The Resurgence of the Brazilian North-East?
Preface
Billions in investments are expected to boost the Northeast's gross domestic product (GDP) and allow the local economy to grow faster than the Brazilian average in the long term. According to a study conducted by several national and international consulting firms, the region is expected to record average growth of 3.4 percent per year between 2026 and 2034, which is higher than the 2.5 percent recorded for the country during this period.
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Background
From 2011 to around 2016, we primarily carried out projects in the oil and gas sector and other commodity industries with iMB.Solutions. During this time, our main operational office was located in Rio de Janeiro, the center of the Brazilian oil and gas industry. The majority of projects were carried out in the infrastructure sector for upstream and downstream processes and the corresponding engineering. Geographically, we were particularly intensively involved in various project missions in north-eastern Brazil with the then refinery projects RENEST in Pernambuco and CompRJ in the state of Rio de Janeiro. Previously, we had also carried out projects with iMB in the automotive sector in the state of Bahia in the former Ford automotive cluster north of Salvador de Bahia. We have therefore been familiar with this region for a long time.
The positive forecasts for the Northeast - home to almost 60 million people, or almost 30% of Brazil's population - are based on a series of public and private investments planned for the coming years. In total, they are expected to amount to US$ 150 billion. The Northeast will gain momentum with natural gas and oil exploration, wind energy, airport concessions and a series of privatizations of electricity and wastewater companies. In the period between 2026 and 2034, the best growth will come from the North (3.1 %), followed by the Center-West (2.9 %), the Southeast (2.3 %) and the South (2.1 %).
Brazilian regional growth 2025-2034 (E), extracted from national and international consulting firms, graphic design by iMBdigital.Gallery_
What has happened in Brazil's powerhouse in recent years?
However, the forecasts for Brazil and especially for the South have been revised downwards in recent years due to the floods in Rio Grande do Sul and the depreciated industrial structure with low investment rates. In the years 2016 to 2022 in particular, Brazil's southern and south-eastern regions have been focusing on remaining competitive by accelerating the devaluation of the real. However, the respective governments and many entrepreneurs have overlooked the fact that the proportion of digital and electronic components in the cost structure of products is continuously increasing. And the costs for these components are now similar or the same everywhere globally. As a result, economies that are still relying on the completely outdated strategy of devaluation to maintain competitiveness are rapidly falling behind and losing out in the global rankings.
If you want to delve deeper into this topic of the illusion of devaluation to increase productivity in the Brazilian context, the following link is highly recommended.
Lack of understanding of changing value creation processes
At iMB.Solutions, we were able to observe this trend very impressively in the years 2017 to 2021/22. Many local entrepreneurs believed that they could manufacture products with the machines that had been written off and were no longer productive, and that they would still remain competitive. In summary, it can be said that an economy cannot devalue as quickly as technical progress in industrial automation, electronics and digitalization is advancing. The Brazilian government in those years apparently did not understand these correlations either, or was relying on this very strategy to decouple the country from globalization. Logically, they tended to be more in the camp of the so-called anti-globalists.
The North East can skip a development stage
If the figures are confirmed, the North East will once again occupy a prominent position in the local economic landscape. In the early 2000s, the region experienced significant growth - even outperforming Brazil for much of the period. In the early 2000s, the Northeast - and Brazil as a whole - benefited from a very particular combination of factors. There was the commodity boom on the international stage, and Brazil underwent a series of public policies to eradicate poverty, from which the Northeast benefited greatly in terms of household consumption. However, since the crisis of 2015 and 2016, the region has seen more modest growth rates, keeping pace with or even below the country's performance. The region is strongly characterized by cyclical sectors such as services. In 2020, for example, at the height of the pandemic, Brazil's GDP fell by 3.3% and that of the Northeast by 4.1%.
The increase in GDP in the region is now likely to be driven by the post-modern, primarily green, industrial sector. According to various national and international consulting firms, the industry is expected to grow by 3.4% per year from 2026 to 2034, which is significantly higher than in the traditional regions of Southeast and South Brazil.
The state as an incubator? Can that work?
Most of the billions of investments planned for the north-east of the country will be public, as part of the new Program to Accelerate Growth (PAC), one of the most important economic projects of President Luiz Inácio Lula da Silva's third government. A total of 140 billion US dollars has been earmarked for the region in the plan. Public investment in infrastructure will be an important driver for the north-east. All of this will have a domino effect on the economy in the long term. When the government announced the return of the PAC last year, it forecast around US$ 0.4 trillion of investment across the country. The federal government needs to be able to enter into good public-private partnerships, as public funds are not sufficient to finance the projects, and increase the implementation capacity of the PAC, which has been very low in the past. This represents an enormous opportunity for international strategic and financial investors.
