Brazil’s Infrastructure Plays Catch Up

By: Frank_Holmes

Brazil has become one of the globe’s beacons of growth but in terms of infrastructure investment it needs to catch up to its peers.

As you can see from the two charts below, Brazil’s investment in its infrastructure has lagged that of emerging market leaders India and China, but it’s also lagged other Latin American countries like Peru and Mexico. In terms of investment-to-GDP ratio, Brazil averaged 17 percent over the past five years, according to a Morgan Stanley report, far behind China (44 percent), India (38 percent) and Russia (24 percent).

Brazil’s infrastructure investment as a percentage of GDP has been declining for some time. In the 1970s, infrastructure investment averaged 5.4 percent of GDP but that number has dropped off to just over 2 percent in the 2000s. This is considered just enough to maintain existing infrastructure, not enough for new projects or to fill new needs.

The U.S. spends roughly the same amount and we have our decaying infrastructure to show for it.

The Brazilian National Development Bank (BNDES) estimates that infrastructure investment could total more than $145 billion over the next three years alone. Morgan Stanley believes that this figure needs to double to 4 percent of GDP if the country is to achieve 5 percent annual growth for this decade.

So where is the $290 billion worth of investment needed?

Morgan Stanley says that the biggest opportunities are in roads, railways and ports. Because they’ve received little investment so far, ports and railways are projected to increase by 24.8 percent and 12.7 percent annually respectively for the next four to five years. In addition, we’ve seen firsthand the need for more airports and large-occupancy housing in its major cities.

Luckily, Brazil already has some drivers in place to increase investment. In addition to the second-edition of the Growth Acceleration Plan we discussed back in April (Brazil’s Plan to Accelerate Growth), Brazil will play host to the 2014 World Cup and the 2016 Olympics. Morgan Stanley also sees that the development of pre-salt oil reserves, a key driver of economic growth, will spur additional investment.

Our team’s visit to Brazil last November confirms the view that the country will benefit enormously from an upgrade of its infrastructure. It will take Brazil to the next level of economic development that will lessen reliance on commodities and diversify the engine of sustainable economic growth towards internal consumption.

By Frank Holmes, CEO , U.S. Global Investors

Frank Holmes is CEO and chief investment officer at U.S. Global Investors , a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company's 13 mutual funds include the Global Resources Fund (PSPFX) , Gold and Precious Metals Fund (USERX) and Global MegaTrends Fund (MEGAX) .

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

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