Brazil

Sydenham Institute of Management Studies, Research and Entrepreneurship Education, Mumbai

A report on,
Country Analysis: Brazil

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Table of Contents
About Brazil 2
Introduction to Brazil economy 2
Gross Domestic Product (GDP): 4
1. GDP per capita: 4
2. GDP growth rate 5
Inflation: 8
Unemployment: 11
Monetary Policy: 12
1. Required Reserve ratio (RRR): 12
2. SELIC Rate: 12
Fiscal Policy: 14
1. Government Budget 14
2. Government Debt to GDP 14
Trade Policy: 16
1. Brazil Exports 16
2. Brazil Imports 16
3. Brazil Current Account to GDP 17
4. Exchange rate (Brazilian Real-BRL) 18
Conclusion: 19
References: 20

About Brazil Area | 8,514,877 km2 | Population | 198,739,269 | Language | Brazilian Portuguese | Age structure | 0-14 years: 26.7% 15-64 years: 66.8% 65 years and over: 6.4% | Urbanization | 86% | Ethnic group | white 53.7%, mulatto (mixed white and black) 38.5%, black 6.2%, other (includes Japanese, Arab, Amerindian) 0.9%, unspecified 0.7% | Literacy | Definition: age 15 and over can read and write total population: 88.6% | Climate | mostly tropical, but temperate in south | Terrain | Mostly flat to rolling lowlands in north; some plains, hills, mountains, and narrow coastal belt | Natural resources | Bauxite, Gold, Iron ore, Manganese, Nickel, Phosphates, Platinum, Tin, Uranium, Petroleum, Hydropower, Timber |

Introduction to Brazil economy
Until the beginning of the 20th century the Brazilian economy was characterized by a succession of cycles, each of them based on the exploitation of a single export commodity: timber (brazilwood) in the first years of colonization; sugarcane in the 16th and 17th centuries; precious metals (gold and silver) and gems (diamonds and emeralds) in the 18th century; and finally, coffee in the 19th. Slave labour was used for production, a situation that would continue until the last quarter of the l9th century.
The industrialisation process from the 1950 's to the 1970 's led to the expansion of important sectors of the economy such as the automobile industry, petrochemicals, and steel, as well as to the initiation and completion of large infrastructure projects.
In the early 1980 's, however, the significant rise in US interest rates began to affect international capital markets. The burden of its debt affected public finances and contributed to an acceleration of inflation. In the second half of the 1980 's, a series of stringent measures was adopted aimed at monetary stabilization. These included ending indexation (a policy of adjusting wages and contracts according to inflation), and the freezing of all prices. In 1987, the government suspended interest payments on foreign commercial debt until a debt rescheduling agreement with creditors could be reached.
The Plano Real ("Real Plan"), instituted in the spring 1994, sought to break inflationary expectations by pegging the real to the U.S. dollar. Inflation was brought down to single digit annual figures, but not fast enough to avoid substantial real exchange rate appreciation during the transition phase of the Plano Real. This appreciation meant that Brazilian goods were now more expensive relative to goods from other countries, which contributed to large current account deficits. However, no shortage of foreign currency ensued because of the financial community 's renewed interest in Brazilian markets as inflation rates stabilized and memories of the debt crisis of the 1980s faded.
In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S. dollar. This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998. Brazil 's debt to GDP ratio of 48% for 1999 beat the IMF target and helped reassure investors that Brazil will maintain tight fiscal and monetary policy even with a floating currency.
The economy began to grow more rapidly until the 2008-2010 world financial crisis, Brazil 's economy was expected to slow down in 2009 between a decline of -0.5% and a growth of 0.0%.

