Brazil Economy

Aaushi Sangai-11HR-002 Anirudh Lanka-11DM-061 Megha Madan-11DM-071 Sachin Pal-11FN-085 Sahil Gandhi-11FN-086 Sumeet-11DM162

Presented By: Group-2

Some Vital Statistics

• Area: 8.5 million sq. km. – More than 2.5 times the size of India

• Population: 190 million – Less than 1/6th of Indian population

• Working Population: 101.7 Million

• Literacy: 90.3% of adult population

Economy

• GDP (nominal): $2.5 Trillion

• GDP (PPP): $2.3 Trillion

• Annual GDP growth: 3.5%

• Contribution to GDP: Primary Sector – 6%

Secondary Sector – 28%

Tertiary Sector – 66%

• Trade Balance: $20 Billion surplus

Objective of the Study

To understand the macroeconomic policies and study their implication on the Brazilian economy

in light of the various internal as well external factors.

History of Brazil Economy – 1968-73

• Spectacular Growth spurned by 1964 reforms

• 11.1 Average Annual Growth Rate

• Industry grows by 13.1% per annum

• Leading Sectors:

– Consumer Durables

– Transportation Equipment

– Basic Industries such as steel, cement etc.

History of Brazil Economy – 1974-80

• 1973 oil shock leads to trade reduction

• Large investments incurred by govt. to increase exports and promote growth

• This leads to a current account deficit which is funded through foreign debt

• Foreign debt rises from US$6.4 billion in 1963 to nearly US$54 billion in 1980

History of Brazil Economy – 1990-Date

• In the 1990s, the new populist govt. tried in vain to curb inflation and boost economy

• “The Real Plan” is introduced by the govt. and is finally able to lower inflation

• In 2000, there is GDP growth of 4.4%, in 2004, 5.7%, in 2005, 3.2%, in 2006, 4%, in 2007, 6.1%, in 2008, 5.1%.

• During the 2008-10 recession, there was no growth expected in the GDP, but still the GDP saw growth as high as 7.5% in 2010

GDP

• The GDP growth (annual %) in Brazil was last reported at 7.49 in 2010.

• Major Sectors contributing to GDP

1. Agriculture

2. Manufacturing

3. Services

BRAZIL ECONOMY:A SNAPSHOT

• Seventh largest economy in the world by nominal GDP

• Eighth largest by purchasing power parity

• Free markets(Process determined by Supply and demand)

• Inward oriented economy

GDP Growth Rate Trend

GDP Growth Rate Trend

• High Growth in 70’s

• Decreasing Growth Rate in the 80’s & hence

• Current GDP Growth Rate @ 7.5%

• Expected to decrease to 6.6%

• Brazil's economy decelerated this year due to tighter monetary policy, including prudential measures to control credit growth and a restrictive fiscal stance.

• The manufacturing sector was hit by the strength of the Brazilian Real until recently and the withdrawal of stimulus measures

MONETARY POLICY

• Brazil has opted to use interest rates as an instrument to control inflation

• This method of using interest rates is known as an inflation-targeting regime

• Cost of Capital is incredibly high as compared to International Standards

• The amount banks charge on their loans even for very good rated companies is well above what is charged worldwide

Monetary Policy Committee (Copom)

• Since the adoption of the inflation-targeting regime, Central Bank Policy has been based upon some basic principles implemented by the Monetary Policy Committee (Copom).

• First, they evaluate the future trend of inflation. • Second, Copom attempts to analyze the reasons

for the differences between the inflation projection and the target

• Lastly, In order for the Central Bank to be able to act with the necessary flexibility, it is essential that its performance be totally transparent.

MONETARY POLICY

• To increase GDP by increasing money supply in the market(printing currency)-led to HyperInflation

• Implemented a reform policy known as “Real Plan” or “Plano Real”

Fiscal Stability Program

• Re-scheduling of state and local government public debts;

• Reform and privatization of state banks;

• Reform in public accounting by recognition of hidden liabilities;

• Measures to control public debt/GDP ratio in 44%;

• Increase in transparency of budget and public finance

Cont’d

• Request of Funds from IMF

• The funds were used Government Expenditures on Health,Education,Housing

• The Fiscal Responsibility Act

Debt

• In 1994-98, Brazil's domestic debt grew very rapidly while remaining short in maturity

• Brazil's domestic debt has posed two challenges to policymakers: it has grown very fast and, despite progress, remains extremely short in maturity.

• The main explanations: extremely high interest payments (caused by Brazil's weak fiscal stance and quasi-fixed exchange rate regime) and the accumulation of assets (especially obligations of Brazil's states).

