Domestic economy drives Brazil's growth

After strong growth in 2007, Brazil's outlook remains very positive, according to Urban Larson, manager of the F&C Latin America Fund.

The Brazilian economy is likely to have grown over 5% in 2007, the fastest rate in several years. "Job creation was a record 1.9 million, inflation was 4.5% - a sixty year low – and bank lending grew at about 25% year on year," explained Larson. Recently released January numbers show loan growth accelerating to a 28% annual rate.

"With credit to GDP at only 35%, compared to 200% in the US, there is considerable room for increased consumer and corporate leverage in Brazil," he noted. "This lending is being funded domestically so does not appear likely to be much affected by tighter liquidity in developed markets."

As of the end of January, Brazil is a net external creditor, this meaning the sum of Brazilian private and public sector external debt is less than the country's international reserves. "This is a first for Brazil and could help pave the way for the country to get an investment grade rating within the next two years," he said. "A potential concern is that Brazil's current account balance has just shifted to a small deficit for the first time in several years but this is more than covered by very strong and rising FDI."

The Brazilian stock market is 60% commodities stocks, and 40% non-commodities. While the commodities side of the market has been very strong for several years thanks to the strong global environment, as well as mining company CVRD's strong organic growth and acquisitions and Petrobras's major recent oil and gas finds, the domestic side is also benefiting from a local economy with very strong momentum.

"We remain very positive on the oil and gas and oil services sectors in Brazil, due to our expectation for sustained growth in oil production. We are also quite positive on the domestic sectors as both consumers and businesses are very well positioned," he said.

"For 2008 we expect growth to remain strong, increasingly driven by the much larger domestic side of the economy. An important medium term driver of the Brazilian market is inflows from domestic pension and mutual funds. These had US$874 billion in assets under management as of October 2007, of which over 80% was in domestic fixed income," he concluded.