SAO PAULO — Brazil’s textile and apparel sector expects revenues to grow 1 percent this year, reversing three years of huge losses as the economy inches out of its worst recession in history.
A fresh corruption probe into graft at builder Odebrecht and a tainted-meat scandal last month are not expected to hinder the economic recovery, however fragile.
“We see light at the end of the tunnel,” said Rafael Cervone, president of top trade association Abit, just as the Brazilian press was leaking a Supreme Court judge’s list of high-profile politicians involved in the country’s so-called Operation Car Wash scandal, which saw Odebrecht pay huge kickbacks to the country’s elite in exchange for lucrative contracts at state oil giant Petrobras.
“Confidence is growing very fast in Brazil, not as fast as we would like but we expect our economy and production to start recovering this year,” Cervone said from Abit’s French colonial building headquarters in the high-end Higienopolis quarter.
He predicted the industry’s revenues will rise 1 percent in real terms to around 123 billion reals, or $39 billion, up from an 8 percent contraction last year, when the economy shrank 3.6 percent. On a nominal basis, there will be a 5 percent gain as inflation eases and production rises 4 percent. This year, the sector is also expected to create 10,000 jobs as embattled President Michel Temer pushes through economic reforms seen boosting GDP 0.5 to 1 percent, according to Cervone.
Still, growth remains fragile and could slip back into the red if Temer struggles to lift Latin America’s largest economy out of its worst recession in history. This is because Judge Edson Fachin’s list issued just before Easter implicates one-third of his Cabinet and Congress. Temer is also facing allegations of accepting illegal campaign donations, questioning the validity of his presidency and boosting concerns he may not be able to push through key tax and labor reforms.
Further rocking markets, the U.S. formally ordered Odebrecht to pay a $2.6 billion fine recently to settle bribery charges in 12 Latin American countries and using U.S. banks to move the money.
Despite the upheaval, Abit’s international division manager Renato Jardim said the scandal is not new and is unlikely to quash the recovery.
“This has been going on for the past three years and even though very important people have been named in the list, Brazilian society and investors were already expecting this,” Jardim said. “As long as Temer’s agenda moves forward we shouldn’t have a problem but if at some point it [the scandals] affects the agenda, then we could have a problem and investors could look elsewhere.”
Those investors may have also been concerned about the carne fraca or tainted-beef scandal, which rocked Brazil last month and prompted China and Japan to suspend meat exports amid claims they contained cardboard and excessive acid levels to mask rotting.
“We are known for having high standards for social labor and the environment and our cotton is 90 percent certified by the Better Cotton Initiative,” said Jardim.
For his part, Cervone noted Brazilian authorities exaggerated the beef case as only four slaughterhouses were said to be involved in any wrongdoing, not the entire sector. “The news was given as if the whole sector was involved and when countries sent inspectors, they realized it was not as bad as it seemed.”
Cervone insisted things will be better this year and as the economy, jobs and inflation stabilize, the sector should grow 2 to 3 percent in 2018.
Profits and investment are also firming up with margins seen rising 2 to 3 percent this year when firms will spend $550 million versus $479 million in 2016. As consumer confidence returns, retail sales are forecast to increase 2 percent versus a 10 percent decline last year, seen as the bottom of the economic malaise.
“We have been spending to update machinery, particularly for spinning, weaving and special finishes for denim, swimwear and home textiles,” Cervone said.
Jardim added that includes new polyester and spandex fabric blends in the key denim portfolio, which boasts 250 categories.
Exports are also predicted to rise 7 percent from just over $1 billion last year, when they shrank 7.8 percent as recession-hit firms outsourced production.
Brazil expects Argentina’s economic rebound will help boost orders for its denim and other fashion, while Paraguay should also increase buying as Brazilian brands Dudalina and Herring open stores there.
“Argentina is our first market which we expect to recover but the strategy is to continue selling to Latin America and Europe,” Jardim noted.
Cervone said Abit is lobbying Brasilia to negotiate free-trade deals with Mexico, the U.S., Europe and Japan to help open future markets for Brazilian products. Simultaneously, it is asking the government to simplify bureaucracy, lower taxes and improve labor to help boost its fortunes.