Debt Management By Government

• Establishment of Brazilian National Treasury

• Refinancing risk at safe levels

• Gradual reduction of market risks

• Short Term Interest Rates

• SLM Framework

• New Brazilian Payment System

Brazil- Regulatory Environment

• Legal system based on ‘civil code’.

• Interpret the law on a case by case basis.

• Courts do not necessarily have to follow the same decision taken on previous similar cases.

• Judges have freedom to take decisions.

• System brings uncertainty in society and takes time.

• Outcomes unpredictable. At times, take 10years or even more.

Regulatory Environment(Cont.)

• Impacts tax and labor rules.

• Tremendous effect on business and corporate relationships.

• Strength of legal rights index reported at 3.00 in 2010.( 0=weak to 10=strong )

Regulatory Environment- FDI

• Opening itself to foreign direct investment.

• Cash inflow and outflow is easier.

• Many sectors opened for privatization.

• Huge impact on telecommunication, power and banking in particular.

• Slight dip in FDI at time of 9/11.

• Growing steadily since 2004 when it was $13bn.

Regulatory Environment- FDI(Cont.)

• Huge market potential.

• Strong existing industrial base.

• Strong competition with China, India and Russia.

• Increases competition in the market.

Regulatory Environment- Some facts

• Time required for operating license- 83.45days.

• Total Tax Rate- 69.00% of profit.

• Time to register property- 42days.

• Time to enforce contract- 616days.

• Time to start up a firm- 243days.

Brazil- Debt & its impact

• Brady deal of 1994 restructured Brazil’s debt.

• Helped Brazil return to international financial markets.

• Hyperinflation ended around the same time.

• Not experienced open debt crisis in recent years.

• However, debt service indicators among the worst in emerging markets.

Debt & its impact(Cont.)

• Public external debt accounts 20% of GDP.

• Interest payment on external reported at 1.00(% of GNI ) in 2008.

• Central Government Debt reported at 60.88( % of GDP ) in 2008.

• Debt reached $320bn in 2011.

Govt. Role in Development of internal Sectors

Health:

• System of health care: Brazil has a public system of medical coverage guaranteed by the Brazilian Constitution called the Sistema Único de Saúde (SUS) that was created in 1989.

• SUS Mission: 1) All citizens should have access to health care.

• 2) All citizens are entitled to full and complete health care.

• 3) All health care policies should aim toward the reduction of inequality between individuals.

Health Care Challenges:

• Funding is an inadequate hotch-potch.

• violent urban slums where the service is lacking.

Improvement: • Turning more public hospitals over to non-

profit bodies.

• Allocate around 12 percent of its GDP to health care

Facts:

• Health care spending as a share of GDP: 8%.

• Share of health care spending that is privately funded: 60%

• Life expectancy at birth: 72.5 years

• Infant Mortality Rate: 21.17 deaths per 1000 live births

• Number of beds per 1,000 (global average): 2.4 (4.3)

• Nurses per 1,000 (global average): 29.1 (60.3)

• Physicians per 10,000 (global average): 16.9 (23.4)

Defense sector:

• End of military rule in 1985 • Secrecy surrounding the funding of various

military-related projects. • Among the countries with the lowest levels of

military expenditures implies few external threats.

• Largest military power in Latin America. • Military expenditure: is around 6% of govt.

expenditure. • As a % of GDP it is noted 1.94% in 2009.

Infrastructure:

• Roads are the primary method of transportation in Brazil of both passengers and freight.

• Highway system is inadequate and poorly maintained.

• The railway system in Brazil is very limited.

• Brazil's air transportation is well developed with 48 main airports, 21 of which are international.

Infra Challenges and opportunities

• The upcoming World Cup of 2014, and Olympic Games of 2016

• Country must continue to seek new ways to attract private capital.

• continues to invest heavily in the market, providing almost R$274 billion for the period of 2010 – 2013 (up 38% from 2005 – 2008).

Education Sector

• Literacy rate of 97.5% for people age 6 to 14

• Literacy rate of 84.1% for people age 15 to 17

• Literacy rate of 92.0%

• Govt. is spending around 5% of their GDP in education sector and it is 16% of their total expenditure.

Education Sector challenges

• Public schools in Brazil are not well cared for.

• Brazil’s first-grade repetition rate is 28 percent, among the highest in the world.

Initiatives:

• A program that has created about 700,000 scholarships.

• opened more than 180 vocational schools . • allocating 18% of the countries total budget to

education.

Export and Imports

• First broad tariff reform was introduced in 1990.

• An agreement forming a Common Market of the South: Mercosur.

