain

An overvalued real was the major source of debate as investors wondered how long Brazil’s recent local bond rally can last. “The six interest rate cuts [Banco Central do Brasil] since July of 2011 proved to be a risk that paid off,” explained Chris Garman, Latin America Director at Eurasia Group, referring to a steadfast inflation rate. Despite the positive short-run returns on Brazil’s debt market, the country’s fundamentals were put into question. Brazil GDP grew only 2.7 percent in 2011 compared to 7.5 percent in 2010. Panelists and audience inquiries also challenged Brazil’s trade balance with the US, which swung from a $6.4 billion surplus in 2007 to an $8.2 billion deficit last year, as the real rallied and growth in Brazil spurred demand for imports. Moving beyond the impacts of monetary policy, attention swung to government spending and the deep-rooted infrastructural challenges facing Brazil.

“The long-run problem for Brazil is structural and nothing that short-term monetary policy can fix,” argued Joaquin Cottani, Chief Economist for Latin America at Citi Investment Research and Analysis. There is not enough investment in infrastructure, education, and health care.” Brazil is expensive relative to other emerging economies which puts a premium on the cost of labor, impacting the competitiveness of its manufacturing and professional services sector.

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An overvalued real – arguably driven by US fiscal policy and quantitative easing – brings down the cost of imports sending Brazilian consumers into feeding frenzy. While China is an export economy, Brazil’s growth feeds on domestic consumption spurred on largely by a growing middle class and government programs targeting poverty reduction. Any fundamental change to fiscal policy is also unlikely, as long as economic growth is perceived as strong. “The Brazilian people have a positive and trustful relationship with government,” expressed Ernesto Araujo Minister Counselor of Economics at the Embassy of Brazil – which puts into question Dilma Rousseff’s ability to make hard choices when it comes to corporate taxation, public infrastructure spending, and direct subsidies for the country’s poor.

High Costs Will Drive IT Automation and Innovation

According to Antonio Gil of BRASSCOM, “pressure on enterprise to bring cheaper and better products to market will fuel IT demand for the foreseeable future.” Brazil’s expensive operating environment will propel IT as an enabler of enterprise agility. In a high cost and consumer-driven market like Brazil, companies look to cut costs across supply chain, back office, and procurement. Government will also look to IT to make health care delivery, education, and transportation more affordable to the masses. Brazil’s high labor costs also leave less room to ignore the value of IT-driven automation and operational efficiency. “Every week I have international IT investors coming to our offices inquiring about new acquisition targets and new market opportunities,” explained Gil.

Cate Ambrose Executive Director of the Latin America Venture Capital Association (LAVCA) also pointed to consumer-focused verticals for new market opportunities. “Anywhere where there is a direct connection to the consumer is where we see new companies and new applications for IT.” Ambrose pointed to retail, health care, and education as the hot sectors with the most startup and innovation activity.

Not Out of the Woods Just Yet

Brazil finally appears to be on the right track toward sustained economic expansion, even if GDP growth rates slumps below Wall Street investor expectations. By all accounts, the days of rampant hyper-inflation seem to flicker in the review mirror. This new epoch of stability should keep IT investment dollars flowing. Yet, Lawrence Goodman, Founder of the Center for Financial Stability warned to never underestimate the power of global economics and the impacts of external shocks. Will China’s slowdown prove to be a hard or soft landing and how will that impact Brazil’s commodities exports? Will Argentina’s takeover of YPF kick off a new wave of government takeovers in Latin America and send foreign investors scurrying? Will a growing European crisis derail global economic progress?