Brazil Ex-Central Banker Says Attention Is Turning to Productivity

Wall Street Journal

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NEW YORK — After a hiring frenzy, Brazil’s private sector will now focus on getting more productivity from its labor force, in a new economic phase that will see slower growth while the country tries to improve infrastructure, a former Brazilian central banker told private-equity investors in New York on Thursday.

Dismissing worries about increasing inflation pared with slowing growth in the South American nation, former central-bank governor Henrique Meirelles said the long-term perspective for Brazil “is not bad”, while acknowledging that “this is not a moment of euphoria…it is a sober moment.” Meirelles, who left the central bank in 2011, said the country “has all the conditions to keep growing.” His views contrast with recent macroeconomic data that show inflation running above the central bank’s target while economic growth has been miserly.

Earlier this week, a weekly central-bank survey of economists put consumer inflation for this year at 5.24%, and gross domestic product growth at 1.62%. Actual GDP growth was 1.6% on an annual basis in the second quarter, according to the government, while inflation was 5.2% year over year in August. The central bank’s inflation target is 4.5%, with a two-point tolerance up or down. Still, Mr. Meirelles pointed to lower interest rates–now at 7.5% and down from the August 2011 peak of 12.5%–growing bank lending and an emerging middle-class as positives the private-equity industry should focus on.

During Mr. Meirelles’s eight-year tenure at the central bank, Brazil went through an austerity period when interest rates soared as high as 26.5% in February 2003, before entering a long period of decline that lasted until early 2010. GDP growth peaked at 7.5% in 2010. Thursday he argued that high growth led to high employment, but now the perspective of slower growth should change that dynamic. Mr. Meirelles sees Brazil entering a new phase in which there will be “the possibility to invest in productivity.” He also pointed out that infrastructure bottlenecks remain one of the biggest challenges for business in Brazil.

Productivity gains, in fact, are happening in many ways, said Jon Francisco Toscano, whose firmTrivella Investment has 13 million Brazilian reais ($6.4 million) invested in private equity and is creating a new, $200-million fund to invest, mainly, in technology startups. He said Trivella has managed to increase margins in some of its acquisitions by reducing workforce and inefficiencies. Also, although Brazil still faces major infrastructure shortfalls, small gains in the past few years have been helping him to increase productivity. With a new toll road built through concession in the past two years between Trivella’s headquarters and one of its affiliates, “I can now save 30 minutes each way–this is a productivity gain”, he said.

But there still are drawbacks highlighted by other private-equity players. During the same event, organized by the Latin American Private Equity & Venture Capital Association, Paulo Guedes, chief executive of BR Investments, said sudden regulatory changes common in Brazil are one of his major worries as a private-equity investor.

One recent such change happened in the power sector, when the government announced earlier this week new policies aimed at reducing electricity costs, a major concern for companies. As part of the measures, current concessions will be renovated at a lower retail price, spurring fears about the financial health of the utilities.

Despite such concerns, Mr. Meirelles, who in June became a senior advisor for investment firm Kohlberg Kravis Roberts & Co. LP, said sectors such as retail, health care, technology and energy, including renewable sources, are promising areas for private-equity investment in Brazil.