Gross Domestic Product (GDP):
The gross domestic product (GDP) is one of the measures of national income and output. GDP can be defined in three ways, which should give identical results. First, it is equal to the total expenditures for all final goods and services produced within the country in a specified period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production by all the industries, plus taxes and minus subsidies on products. Third, it is equal to the sum of the income generated by production like compensation of employees, taxes on production and imports less subsidies, and gross operating surplus.
Nominal GDP of Brazil is $2.22 trillion (2012-2013 estimated) and 2.3 with PPP. In Brazilian reals, its GDP is estimated at R$ 4.403 trillion in 2013.
Brazil is the sixth largest economy in the world and the largest in Latin America. The services sector is the biggest and contributes 67 % to total GDP. Within services, the most important segments are: government, education and health (16.3 % of total GDP), wholesale and retail trade (12.6 %), business and financial services (7.4%) and real estate (7.9%). Industry contributes 27.5% to GDP. The largest segments within the industry sector are: manufacturing (14.6 % of total GDP), construction (5.8%) and mining (4.1%). Agriculture contributes the remaining 5.5 %.

1. GDP per capita:
The GDP per capita is obtained by dividing the country’s gross domestic product, adjusted by inflation, by the total population.
The Gross Domestic Product per capita in Brazil was last recorded at 4803.40 US dollars in 2011. GDP per capita in Brazil is reported by the World Bank.

GDP growth rate
The annual growth rate in Gross Domestic Product measures the increase in value of the goods and services produced by an economy over the period of a year. The Gross Domestic Product in Brazil expanded 1.40 % in the fourth quarter of 2012 over the same quarter of the previous year. In relation to the third quarter of 2012, the GDP of the fourth quarter posted a positive change of 0.6%. But, after weak third-quarter GDP figures (0.9%) shocked market economists and government, both cut their predictions for growth in FY 2012-13 to just 1%.
Now inflation figures have brought more gloom. During 2012 prices rose by 5.84%—above market expectations, and, for the third year running, close to the ceiling of the range (2.5-6.5%) targeted by the Central Bank. Stimulus may come partly in the form of yet more giveaway credits from state banks. But policy is already very loose. The Central Bank’s benchmark interest rate is less than 1.5% in real terms. Any further stimulus is more likely to push up inflation than growth.
The most likely source of business optimism is a successful round of infrastructure auctions, planned for later this year. That would show that the government is serious about tackling bottlenecks—and not too wedded to its statist ways to offer investors an attractive rate of return.
Even so, 2013 looks like uphill going. A further complication is that a drought last year is threatening electricity generation at Brazil’s big hydropower plants. Gas- and oil-fired plants, normally switched on only in the dry season, are running at full tilt. The last time reservoirs fell this low, in 2000, electricity rationing ensued.
The government is pushing ahead with big cuts in electricity tariffs, promised last year even as the reservoirs were receding. Lower energy prices are a big part of its plans to improve industrial competitiveness, and are politically popular but ploughing on may be costly too. Gas is much pricier than hydropower (partly because the government has discouraged the private sector from looking for it). If it cuts tariffs, the government will have to pay the difference. And by stimulating demand, cheaper electricity will bring the risk of rationing a bit closer.Week by week, they are revising down their forecasts for economic growth in 2013, now at about 3%.

Inflation:
The rate of inflation in Brazil refers to the rate of inflation based on the consumer price index (CPI) called IPCA in Brazil.
The Brazilian CPI shows the change in prices of a standard package of goods and services which Brazilian households purchase for consumption. In order to measure inflation, an assessment is made of how much the CPI has risen in %age terms over a given period compared to the CPI in a preceding period.
In Brazil, the main components of the consumer price index are:

