Brazil is an economic slum.... companies like app believe in their potential

No, Steve Jobs declared. Apple wouldn’t
put a store in Brazil, with its “crazy” and
“super-high” taxation. This was 2010, and
Jobs was writing, bluntly, to an official in
Rio de Janeiro.
Four years later, Jobs’s successor had a
different message for Brazilians.
“ ‘Obrigado’ to everyone who visited our
new store,” CEO Tim Cook tweeted in
February, after 1,700 people packed into
a Rio mall for the opening of the first
Apple store in Latin America. “We are
Brazilians, with lots of pride and lots of
love,” his blue-shirted employees sang,
adapting a tune heard in stadiums and
bars when the national soccer team
plays.
Apple is one of many foreign brands
feeling the love for Brazil — even if
Brazilians, mired in an economic slump,
aren’t. As the country hosts this year’s
World Cup and prepares for the Olympic
Games in 2016, the optimism that led it
to bid for the planet’s two most famous
sporting events has all but evaporated.
Inflation and flagging growth are
squeezing Brazil’s new middle class,
whose anger is so intense and
encompassing that its targets include the
World Cup itself — an amazing thing in a
country that is the definition of soccer
mad. Protesters have jeered the national
team, the World Cup trophy and the
country’s president, Dilma Rousseff,
whom Brazilians blame for spending
extravagantly on stadiums while
neglecting basic public services.
In May, Sao Paulo bus drivers snarled
162 miles of traffic when they threw
away their keys in a strike, a fitting
image for a country that is stalled after
years of rapid economic growth.
The foreign investors still come, drawn
by something even high taxes can’t take
away: young, increasingly educated and
affluent consumers. Companies as
diverse as Forever 21, known for trendy
fashions, and luxury automaker
Bayerische Motoren Werke are putting
down stakes this year.
“Brazil has changed,” says Arturo
Pineiro, head of BMW Brasil Group,
which is investing $276 million in a plant
scheduled to open later this year in
Araquari, in the country’s south. “It has
some problems, but, with the right focus,
they can be solved.”
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It can be hard to find ordinary Brazilians
who agree with him, amid reports of
protesters pelting police with rocks — or,
at one clash in May, shooting them with
arrows — and widespread griping about
public corruption.
When the country was awarded the two
sporting events last decade, then-
President Luiz Inacio Lula da Silva — just
Lula to Brazilians — was hailed as a
miracle worker. The former union leader
guided an epic boom during eight years
in office, from 2003 to 2010, with the
benchmark Ibovespa stock index growing
sixfold and annual economic growth
reaching as much as 7.5 percent. This
allowed Lula to plow cash into his
ambitious Bolsa Familia, a program that
gives low-income Brazilians a monthly
stipend in exchange for sending their
children to school and has helped cut the
poverty rate in half.
Brazilians long for those days now.
Economic growth has slowed to just over
2 percent annually, and the stock market
has declined by more than 20 percent in
three years under Rousseff, Lula’s former
chief of staff.
Much of this can be attributed to the
shrinking of China’s once-enormous
appetite for Brazilian commodities. Last
year, Brazil, a huge producer of beef,
chicken, soybeans and other agricultural
goods, came close to a trade deficit for
the first time since 2000.
Far from showcasing Brazil’s strengths,
the World Cup is shining a light on a key
weakness. Lula pledged that projects for
the games would jump-start investment
in transportation upgrades, and Rousseff
promoted a Growth Acceleration
Program, known as PAC, that would
reinvigorate the economy.
Instead, the $3.6 billion spent on new
stadiums was almost four times initial
estimates. Other projects floundered:
Contas Abertas, an organization that
works for government transparency, said
in April that only 12 percent of the
planned public works projects were
completed. A promised bullet train from
Rio to Sao Paulo was shelved.
A YouTube video shot in the city of Porto
Alegre captured the public’s mood: In it,
young people dance to the Pharrell
Williams hit “Happy,” past piles of dirt,
rutted roads and angry graffiti, as
extravagant official predictions for Cup
riches scroll past.
“We’re ashamed to receive foreigners
into this chaos here,” says Ana Trindade,
40, who organized a protest in Porto
Alegre, a World Cup host city and once
Rousseff’s home. “The World Cup will
leave behind no legacy whatsoever, just
more debt and less investment in health,
education and transport.”
A one-time World Cup hero who’s now
an opposition politician puts it even
more starkly: “I’m rooting for Brazil to
win on the field,” says Romario, a striker
on the team that won the 1994 World
Cup. “Off the field, we’ve already lost.”
How does any of this square with the
sanguineness of a core of investors?
Remember that 30 years ago, Brazil was a
country that had been ruled for 20 years
by an authoritarian military regime.