Meanwhile, Minas Gerais State, known for mining gemstones used to make bejeweled garments and accessories, will double investment to $3.2 million this year to make fashion a key growth engine and increase start-up investments.
“We want to increase investment in the fashion value chain, in clothes, shoes and bags” to lift exports in three years, said Fernanda Machado, creative industries director at state development body Codemig.
She spoke during the 10th annual edition of Minas Trend, a textiles and fashion fair billed as the country’s largest. “The recession has taught us that we cannot afford to rely on mining any longer,” she added.
Codemig will team with Fiemg and Sebrae, the leading industry federation and small-enterprise export agency, to pursue the plan, which aims to strengthen its venture-capital or “accelerator” arm P7 Criativo to bankroll up to 10 young fashion enterprises this year.
At the same time, the agencies will work to refurbish Belo Horizonte’s historic Bemge building, designed by top architect Oscar Niemeyer, to become P7 Criativo’s headquarters, Machado revealed.
“We are going to put time and effort to develop new designers and create an environment to connect small and big companies,” to achieve economies of scale, she noted.
This year’s $3-million budget is part of the central-east state’s efforts to earmark 119 million reals, or $38 million at current exchange, to muscle its non-mining, creative economy, Machado said. Tourism will also be a priority for Minas Gerais, which spent 89 million reals, or $28.3 million, in those areas last year.
Minas Trend saw its spring edition’s buyer and attendance levels slip to 8,000 compared to 10,000 last year, however. About 601 buyers attended the latest show, held in the Expominas pavilion from April 4 to 7, down from 619 last time, as merchants freted over Brazil’s future.
However, amid hopes the economy can gradually stage a recovery, they boosted orders 30 percent to nearly $30 million, Machado claimed.
“There were fewer buyers but they bought more because last year we were in the middle of our economic problems,” she said, adding that retailers were “excited” by the brands’ offerings of elaborate, party-tinged apparel, footwear and jewelry the region is known for.
The state also spent heavily to bring 32 international buyers from 19 last year, including large Asian and Latin American contingents.
To rev up exports key to offsetting sluggish sales at home, Minas Gerais intends to bring 50 foreign buyers to the next October edition, with a focus on winning sales to Asia, Europe and the U.S., said Machado.
If all goes well the state — home to successful designers such as Patricia Bonaldi and Victor Dzenk — should boost exports around 5 percent this year after posting a 1 percent gain in 2016, she predicted. By 2020, the plan is to double exports to account for up to 20 percent of the industry’s $1 billion in annual revenues, up from 10 percent now, she added.
Asian buyers — in large attendance for the first time — liked what they saw.
Hong Kong apparel distributor Brandyond placed an initial, 5 million renminbi, or $725,000, order from Victor Dzenk, Particia Maranhao and Lucas Magalhaes, noting he hopes to sell the merchandise on Chinese e-commerce platforms JD and T Mall.
Korean buyer Chung Soo Hyun, owner of her eponymous Chung Soo Hyun clothing distributor, added: “This was my first time in Brazil and I was very surprised with the offer, which I think is of very high quality at the right price.”
Victor Dzenk’s latest spring collection featured looks inspired by Brazilian tropics and African safaris, is working to lift exports 20 percent to 1,800 garments this year. However, he noted the feat won’t be easy, due to the country’s notoriously high taxes and export red tape.
“Taxes are very high, sometimes double the price of a garment and our reverse seasons are still a challenge,” said Dzenk, known for using large, hand-drawn prints in his designs that evoke a Brazilian sensuality and joy of life.
“We are going to raise investment 20 to 30 percent this year to do special collections to meet the U.S. and Europe” seasonal needs and target new markets in Argentina and Peru, he said.
Like other designers, Dzenk said he logged big orders from Panamanian boutique operator Mannequin and Chile’s Andrea, as well as an undisclosed Peruvian firm.
Leticia Gonzales, whose summer 2018 collection brought a fusion of Brazilian and Thai elements, including garments blending denim and silk, said she intends to start exporting this year when she will have a showroom during Paris Fashion Week.
“This is my first time showing abroad,” said Gonzales, who studied at Bunka Fashion Academy in Bangkok, adding that showroom operator Tranoi and Brazilian textiles lobby Abit teamed to take her to France.