Big Mac Says Brazil is Overcooked

According to the Big Mac Index, the Brazilian Real is overvalued nearly 150 % to the US Dollar. This gives Brazil the dubious title “the most overvalued currency in the world”. This means additional risk to an already high risk market for foreign firms looking to get started in Brazil.

Burgernomics
Beefed-up burgernomics was the title in this weeks’s The Economist. Celebrating its 25th year, the Newspapers Big Mac Index is a “lighthearted guide to whether currencies are at their ‘correct’ level”. Yet, since its inception, the Index has been the focus of several academic studies. Today, the Big Mac Index has made its way into Economics textbooks and MBA curriculum worldwide.

Growing mature, the Big Mac Index is “beefed up” for an even deeper insight into the true value of currencies. New this year is adjusting for GDP per person. Applying this, gives another dimension to the beloved index.
Following the Index, Norway (+104 %), Switzerland (+98%) and Sweden (+88%) all appear to have highly overvalued currencies to the USD.

But Brazil is truly cooking
But adjusting for GDP per person gives another picture. Using this, Brazil jumps ahead with 149% overvalue to the Dollar. Columbia gets the second place, with a ‘mere’ 108%.

Economists have long been raising the red flag, warning of overheating in the Brazilian economy. Professor Nouriel Roubini has argued repeatedly for the need for new laws and economic policies. Stating he’s “positive, but not but not as euphoric,”. More recently, The Economist labeled Brazil “Too Hot”, and “heading for trouble”.

Reforms ahead
Both The Economist and Roubini call for stronger policies and deeper reforms. In December 2009, Roubini stated “Brazil’s economy can grow more than 6 percent a year if the government makes structural changes to education and infrastructure”. But, our recent travels and meetings in Brazil show the difficulties in implementing these reforms. According to one of our business contacts, the current administration led by Dilma, “is just an administration in waiting. Waiting for Lula to return after her term is over”. According to this consultant, the reforms necessary just are not getting of the ground under the current regime. In June this year, The Economist echoed this, saying “She must push through unpopular measures to cool the economy and sustain growth in the medium term, and to fulfill her promise to make the state more efficient.”, but this becoming increasingly difficult due to internal party politics and suspicions of corruption among her leading economist.

Risk on the rise
For foreign firms looking to get into the growing Brazilian economy all this means more risk. Given the status as the world’s most overvalued currency to the USD, it is more than likely than the Brazilian Real is heading for a correction. With a Big Mac Index of +149 % to the USD, a 20 – 40% correction of the real is not an unlikely scenario. Companies establishing themselves in Brazil, need to hedge themselves and plan for exciting but turbulent times ahead. But with turbulence and risks come also opportunities; potentially great opportunities in an emerging Brazil.

Port O’hoy

Through this channel, Brazil’s coming generation of offshore vessels might pass. Surveying what might become a Brazilian Superport in 10 years. Maybe.

Streetview Rio

Brazilian business travel adventures

Industrializing Brazil, part II

Sunday office

Some of the material we have been working on

Working with our Norwegian oil & gas client, we have been covering both Brazil’s recent economic development and ample innovation material. 

Considering market entry into Brazil, requires a deep understanding of both history,  culture and economics in the world’s seventh largest economy. 
No matter how good the business plan looks in the office, going into Brazil truly requires going here. One of the key reasons companies fail here is the lack of knowledge around business culture aswell as insufficent time invested on the ground. This little pile is just a small introduction to what we call required reading material for doing business in Brazil.

On the strategy and innovation side great reading material abound. For this client Engage // Innovate have highlighted the execution side of strategy. “Innovation to the core“, “The Innovator’s Guide…..” and Harvard Business Review’s June issue are just some of the readings we have been leaning on. 

 

Morning office view

The daily morning view from our Strategy and Innovation camp in Brazil. A great place to challenge clients to dream bigger – and our job to help them execute succesfully.

Tons of exciting work on the Innovation Pyramid awaits over the coming weeks.