The national index is calculated as the weighted average of regional indices.
The inflation rate in Brazil was recorded at 6.31 % in February of 2013. Inflation Rate in Brazil is reported by the IBGE (The Brazilian Institute of Geography and Statistics).
In the 12 months through February, inflation rose to 6.31 %, the highest value in more than a year. Education and food and beverages recorded the largest price increases, 5.4% and 1.45% respectively.
At this pace, inflation has already passed the official target of 4.5+/-2% and is rapidly approaching the tolerance margin of plus 2% points. Since, 2005 Brazils’ target inflation rate is constant at 4.5 % with tolerance level of 2. They are successfully managed to keep it within the bandwidth targeted.
The Brazilian economy is estimated to have grown only 1 per cent last year compared with 2.7 per cent a year earlier and 7.5 per cent in 2010. Hence, inflation is surprising on the upside despite an economic recovery that has been weaker than expected raising concerns that Latin America’s largest economy was sliding towards stagflation.
On a month over month basis, the IPCA increased 0.6 % in February and was below the 0.86 % registered in January, mainly due to a decline of 15.2% in electricity expenses.
The government has slashed the price of electricity and recently it also cut the tax on cesta básica- a selection of basic food items for households, a measure that would help reduce inflation.
Analysts believe Brazil’s problems stem from a declining rate of investment with companies unwilling to commit more money at a time when industrial production is contracting implying demand-pull inflation.
Companies anticipated that record low borrowing costs, government tax breaks and increased public spending would fuel economic growth and thus they are at the peak of the recruitment regime. Nearly full employment and rising real wages have pressured inflation implying cost-push inflation.
The fact for 2012 is that the headline figure underestimates inflationary pressures. If the federal government had not capped petrol prices, and municipalities frozen public-transport fares before October’s local elections, last year’s figure would have been closer to 6.5%. In 2013 both those prices are likely to rise. The end of a sales-tax holiday for cars will boost inflation, too. Most analysts now think that inflation will be around 6% this year.
Central bank also stated that inflation would remain in the range of 6 per cent in the first semester of this year, near the top of the central bank’s range of 4.5 per cent plus or minus 2 %age points. But prices would fall in the second half. Many analysts also believe the January figure is likely to be the peak for this year.
Moreover, this rise in inflation may put pressure on the Central Bank of Brazil to increase interest rate which may threaten Brazilian government plans to reignite a near-stagnant economy. Indeed on March 6th the Central Bank decided to maintain its key policy interest rate unchanged at 7.25, despite the timid growth rate of just 0.6 %, quarter on quarter, registered in the last three months of 2012.

After 2002 the economy began to grow more rapidly. In 2004 Brazil saw a promising growth of 5.7% in GDP, following 2005 with a 3.2% growth, 2006 with a 4.0%, 2007 with a 6.1% and 2008 with a 5.1% growth. Due the 2008-2010 world financial crises, Brazil 's economy was expected to slow down but in reality, economic growth has continued at a high rate with economic growth hitting 7.5% in 2010. Hence along with the growth inflation accompanied and continued to rise.

Source: www.global-rates.com/economic-indicators/

Unemployment:
The unemployment rate can be defined as the number of people actively looking for a job divided by the labour force. Changes in unemployment depend mostly on inflows made up of non-employed people starting to look for jobs, of employed people who lose their jobs and look for new ones and of people who stop looking for employment.
Unemployment Rate in Brazil is 5.40 % (1.3 million persons) in January of 2013. It is increased from record low of 4.60 % in December of 2012 as reported by the IBGE.
Brazil’s unemployment rate dropped to the decade low in December as companies expect economic growth to rebound after slowing for two consecutive years and being lending rate at 7.25 % a record low. However, some economists argue that employers have hung on to excess workers, partly because firing them is expensive. They say without faster growth, such hoarding of labour cannot last indefinitely.
Historically Brazil has very high average unemployment rate around 10 %. The reason being Brazil has a very high population. It has the second highest population, after the United States of America, in the western hemisphere which is a major cause of its unemployment problem. Unemployment has been under control in Brazil since 2003. Service sector growth has played a major role in decreasing the unemployment rate of Brazil.
The service sector employs the maximum number of people in Brazil. Around 65% of Brazils working population is engaged in the service sector. Agriculture accounts for 20% of the working population. 15% of the working population of Brazil is engaged in the industrial sector.
In 2006, women workers constituted 42.5% of the total workforce of Brazil. Unemployment rate of women has shown a downward trend in recent years