The new green technology is replacing the oil and gas industry
The most important investments from the private sector will flow into the renewable energy sector. In the wind sector alone, wind farms worth 4.2 billion US dollars are under construction with a capacity of 5,000 megawatts (MW). According to the Brazilian Wind Energy Association (Abeeólica), projects worth around 26 billion US dollars (18,000 MW) have also been approved but not yet started in the region.
For every 1 US dollar invested in energy, almost 3 US dollars flow back into GDP. There is a production chain effect for the whole country. In the north-east, the effect is even greater, as the HDI (local human development index) has risen by 20 percent in recent years with the construction of wind farms.
One of the most important projects in the region is Engie's Santo Agostinho wind farm in Rio Grande do Norte. The project is located in the municipalities of Lajes (9,800 inhabitants) and Pedro Avelino (6,000 inhabitants) and consists of 14 wind farms and 70 wind turbines. The 0.5 billion US$ project will have an installed capacity of 434 MW and some of the wind turbines have already been in operation since last year. The company has another mega-project under construction in the north-east of the country. With an investment of 1.2 billion US dollars, the Serra do Assuruá Wind Complex in Bahia could generate 846 MW. The project will comprise 188 wind turbines and is 44 percent complete.
Northeast Brazil is a paradise for the development of renewable energy projects
Solar energy projects have also helped to boost investment in the region. According to the Brazilian Solar Energy Association (Absolar), a total of more than USD 12 billion has been invested in decentralized (on rooftops) and centralized (in large solar parks) power generation. Bahia, Piauí and Ceará are the states with the highest investment volume, accounting for almost two thirds of the total.
One sector that has become increasingly important in the north-east is wastewater disposal. In view of the inadequate water and wastewater supply, the states and municipalities in the region have decided to rely on private initiative to improve and expand the supply to the population. The investments contractually agreed by 2026 are expected to amount to almost 13 billion dollars over an average period of 30 years, in 842 municipalities. This is according to a study carried out by the National Association and Association of Private Concessionaires of Public Water and Sanitation Services (Abcon Sindcon) based on data from RadarPPP and the National Bank for Economic and Social Development (BNDES). The largest investments in wastewater disposal are made in Pernambuco (almost US$ 5 billion), followed by Maranhão (US$ 4 billion) and Pauí (US$ 2 billion).
The automotive industry in the region
But there are also investments in other sectors, such as the automotive industry. Stellantis (owner of the Fiat, Peugeot and Citroën, Jeep and Ram brands), for example, will invest 2.6 billion US dollars in the Group's plant in Goiania in the north of Pernambuco. This amount is part of the USD 6 billion investment cycle for Brazil between 2025 and 2030. In addition to expanding the plant, the company plans to increase the number of suppliers in the area surrounding the plant from the current 38 to more than 100 over the next few years, which will boost the GDP of the communities in the region.
The Importance of Industry
As part of the state initiative of the so-called Neo-Industrialization “New Industry of Brazil” (NIB), in addition to the milestones established in the six fundamental tasks of the program, clear objectives and the performance of each sector and its different segments must be identified in order to assess whether it is increasing its capacity for growth, investment, innovation and progress in line with the sustainability agenda.
The following indicators should be considered:
Annual growth of manufacturing and other investments, employment development and increase in share of GDP from current 15% to 18% in 10 years.
Brazilian industry currently generates around 22.2% of national GDP. The following national contributions are generated from this share:
national contributions 2022/23 (in %)
What is the Return on Investment if you invest USD 1.00 in Brazil?
In terms of investment in the respective sectors, various independent studies indicate a need for USD 91 billion over a decade, compared to the current USD 52 billion, a difference of USD 40 billion. The NIB's investment of US$60 billion between 2024 and 2026 is therefore very welcome as it will add to the contributions already made by the sector today and reduce the gap identified by the independent studies. Other critical issues include labour and capital costs and access to credit, international agreements, the tax burden and the harmonized regulation of international e-commerce platforms. With regard to international agreements, there are two rounds of discussion that could play a decisive role here. On the one hand, an agreement between the European Union and the Mercosur Economic Community has been under negotiation for more than two decades, without currently showing any signs of a positive conclusion. At the same time, an open round of talks has begun within the framework of the BRICS states as to whether and to what extent Brazil should join the Chinese Silk Road Initiative. Other Mercosur member states have also been actively involved in the discussions in advance. There is no doubt that the European Union is currently being sidelined in the global reorganization of trade relations with regard to the Mecosur region.
Conclusion
Industrial development is important for Brazil, whose GDP continues to grow slowly and below the ideal rate of 4% per year, despite progress in the agricultural industry, the service sector, mining and the oil and gas sector. To stimulate growth, an expansion of the manufacturing sector is essential, as has happened in several countries. Therefore, the success of the NIB could be a turning point in national development.
