Brazil Needs to Ramp Up Its Infrastructure Spending

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.

About Frank Holmes 264 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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