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Shopping Centers Today -> May 2003
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BRAZIL RETAIL DEFIES ECONOMY
BY DEBRA HAZEL
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| Carioca Shopping, with 249 specialty stores, opened north of Rio a year ago. |
Despite the serious problems that Brazil’s economy faces, the country’s shopping center industry appears to be surprisingly resilient.
There are plans to build about 25 new centers by 2005, with 44 percent of existing centers scheduled for expansion over the same period. And there are lots of those existing centers. The number of retail developments has doubled over the past seven years alone to 245 (mostly regional malls), totaling 60.3 million square feet, according to Paul de Barros Stewart, president of ABRASCE, which stands for Associação Brasileira de Shopping Centers. This ranks the nation 10th in the world for shopping center space.
The various crises we’ve faced “make us champions of entrepreneurial competitiveness,” Stewart said at ABRASCE’s seventh International Congress in São Paulo last August. “We have shown that we can overcome these crises.”
The meeting also served as ICSC’s Conference of the Americas, the first time the two organizations have organized the panels together.
Brazil’s economy has been on a roller-coaster ride for more than 20 years. Since the end of military rule in 1985, it has been on a course of democratization and privatization, with periods of explosive growth as well as deep lows. More recently, the country has seen a steep devaluation of its currency, the real.
“The opening of our markets exposed our companies to a healthy competition process,” said economist Carlos Langoni at the conference. “But over the last eight to 10 years, our growth has been much slower than its potential.” Brazil’s gross domestic product is capable of growing 8 percent to 10 percent yearly, Langoni says, but has been increasing only about 2 percent per year.
The diversification of the national economy is behind that potential, observers say. In 1999 the service sector accounted for about 60 percent of GDP, according to the Brazilian Embassy in London, with agriculture and manufacturing taking about 20 percent each. But one major problem has been Brazil’s high taxation levels, which the national government has levied to pay down debt and underwrite its own expenses rather than to use on investment or public services. To make things even more difficult, a drought in 2001 caused power reductions throughout the country (Brazil relies largely on hydroelectric power), which cut into shopping center operating hours. Per capita income peaked in 1997 and has since fallen back to previous levels.
These difficulties have been further aggravated by foreign events, said Stewart, who served as chairman of the conference.
“The crisis in Argentina has made the markets volatile, as [have] the recessions in the United States and Europe,” he said, referring to Argentina’s $125 billion public debt default in 2001. “[And] Sept. 11 was a problem for the whole world.”
About 65 percent of the total gross leasable area for retail is located in Brazil’s southeast region, which includes São Paulo and Rio de Janeiro, according to CB Richard Ellis, which has offices in both cities.
The industry’s importance to Brazil’s economy is considerable, generating 450,000 direct jobs and some 1.3 million indirect ones, reported Reinaldo Rique, COO of management firm RABR Participações, Rio de Janeiro.
“Moreover, we tend to invest in smaller cities, upstate cities,” Rique observed, places where other industries have invested little.
There is some uncertainty about the future, although some observers have expressed relief that President Luiz Inacio Lula da Silva, the former union boss who in January succeeded Fernando Henrique Cardoso, has not abided by many of his election promises. These included substantial increases in the minimum wage and in social spending, talk of which caused considerable unease in the international finance community.
His Workers’ Party has also pledged to maintain strict monetary discipline and financial controls to check inflation and maintain growth. He even flew commercial on his first visit to Europe after taking office to emphasize fiscal austerity.
“I’m not surprised by what is happening with Mr. da Silva’s government, said Carlos Jereissati Filho, COO of Iguatemi Empresa de Shopping Centers, São Paulo. “Although there was a lot of mistrust by the markets because of his leftist background, Mr. da Silva has shown during the last few years the intention of abandoning his more radical ideas and made clear that he believes that fiscal discipline, and the reforms of social security and fiscal [spending] were fundamental. And he’s doing this.”
Da Silva inherited an already struggling economy. The real suffered a 35 percent devaluation in 2002, though it bounced back 10 percent in the early part of this year.
The International Monetary Fund, however, has been sensitive to Brazil’s plight, economist Langoni said. It has extended its loan from the previous administration into da Silva’s and required the maintenance of various economic baselines and growth levels. Until 2005 Brazil must produce surpluses amounting to 3.75 percent of its GDP.
“The question is, will this be enough to calm the situation?” Langoni asked. He expressed doubt. “The IMF program is not a solution in itself — this is the third program signed by Brazil in the last eight years,” he said.
An independent central bank will be necessary. So will adjusting the tax structure and spending more on public services. Increased exports to Europe and North America are needed, too. As South America’s largest economy, it is incumbent upon Brazil to take the lead in such dealings to improve the entire region.
“Without doubling exports, we won’t be able to grow more than 2 percent a year,” Langoni said. Still, he does expect growth to be about 3 percent this year and unemployment to drop from 7.5 percent to 6.5 percent, if the new administration continues to act responsibly. Inflation will probably hover at about 10 percent, according to several conference speakers.
Investors are still skittish, though. This year JP Morgan Chase announced plans to sell its Brazilian asset management division to Bradesco, the nation’s largest privately owned bank. Bradesco also recently acquired the retail and investment banking operation of a Spanish bank that had operated in Brazil. Bank of America, meanwhile, is cutting back its presence in the country.
But da Silva has clearly made a good start, and Filho remains optimistic about the second half of 2003.
“After [da Silva’s] reforms, which are scheduled to happen at the end of the first half, and, hopefully, not a long war in Iraq, the government will be able to reduce interest rates,” he said. “And we may see a much better end of this year.”
These problems notwithstanding, Brazil continues to dominate Latin America, representing 37 percent of the regional economy.
“Brazil is a huge country with a huge population,” totaling more than 170 million, said Roberto Ordorica, director of Prudential Real Estate Investors Latin America, Parsippany, N.J. “It cannot be ignored.”
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