Short-term concern, long-term optimism among MNCs in Brazil.
BY LATINVEX STAFF
While multinational companies are bullish about Brazil’s long-term growth potential, they are concerned about the short-term. The economic slowdown, coupled with the continued Custo Brasil, is hurting profits, according to a new survey by Frontier Strategy Group (FSG), a US-based consultancy specializing in emerging markets.
“FSG clients fear that under-performance in 2012 could weaken corporate commitment to Brazil and threaten their ability to capitalize on Brazil’s positive long-term trajectory,” FSG says in a new report.
Brazil’s economy, Latin America’s largest, is expected to grow by 1.5 percent this year, according to the International Monetary Fund. That marks a clear slowdown compared to 2.7 percent last year and 7.5 percent in 2020 (its best result in 25 years).
That slowdown is putting pressure on the bottom line at many multinationals operating in Brazil. “Increasingly, emerging markets are expected to deliver both growth and profitability to make up for sluggish-to-negative performance in developed markets,” FSG says. “Brazil, in particular, is a market where executives are under pressure to deliver positive returns on investment.”
Meanwhile, executives surveyed by FSG say that the cost of doing business will continue to be higher in Brazil than other Latin American and global emerging markets due to poor/under-developed infrastructure, difficult distribution environment, pervasive institutional inefficiencies, high tax burden and compliance costs, labor market inefficiencies and protectionist trade policies.
“Higher-than-average supply-side costs have long been a feature of the Brazilian environment, FSG says in its report. “However, for many executives, corporate patience is running out—they must find a way to deliver both top- and bottom-line growth.”
Brazil has Latin America’s second-worst transport infrastructure, according to a ranking by Latinvex based on twelve key factors that measure a country’s transport infrastructure quality: The quality of ports, air transport, railway and roads; percent of paved roads and airport runways and the cost, time and documents required to export and import containers. Only Haiti is worse, according to the ranking of 18 countries.
Brazil has the world’s highest time to comply with taxes each year – 2,600 hours or 108 days, according to The World Bank’s latest Doing business report, released last month. Bolivia, the second-worst country, requires 1,025 hours. The average in Latin America is 367 hours.
However, while the executives in the FSG survey expect the Brazilian government to improve infrastructure, they don’t expect any progress on the tax front.
While 67 percent of respondents want the government to focus on tax reform, none expect it will do so. That contrasts with 22 percent who want the government to focus on infrastructure and 78 percent that expect it will do so.
The Brazilian government is expected to invest heavily in infrastructure in the run-up to the 2014 World Cup and 2016 Olympics. It recently held bids to privatize the operations of three airports, including Guarulhos in Sao Paulo, which is Latin America’s top passenger airport and handled 30.4 million passengers last year.
However, many Brazilians are skeptical over the preparations for the two sporting events, fearing that there won’t be enough time to get ready.
Despite the challenges, Brazil is slated to become even more important for multinationals in the future. The proportion of FSG clients expecting more than 50 percent of their Latin America revenue to come from sales in Brazil will nearly double by 2022. A similar trend will be seen globally. The proportion of FSG clients expecting 6–15 percent of their global revenue to come from sales in Brazil will more than double by 2022, the report reveals.
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