Brazil At A Crossroads, But Investors Optimistic

In more ways than one, Brazilians have had it.

This is a good thing for all involved.

What they have "had it" with is quite different than what Americans usually complain about.  They're not ticked off at the culture, or angry that politicians are giving working class people too many rights. They have had it with what might seem quite boring if not wholly lacking in daily entertainment value. They've had it with taxes and inflation. (If only they had Fox Fox News to rile them up, but I digress…)

On the street, average Brazilians are tired of paying into a federal and state tax system and getting nothing in return.  This was manifested in the protests that began in June 2013, which started over a $0.05 bus fare hike and raged into complaints about the government finding money for soccer stadiums but never finding it for social services.  Take a look at a Brazilian's cell phone bill and half of it will be taxes. Gasoline prices are over $5 a gallon, mainly due to taxes.

In the Brazilian winter of 2013, millions took to the streets to protest against poor social services. It was one of the biggest middle class protests since the ousting of President Fernando Collor, and prior to that, the pro-democracy movements during the 1970s military dictatorship. The sign reads: "Sorry for the inconvenience while we improve your country."

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In the boardrooms, they're also tired of taxes, but mainly it's inflation that keeps them up at night.  Four years ago, inflation was well within the Central Bank's bullseye of around 4.5%.  Today, it is over 6%. Sometimes it's 5%. Sometime it's 7%.  This makes it hard for companies to price goods out into the near future, because they never know how much inflation is going to squeeze their margins.  As a result, Brazilian companies have been investing less over the last four years under President Dilma Rousseff.

And in the nation's capital, Brasilia, President Dilma and the man partially in charge of the economy, for better or for worse, Guido Mantega, have apparently seen the light. Their experiment with keeping interest rates low and tackling inflation by other means is about to be relegated to the trash bin.

Lastly, while Brazil was part of the so-called Fragile Five emerging market economies late last year, it is now seen as turning the corner. Everyone has had enough, and now it is time to make things better: more investment in infrastructure, continued improvement in Brazil's public education system, a Central Bank that is more serious about inflation, and a Finance Ministry that is less wishy-washy about taxes.

"The events of the past few years have clearly shown that a certain economic and social model has reached exhaustion and needs to be replaced," said Tony Volpon, head of emerging markets Americas for Nomura Securities in New York. "The choices made over the next year will likely have a very significant impact on where Brazil will go over the coming decade."