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Country Insight is for investors looking for a fact filled and descriptive picture of a country's people, economy, politics and investment potential.
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Wednesday, March 15th, 2006
Brazil's Stronger Balance Sheet
Brazil's booming stock market has caught foreign investor's attention but the question still lurks in the background like an uninvited guest - is this just another leg in the typical boom and bust cycle?
For the answer, take a look at Brazil's improving balance sheet. While America piles on the debt, Brazil is going the other way. It decided last December to pay off its remaining $15.5 billion debt with the International Monetary Fund (that must be a relief!) and announced just last week that it will retire all of its remaining $6.6 billion worth of Brady bonds issued during the early 1990's financial crisis.
Where is the money coming from? Brazil recorded trade surpluses in 2004 and 2005 with exports for the last twelve months hitting a record $120 billion. Exports of oil, soybeans, copper, steel, autos, sugar and coffee are surging even in the face of a strengthening currency. The Brazilian real is up 52% against the US dollar since May 2004 and up 22% during 2005. Brazil is almost energy independent and foreign exchange reserves are now $58 billion even after paying off the nettlesome IMF debt.
Behind all these positive numbers are substantial reforms begun by President Cardosa and continued by Luiz Inacio "Lula" da Silva. Payroll taxes and corporate taxes have been cut, the tax system simplified and last week Brazil announced that it would eliminate the income tax for foreigners that purchase public debt. Brazil's strong currency will likely also lead to a loosening of foreign exchange restrictions.
A cynical friend of mine often comments that successful political leaders need to ignore their strongest supporters if they are to achieve real reform. If so, Lula is a good example since most expected him to reverse market reforms after taking power in 2002 while in fact he deepened them. Up for re-election in October, Lula has nevertheless delivered higher living standards and restored national pride. With 187 million people and an area only slightly smaller than the United States, this leading South American economic power together with Chile and Colombia are changing attitudes toward the region as a whole.
What's the best way to bet on Brazil's momentum and improving balance sheet. I had been recommending the Brazil iShare (EWZ) which is up 27% this year and 72% in the last 12 months. In June of last year I switched to the S&P Latin America 40 iShare (ILO) that gives you broader exposure with 50% exposure to Brazil, 38% to Mexico, 9% to Chile and 3% to Argentina. This ETF is up 18% this year and 69% over the last year.
One ADR to take a look at is wireless provider that has been on a tear America Movil (AMX) and a safer option is Colgate Palmolive which derives roughly 20% of its sales from Latin American markets.
How important is the October election to Brazil? Even with all the economic growth, lower debt, lower taxes, booming exports and strong currency, public sector debt is still 51% of GDP so continued progress is essential. Like the old saw goes, even if you are on the right track, if you're not moving you will could get run over.
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