Monetary Policy:
Central bank of Brazil follows inflation targeting regime which differs from alternative stabilization strategies, which seek to influence inflation indirectly by targeting the exchange rate or the money supply. Under inflation targeting, central bankers use monetary policy instruments to achieve the announced inflation target. The monetary policy tools are explained below: 1. Required Reserve ratio (RRR):
The reserve requirement is a central bank regulation that sets the minimum fraction of customer deposits and notes that each commercial bank must hold (rather than lend out) as reserves. These required reserves are normally in the form of cash deposits made with a central bank.
The required reserve ratio is used as a tool in monetary policy, influencing the country 's borrowing and interest rates by changing the amount of funds available for banks to make loans with. This required reserve is different for long-term deposits and regular deposits.
Currently, the cash reserve ratio on long-term deposits is 20 % and the regular deposits ratio is 12 %.
Long-term deposits were raised from 15 to 20 % and the regular deposits ratio from 8 to 12 % effective from 2010-12-06 in order to decrease the liquidity in the market and rein in inflation. In 2009, the Brazilian central bank decreased the cash reserve ratio to help fight the international financial crisis. Now in order to bring the inflation under control, the BCB decided to do the opposite.
SELIC Rate:
Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves; they generally prefer to use open market operations (buying and selling government-issued bonds) to implement their monetary policy and the same applies with central bank of Brazil. They prefer to use overnight lending rate as a primary monetary tool rather than reserve ratio.
The SELIC (Special System for Settlement and Custody) rate refers to the central bank benchmark interest rate which is the Central Bank overnight lending rate at which central banks make loans to the commercial banks under their jurisdiction.
Moving the benchmark interest rate, the central bank is able to make an impact on interest rates of commercial banks, inflation level of the country and national currency exchange rate. Reduction of interest rates should bring increase in business activity, a rise in inflation rate and weakening of national currency. In case of increase in interest rates the level of business activity is likely to drop, inflation declines and national currency strengthens.
The Central Bank’s Monetary Policy Committee (COPOM) meet monthly and make a decision on the SELIC rate, the Central Bank overnight lending rate, which crucially shape private actors’ expectations and thus become a reference point for other interest rates in the economy.
The COPOM of Brazil decided on March 6th to maintain its SELIC rate at 7.25 %, without bias.
Since last two quarters SELIC rate has been constant at 7.25 %. Taking into consideration the macroeconomic environment and the outlook for inflation, the Committee unanimously decided to keep the SELIC rate unchanged.
Most analysts now believe that its decisions are taken with an eye to boosting growth and weakening the currency, and that unless inflation threatens to break the 6.5% barrier, rates will stay low for some time.
The Committee will monitor the macroeconomic scenario until its next meeting, to then define the next step in its monetary policy strategy. Indeed, an interest rate hike might be on the table as inflation keeps rising.

Fiscal Policy: 1. Government Budget
Brazil recorded a Government Budget primary surplus equal to 2.01% of the country 's Gross Domestic Product in 2012. Government Budget in Brazil is reported by the Banco Central do Brasil. Historically, from 1998 until 2012, Brazil Government Budget primary surplus averaged 2.04 % of GDP. Government Budget is an itemized accounting of the payments received by government (taxes and other fees) and the payments made by government (purchases and transfer payments). A budget deficit occurs when an government spends more money than it takes in. The opposite of a budget deficit is a budget surplus
.

Government Debt to GDP
Brazil recorded a Government Debt to GDP of 65.10 % of the country 's Gross Domestic Product in 2012. Government Debt to GDP in Brazil is reported by the International Monetary Fund. Historically, from 2000 until 2012, Brazil Government Debt To GDP averaged 68.72 % reaching an all-time high of 79.80 % in December of 2002 and a record low of 63.50 % in December of 2007.

Generally, Government debt as a % of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.

Trade Policy: 1. Brazil Exports
Brazil has an export-oriented economy. Brazil is the world’s second largest exporter of soybean, is responsible for 80 % of the planet’s orange juice and accounts for 35 % of global exports of raw cane and refined sugar. Other exports include: iron ores and concentrates (16 % of total exports), oil (8 %), meat (4 %), coffee (2 %), clothing and cars. Main export partners are China (17 % of total exports) and United States (11 %). Others include: Argentina, Netherlands, Japan and Germany.
Exports in Brazil decreased to 15966 USD Million in January of 2013 from 16141 USD Million in January of 2012.