Amazing potential….but…..

“Amazing potential……but you have to work around the hassle….”
That was the conclusion British businessman Jamie Macdonald-Murray gave tonight during his guest lecture at our client strategy seminar in Taiba.

The Dark Side of Doing Business in Brazil
Engage // Innovate invited Jamie up to Villa Vista Taiba for an informal keynote speech on the “other side” of doing business here in Brazil. “The Dark Side of Doing Business in Brazil” was the topic we challenged Jamie to discuss.
With six years of business experience in Brazil, Jamie has started, closed and developed a range of companies across industries. In the process he has made a series of invaluable experiences, experiences other foreign companies can learn from. Tonight he shared some of his stories with our Norwegian oil & gas client.

It’s who you know
Like in large parts of the world, personal relations rule supreme. Your ability to get in the door. To meet the right people and network with them is key. Without the relations, your project timeline can extend well into the horizon. According to Jamie, this requires a lot of facetime, long dinners, late night ‘meetings’ and the occasional vacation spent together. For our client, this was a clear message that investments in Brazil will require management to spend significantly more time than they are already doing.

Not one of the world’s top 200 universities
Education is a strategic area for Brazil’s future growth. But for the world’s fifth most populated country, education has long been a challenge. Today, significant investment is being done in the national educational system. But Brazil has a long ways to go. Private schools are growing quickly. And the last few years have seen a boom in privately run language schools teaching English. Jamie highlighted this trend by showing to the rise in private schools, where all subjects are taught in Portuguese in the morning and English in the afternoon. Compare this to the most recent “Times Higher Education” ranking, showing not a single Brazilian university in the world’s top 200, and Jamie’s conclusion, “it’s going to take a generation to get the education system right, but it’s coming”. Our Norwegian client got a reality check in terms of the level of competence they can expect when they start staffing up projects. The human capital challenge Brazil is facing is significant, and will limit economic growth for the next two to three decades.

Amazing potential….but learn the lingo
As Director of MDMY Jamie is heading up the development of real estate projects across Brazil. Following the economic growth over the last six years, Jamie sees amazing potential for the country. “The people at the top are genuinely interested in and open to attracting talented foreigners”, he believes. But, as always, adapting to local business culture can be challenging. “Knowing how to work around the bumps, all the hassle, is key to being successful in Brazil. Spending time here, investing in truly understanding how to get business done in the growth market Brazil is key to success”, according to our guest speaker.

And yes, learning the language is essential.

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If you want to learn more about the recent and future economic development in Northeastern Brazil, we recommend “Catching up in a hurry“, from the Economist’s May 19th issue.

Villa Vista Taiba; our world class seminar facilities in Brazil

World class beaches, world class strategy seminar and world class kitesurfing. Sometimes work is a lot more than just work……

Last week we arrived in Ceara, Brazil for an extended client seminar. In collaboration with the Boutique hotel Villa Vista Taiba, Engage // Innovate has developed a strategy seminar for a Norwegian oil & gas client.

Coming from a very strong position (50 % market share) in Norway, the client has been working to expand the international business areas. Building on a strong Norwegian competence in oil & gas, emerging markets have been designated future growth areas. With operations in India and West Africa, the firm help their clients develop petroleum technology competencies to international standards. Recently, the client has begun developing business opportunities in Iran, Venezuela, Russia and Brazil.

But as always, finding the right market entry strategy for various markets, and align it with keeping the core business at home healthy, is challenging. Through a one-week strategy and training seminar in Brazil, we will assist the client in both finding focus in strategy execution at home, align board members and employees behind the internationalization drive and find the right market entry strategies here in Brazil. For client employeess and their spouses, an extended vacation is planned for a total of two and a half weeks here in Taiba, Ceara.

Hosting the event is the boutique hotel Villa Vista Taiba. Located directly on the beach, with one of Northeastern Brazil’s best waves breaking directly in front of the hotel, is a sight to be seen. From our facilitator’s chair, we look directly down on this amazing ‘housewave’.