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Fixed investment key to Brazil, SA growth: S&P
In a report comparing Brazil's sovereign rating with those of its peers such as SA, rating agency Standard and Poor's note that fixed investment is the key to growth in both Brazil and SA, as these countries have lower fixed investment to gross domestic product ratios than their peers.
"Among other factors, the low growth in Brazil is related to a moderate investments-to-GDP ratio, probably the most important hurdle Brazil currently faces to evolve a more dynamic and robust economy. Along with SA, Brazil presents the lowest ratios of investment to GDP in the peer group," Sebastian Briozzo and Joydeep Mukherji said in the report.
SA's gross fixed capital formation to GDP ratio was 19.0% in the third quarter 2011 after falling to 14.7% in 2002 before the government started a programme of increased fixed capital investment. In that year, general government's fixed investment to GDP ratio was 2.2% compared with 5.2% in 1981, while the share of state-owned enterprises (SOEs) such as Eskom and Transnet was 1.5% from 3.3% in 1981. The private sector maintained its share and was 10.1% in 2002 compared with 10.3% in 1981.
In 2008, the respective shares of GDP rose to 3.3%, 3.6% and 14.2% as the total fixed investment to GDP ratio reached 23%.
S&P said that Brazil in the medium term faced a policy trade-off between higher GDP growth and a stronger macroeconomic framework as the government deals with increasing investment needs. The challenge remains to boost GDP growth rates without risking what was achieved so far in terms of macroeconomic strengthening. Brazil's investment-to-GDP ratio of 19.4% (estimate for 2011) remains a key outlier within Brazil's credit profile and constitutes the key variable that could allow Brazil to achieve higher and sustainable GDP growth.
A major boost to fixed investment (as it was in SA prior to 2010) is the hosting of international sporting events as Brazil will host the Soccer World Cup in 2014 and the Olympics in 2016.
"Brazil's growing track record of prudent economic policies and its gradually improving fundamentals continue to facilitate the government's ability to run countercyclical macroeconomic policies. This is critical for Brazil to become a mature economy, and is a much-needed policy tool to deal with the increasing global instability," S&P said.
In his state of the nation address (SONA) on February 9 President Jacob Zuma invited the nation to join government in a massive infrastructure development drive.
"We will use the project management expertise gained during the 2010 FIFA Soccer World Cup to make this project a success. The infrastructure plan will be driven and overseen by the Presidential Infrastructure Coordinating Commission, (PICC), which was established in September, bringing together ministers, premiers and metro mayors under the leadership of the president and the deputy president," Zuma said.
The PICC has identified and developed projects and infrastructure initiatives from state-owned enterprises as well as national, provincial and local government departments. These have been clustered, sequenced and prioritised into a pipeline of strategic integrated projects.
"We have chosen five major geographically-focussed programmes, as well as projects focusing on health and basic education infrastructure, information and communication technologies and regional integration," he said.
The SONA objectives build on the New Growth Plan (NGP) developed under the leadership of Economic Development Minister Ebrahim Patel. Central to the NGP is a massive investment in infrastructure as a critical driver of jobs across the economy. The framework identified investments in five key areas namely: energy, transport, communication, water and housing. Sustaining high levels of public investment in these areas will create jobs in construction, operation and maintenance of infrastructure. The NGP expected the infrastructure programme to trigger a local supplier industry for the manufacture of the components for the build-programme.
The areas prioritised for job creation were the green economy, agriculture, mining, manufacturing, as well as tourism and other high-level services.
The key question now is whether the grand plans can be turned in to brick and mortar. The early answer is yes, as cement sales volumes increased by 22.0% year on year (y/y) in January, while bulk export volumes, which have in the past been hampered by the lack of Transnet rolling stock, surged by 28.1% y/y.
One month's data does however not constitute a trend, so we wait to see whether Brazil and SA can fulfil their promise of achieving a better life for all.
Source - Business Day
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