Brazil Imports
Imports in Brazil increased to 20003.06 USD Million in January of 2013 from 17447 USD Million in January of 2012. Brazil main imports are: fuel (11 % of total imports), motor vehicles (9 %), pharmaceuticals (3 %) and electronics (2 %). Main import partners are: China (15.4 %) and Unites States (14.5 %). Others include: Argentina (7 %), Germany (6.4 %), South Korea (4 %), Japan (3.5 %) and Nigeria (3.4 %).

On September 5, 2012 the Brazilian government approved a 25% tariff increase on an additional list of 100 goods from the steel, petrochemical, chemistry, medicines and capital goods, according to reports from the official government news agency Brazil and at the same time announced the implementation of a monitoring scheme for those items’ prices in the domestic market to avoid unduly increases.
According to Finance minister Guido Mantega the goods that will be covered by the tariff 25% increase will be monitored by his ministry and in case an increase of prices at consumer level is detected, the percentage will fall immediately.

Brazil Current Account to GDP
Brazil recorded a Current Account deficit of 2.40 % of the country 's Gross Domestic Product in 2012. Current Account to GDP in Brazil is reported by the Banco Central do Brasil. Historically, from 1980 until 2012, Brazil Current Account to GDP averaged -1.78 % reaching an all-time high of 1.80 % in December of 2004 and a record low of -8.20 % in December of 1982. The Current account balance as a % of GDP provides an indication on the level of international competitiveness of a country. Usually, countries recording a strong current account surplus have an economy heavily dependent on exports revenues, with high savings ratings but weak domestic demand. On the other hand, countries recording a current account deficit have strong imports, a low saving rates and high personal consumption rates as a %age of disposable incomes.

Exchange rate (Brazilian Real-BRL)
Up to 1999 Brazil had a fixed exchange rate, with the Brazilian currency(REAL) was set at the same value as the U.S. dollar, i.e. US$ 1 was equivalent to R$ 1. However, like many other countries, Brazil has adopted an administered floating exchange rate regime. That is to say that the exchange rate floats freely, and can change daily according to supply and demand in the market. However, the Brazilian Central Bank (BCB) may intervene in exchange rate when the situation demands. These interventions occur principally in three circumstances: to build foreign exchange reserves, to correct localized and momentary imbalances in liquidity (the ease with which an investment can be converted into cash), and to contain excessive volatility that could affect the normal functioning of the market.
In the evaluation of economists, the introduction of floating exchange rates was a kind of 'watershed ' for Brazil. The system helped to improve the balance of payments, which registered a surplus in 2001. At the same time, it was essential to promote a drastic reduction in the Country 's external debt and to do away with the need to maintain high interest rates and thus attract foreign investors.
On March 8 2013, Brazil’s real(BRL) fell from a 10-month high after the central bank sold $1 billion of reverse foreign- exchange swaps to weaken the currency. The central bank sold 20,000 of 30,000 reverse currency contracts.
The real depreciated 0.7 % to 1.9569 per U.S. dollar at the close of trading in Sao Paulo after rallying on March 8 to 1.9442 per dollar, the strongest level on a closing basis since May 8. The currency has strengthened 4.8 % this year, the biggest gain among 25 emerging-market counterparts tracked by Bloomberg.

Conclusion:
The unemployment rate is fairly low at 5.4% but inflation is near the upper limit of target band at 6.31% and it is bound to rise further after end of Tax free holidays, rise in food prices etc. so the SELIC rate cut is not likely to happen in next policy meeting. It will hamper the growth further.
The Brazilian economy is estimated to have grown only 1 per cent in 2012-13 compared with 2.7 per cent a year earlier. Hence, inflation is surprising on the upside despite an economic recovery that has been weaker than expected raising concerns that Latin America’s largest economy was sliding towards stagflation.

References: www.bcb.br (Central bank of Brazil) www.tradingeconomics.com Bloomberg www.heritage.org brazil.gov.br
Macroeconomics (Samuelson- 5th edition)

References: www.bcb.br (Central bank of Brazil) www.tradingeconomics.com Bloomberg www.heritage.org brazil.gov.br Macroeconomics (Samuelson- 5th edition)