Forty years ago, Rousseff was a Marxist
guerrilla who had been jailed and
tortured.
Now, Brazilians express their
dissatisfaction with their government
peacefully, for the most part, and look
for answers at the polls. When Rousseff’s
Workers’ Party faces voters in October,
the election will turn on basic
pocketbook issues, as in most other
Western democracies.
Pimco’s shift
The shift at the giant bond shop Pacific
Investment Management Co. reflects this
stability. As recently as January, Pimco
despaired over Brazil. Founder Bill Gross
said the country was no longer a
preferred emerging market. A few
months later, a team of Pimco credit
analysts visited the country and came
back with a different point of view. The
deep pessimism of Brazilians, they said,
was great for investors.
Pessimism was going to drive change,
Mark Kiesel, Pimco’s deputy chief
investment officer, wrote in an April
report. And if that was the case,
investors were undervaluing Brazil’s
strengths: a huge resource base, a
democratic government and favorable
demographics, including a median age of
30.7, compared with 46.1 in Germany and
Japan and 37.6 in the United States.
“Simply put, there comes a point to take
the road less traveled, when a lot of bad
news is priced in,” Kiesel wrote.
Long known for fabulous wealth
mingling with dire poverty, Brazil now
has a middle class that numbers
109 million, according to research firm
Data Popular. The Brazilian government’s
Secretariat of Strategic Affairs defines
middle class as average monthly per
capita income of 291 reais ($124) to 1,019
reais, based on data from mid-2012.
Although that isn’t rich by the standards
of developed countries, 29 million
Brazilians are in the nation’s wealthiest
income classes, up from 13 million in
2002, according to Finance Minister
Guido Mantega. They have a monthly
average family income of 5,329 reais or
more.
BMW is targeting those wealthier
consumers with the plant it’s building in
Araquari. BMW Brasil Group President
Pineiro, 49, is a Sao Paulo native and a
returnee. In the 1990s and early 2000s,
Pineiro worked for BMW in Spain and
the United States.
“The country was broken when I left,” he
says.
He remembers the havoc caused by
500 percent annual inflation in the 1980s;
in 2014, economists are wringing their
hands over inflation approaching the
government’s declared upper limit of
6.5 percent.
Slowing wage growth and rising debt
have dented consumer spending, but an
jobless rate below 5 percent has kept the
middle class from shrinking.
“They are learning about consumption
for the first time,” Pineiro says. “As they
start to consume, it’s very unlikely they’ll
go back.”
Those consumers are a boon for both
Brazilian businesses and international
companies. After average monthly
incomes almost doubled from 2006 to
2012, Brazilian households could afford
more than just staples. Packaged food
sales have risen 9 percent a year in the
country for the past five years, and the
industry may add another $75 billion in
sales by 2018, estimates Sean Walker,
president of Latin America for General
Mills, the Minneapolis-based maker of
Cheerios.
“We have no reason to fear anything,”
says Abilio Diniz, who built a
supermarket chain into the country’s
largest retailer and is now the billionaire
chairman of BRF, Brazil’s biggest food
producer. “This country has solid
fundamentals.”
Byzantine bureaucracy
It also has fundamental weaknesses, in
the estimation of the World Bank, and is
not addressing them with urgency. In
ease of doing business, the bank ranks
Brazil No. 116 of 189 countries. In 2006, it
was No. 119. That reflects a byzantine
bureaucracy in a famously protectionist
country. As one Portuguese phrase goes,
para ingles ver — “for the English to
see.”
The phrase originally referred to
abolition laws that Brazil passed in the
1800s under British pressure; it’s meant
to convey a sense that some policies are
only for show. Because of the taxes and
tariffs Jobs complained about, the iPhone
5s Apple sells in Rio — plastered on
billboards in Brazil’s green and yellow
colors, with the slogan que bonito e,
“How beautiful it is” — is the world’s
most expensive, at $1,257. That compares
with $649 in the U.S.
In March, Mantega spoke to economics
students at a Sao Paulo university. He
made the case for his government’s
policies and for the pro-investment
camp. Brazil weathered the 2008
financial crisis better than most major
economies while boosting foreign
reserves to more than $370 billion, he
said. He pointed to the 20 million jobs
created since 2003. He said infrastructure
spending could help growth reach
4 percent annually during the next eight
years.
That last contention is conspicuously
optimistic: Economists surveyed by
Bloomberg see 1.8 percent growth in
2014, 2 percent in 2015 and 2.7 percent in
2016.
If Mantega is correct, then que bonito e
indeed for Apple and Tim Cook. If the
pessimists, and the Brazilian people, are
being more realistic, it could turn out
that Steve Jobs was right again