Is Brazil's economic boom a bubble ready to burst?
- 28 June 2011
- From the section Business
"House prices in some parts of Rio are up nearly 80% in the past year," says Ronaldo Coelho Netto, an estate agent in Rio de Janeiro, looking up at a new development near the city centre.
The Paco Real residential area is in a part of the city that was previously only considered a des-res by Rio's criminals and drug lords.
But times have changed and a new mood is sweeping the country.
Football's World Cup comes to Rio in 2014 and the Olympics in 2016. The vast oil reserves off the city's coast will begin pumping crude imminently.
Like Brazil as a whole, Rio is booming and the city's new middle class have caught the property owning bug.
The house price boom shows no immediate signs of abating.
Raids led by armed squads of police are not the traditional route to pulling up property prices, but it's working in Rio.
So far, 18 of the city's favela slums have been raided by police in a process known as "pacification".
By invading the favelas, the government hopes to force out the local drug dealers and criminals and bring order and economic development for the local residents.
"Areas near the pacified favelas used to be places that people avoided living in. Now people are looking to buy there and the prices are rising," according to Mr Netto.
Residents are now less concerned about the "stray bullet" premium that used to come as standard with many Rio properties.
Flood of money
The contrast between Brazil and Portugal, its old colonial power, could not be more stark.
While one was struggling to finance itself and had to be bailed out by the EU and IMF, the other is struggling to deal with large amounts of money flooding into the economy.
While interest rates in the eurozone have only recently crept up to 1.25%, the main rate in Brazil reached 12.25% earlier this month.
This has caused a flood of money to flow into Brazil as investors look for a return on their investments in the stock market, as well as in areas like property.
In the first three months of this year, Brazil saw a net inflow of $35bn into its economy, more than the whole of 2010.
As foreign money has flooded in, natural resources have been going the other way - but not at the rate that many would like to see.
"Our ports are Jurassic and our airports are miserable," says Eike Batista, Brazil's richest man and the 8th richest in the world.
Mr Batista started out prospecting for gold in the Amazon in 1980s and has expanded his business to take in iron ore production, shipbuilding and oil production.
In fact, fact there are not many areas of business that Mr Batista does not have an interest in: he's opened a floating restaurant, has plans for a new luxury hotel and has started a real estate business.
But despite his wide-ranging interests, one word keeps popping up in his conversation: infrastructure.
South America's Rotterdam
Up the coast from Rio is Batista's one-man attempt to solve the infrastructure bottlenecks that he believes have held back Brazilian industry.
The Açu Superport will be the largest in the Americas, able to dock the largest ship in the world, the Chinamax, and will have everything from a car building plant to a cement factory.
"China is the factory of the world, because they set up all the ports along the coast and created an efficient logistics system around it," he says.
"All our ports are in the middle of the cities, which make things very slow. Our aim is to make Açu the Rotterdam of South America," says Mr Batista.
While Mr Batista might aspire to the efficiencies of some European ports, his business focus is firmly locked on China.
The iron ore that will start leaving Açu towards the end of the year will mostly be heading to China.
He has formed a partnership with the Chinese company Wuhan Iron and Steel, and has even opened Rio's first gourmet Chinese restaurant.
"China is putting more than 20 million new consumers into the world each year, add to that the two million we're adding in Brazil and the three million from India - it's clear we're living a cycle," says Mr Batista.
But all this boom has a downside.
On a busy market street in central Sao Paulo, shoppers push past each other in the narrow alley.
Lining the stalls is everything from toys to electrical goods, but nearly every single item has the three very telling words on the packaging: Made in China.
Brazil's economic boom has come at a price as the currency, the real, has soared in value - up nearly 40% in the past year against the dollar.
The strength of the real has made imports from the East increasingly cheap, but has pushed many domestic manufacturers out of business.
According to the Association of Textile Importers, the rise of China and the fall of domestic producers means that 80% of the costumes for this year's Rio carnival were made in China.
Leonardo Hallal has seen the rise of China first hand since he started his clothing textile business in 1996.
Rummaging through a rail of clothes in his Sao Paulo design studio, he explains how things have changed for his industry.
"When I started out, I imported almost nothing from China. Now 60% of the materials I import come from factories there," he says.
The strong currency means he can import cheaper fabrics from the East and sell them at a good profit to designer labels in Brazil. It's no surprise that Mr Hallal's main business trips are to the factories of China and not to manufacturers in his native country.
The effect of cheaper imported goods for Brazilian consumers is obvious to see, but many are worried that if the real continues to remain strong, it could see more de-industrialisation in a country once proud of its manufacturing sector.
While the traditional powerhouses of world economic growth are stuck in the mire of slow growth, Brazil is finding it hard to control its boom.
Last year it clocked up growth of 7.5% and this year, despite a slowdown in the rest of the world, economists are still expecting an expansion of more than 4%.
Despite the optimism of many in the country, there are challenges ahead.
There are worries that the slow progress for the World Cup and Olympics could cause international embarrassment and there are concerns that the country is not manufacturing more, rather than simply shipping out raw materials to the rest of the world.
But for all the potential problems of the future, Brazilians are very much living in the present.
Looking out from his office over the bay towards Sugarloaf Mountain, Eike Batista, Brazil's self-appointed cheerleader-in-chief, is bullish about the country's prospects.
"We have our own oil, we've got natural resources - I believe we're living a cycle of growth like the US lived in the 1960s," he said.
Even if the Brazilian boom does eventually turn to bust, it won't be through a lack of ambition.