Technology Industry Risk in the BRIC

Without a doubt the BRIC countries (Brazil, Russia, India and China) – four of the world’s largest emerging economies, have massive economic and investment potential, especially within the technology industry. According to Euromonitor International if the BRIC countries are able to maintain their current growth rate, the combined economies of these four global powerhouses could be worth more in US dollar terms than the G6 (Germany, France, Italy, Japan, UK and the US) by 2041. Both the Gross Domestic Product (GDP) and the Personal Disposable Income (PDI) have developed exponentially among the BRIC nations over the last decade. This growth has fueled numerous Public-Private Partnerships (PPP) across each country making Foreign Direct Investments (FDI) a formidable business venture for any major corporations. PPP deals can often be complex, financially demanding and extremely time consuming with projects lasting several years. However, under the right economic conditions and proper business strategy, they can offer significant benefits to the private business sector, the consumer and national governments. Each country may pose a different risk and the success of these projects would largely depend on the country’s ability to handle such risks and minimize interruptions to the projects. Our paper examinees the comparative risk, opportunity, overall economic climate, comparative industry market potential and structure within each BRIC countries and ultimately making a recommendation on which country to invest within the technology sector.

Brazil

According to data compiled by the Economist Intelligence Unit, Brazil is currently at a score of a “BBB” in its overall country risk assessment. This is otherwise known as an “investment grade status. Based on this assessment, Brazil is considered to be a low-moderate risk country to invest in depending on agency rating. Brazil is abundant in natural resources like quartz, diamonds, chromium, iron ore, phosphates, petroleum, mica, graphite, titanium, copper, gold, oil, bauxite, zinc, tin, and mercury. According to Bloomberg Media “Its natural riches have since propelled this nation of 200 million people to the top tiers of global markets. Brazil’s economy has ascended the ranks of the world’s largest, from 16th in 1980 to 6th today.” Brazil’s large government debt and economic deficits in the 1990’s facilitated private investment in various industries. The Brazilian Privatization Program from 1990-2002 led to privatization of 33 companies, an estimate 105 Billion in national revenue and increment in the investment opportunities, particularly within the technology driven telecommunications industries which represented 31% of this movement.

Reports regarding Brazil’s economic future have varied widely. Despite unstable performance results across Brazil’s five regions reported this year, the economic outlook for Brazil is fairly positive. The Wall Street Journal recently reported Standard & Poor’s downward revision in Brazil’s outlook to “negative” from “stable. ” According to the Economist Intelligence Unit “long-term growth forecast anticipates more rapid average annual GDP growth over the next 19 years (3.8%) than over the past 25 (2.8%). Improvements in infrastructure and education, trade expansion, a broader presence of multinational business, a reduction in the debt-service burden and the development of Brazil’s huge oil reserves will mitigate slower labor force growth and help to sustain labor productivity growth at 2.7%.”

The current political focus In Brazil is rapidly shifting to next year’s general election. President, Dilma Rousseff (of the leftist Partido dos Trabalhadores) who became the first female president in the nation’s history in 2010, announced her bid for another four-year term this past February. President Rousseff remains extremely popular despite corruption scandals, weak economic growth and a resurgence of inflation, particularly due to the fact that unemployment remained low at 5.8% when compared to historical trends. With respect to political risk Brazil is moderately stable in comparison to other BRIC nations. “Campaigning for the October 2014 elections in Brazil has already begun, President Dilma Rousseff’s popularity has helped reduce the scope for sensitive reforms and contaminating the policy environment”, according to the Economist Intelligence Unit.6 Furthermore, President Rousseff was ranked by Forbes Magazine as the #2 most powerful woman in the world. Many International investors are attracted to Brazil because of its stable political and economic environment; however they do face very high levels of bureaucracy, taxes, crime and corruption that typically are far greater than in their home markets.

Brazil’s economy is slowly recuperating from the 2011-12 downturns, but Brazil’s potential growth rate is much lower than in 2004-10, when it grew by 4.5% annually. According to the Economist Intelligence Unit “The financial services sector will grow above the overall rate, but it will lose some dynamism as credit growth slows. Credit has more than doubled since 2003 in GDP terms, to 53% as of February 2013.”

“With respect to financial risk, the Brazilian financial system is exposed to the effects of volatile international markets, especially for commodities and capital. Over the past decade, Brazil’s financial sectors assets have doubled particularly due to expansion of the securities and derivatives markets, and heavy investments from home and abroad.

According to the Economist Intelligence Unit “With an estimated population of 195m and GDP of US$2.3trn in 2012, Brazil has the largest financial services market in Latin America. However, income and wealth remain highly concentrated. A continued trend towards formalization of businesses and the labor force will support financial deepening. Rising incomes will lift demand for financial services, but Brazil’s labor-market dynamics are becoming less favorable than in the previous decade.”

Some economists have suggested that Brazil may become a victim of its own success. The gross public debt ratio remains high forcing the government’s borrowing requirement to also stay high. According to Dimitri Demekas assistant director in the IMF’s Monetary and Capital Markets department “Rapid credit expansion in recent years has supported domestic economic growth and broader financial inclusion, but could also create vulnerabilities.” Nevertheless a series of additional infrastructure improvements, it’s growing population, abundant natural resources and anticipated investments from the forthcoming 2014 world Cup and 2016 Olympics promise to keep Brazil at the top of global financial strategies for the years to come.

According to the Economist Intelligence Unit, using the average industry risk rating for the technology sector in 2013, Brazil scores a 43.5. In order to examine the risk vs. return, we pair this with the Economic Intelligence Units business environment score. Given on a scale of 1-10, we multiply this by 10 for purposes of comparison throughout this paper; we get 66.9 for Brazil, representing an excellent opportunity within the technology sector.