• Present scenario: pollution intensive exports in manufacturing.

• Primary Partners for Exports and Imports: U.S., China, Argentina, Germany etc.

Imports:

Country 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil 48.7 55.8 57.7 46.2 48.25 61 78.02 91.4 173.1 127.7 187.7

Imports contd.

• Imports barriers before 1990.

• Imports of goods and services (annual % growth) in Brazil was reported at 18.49 in 2008

• Fuel imports (% of merchandise imports) in Brazil was reported at 19.82 in 2008 which was more than 50% in 1980.

• Manufacturing (% of merchandise imports) in Brazil was reported at 70.22 in 2008 .

Exports:

Country 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil 46.9 55.1 57.8 59.4 73.28 95 115.1 137.5 197.9 153 199.7

Exports contd.

• In 2005, Brazil's total exports more than doubled to US$118 billion from $58 billion for 2001

• trade surplus has expanded more than 16-times to $47 billion from $2.6 billion over the past 4 years.

• world's leading exporter of sugar, coffee, beef and orange juice and soybeans.

Exports contd.

• Factors That May Increase Exports: Brazil is using only 1/3 of potential arable land. The potential for expansion is three times this amount. Rising incomes around the world contribute as well.

• Factors That May Decrease Exports: Important markets in the North America Free Trade Agreement and in East Asia are blocked.

• The Future of Brazil’s Exports: Brazil’s efforts to improve sanitary conditions will determine the future increases in meat exports.

• Increasing demand for raw materials for bio fuels. Domestic food consumption is also rising. This could reduce exportable surpluses.

• Considerable growth in import spending and fast growth in Asia, which together will further deteriorate the trade surplus.

FDI:

• The Foreign Capital and Exchange Department (Decec) of the Brazilian Central Bank (Bacen) is responsible for foreign direct investment (FDI) in Brazil.

Foreign direct investment, net inflows (BoP, current US$)

FDI contd.

• Started in 19 century, British direct investments.

• Improved in 20 century, due to urbanization and industrialization.

• Last few decades, attracted especially by the large domestic market – but also by government policies .

• FDI jumped four times since 2005 totalling 661bn.

• Telecomm sector created boom in 1998-2001.

• Active participant in the multilateral systems of rules regulating the action of national states in the economic, trade and political fields .

• Traditionally a leader in the inter-American community

• Charter member of the United Nations

• In 2009 became a creditor country to the International Monetary Fund (IMF).

• Brazil was a leader of the G-20 group of nations

International Linkages

• Close relations with US for 200 years • Jointly Cooperate on trade issues, HIV/AIDS

efforts, regional concerns, and the international peacekeeping operation in Haiti

• Brazil and the United States signed an agreement to promote and increase the worldwide trade in ethanol as both are the top global ethanol producers

• Brazil and the United States cooperated in principle on the creation of a Free Trade Area of the Americas (FTAA)

Ties with US

• Argentina is the main destination for Brazilian investment in Latin America.

• Brazil accounts for Argentina's largest export and import market, while Argentina accounts for Brazil's third largest export and import market

Ties with Argentina

2009 2010

Argentine exports to Brazil $11.3 billion $14.4 billion

Brazilian exports to Argentina $12.8 billion $18.5 billion

TOTAL $24.1 billion $32.9 billion

• Two countries share similar perceptions on issues of interest to developing countries

• Trade is expected to to cross $ 10 billion mark by 2012

• Major Brazilian investments in India so far is the joint venture-Tata-Marcopolo, between Tata Motors and Marcopolo of Brazil

Relations with India

• Instituted in the 1994, sought to break inflationary expectations by pegging the real to the U.S. Dollar

• Brazil floated the Real (BRL),breaking with decades of exchange rate manipulation and repression by the government

• Inflation was brought down , but not fast enough to avoid substantial real exchange rate appreciation during the transition.

• The Appreciation meant that Brazilian goods were now more expensive relative to goods from other countries, which contributed to large current account deficits

Plano Real

• The National Congress of Brazil is the legislative body of Brazil's federal government

• The 1988 constitution grants broad powers to the federal government, made up of executive, legislative, and judicial branches

• The president holds office for 4 years, with the right to re-election for an additional 4-year term, and appoints the cabinet.

Political Stability

• Fifteen political parties are represented in Congress.

• Party-switching is a long-running theme in Brazilian party politics, So ,the proportion of congressional seats held by particular parties changes regularly.

• President LuizInácio Lula da Silva ( who took office on January 1, 2003) has been credited with implementing policies that promoted upward social mobility by addressing inequality and raising living standards.

• The country dramatically reduced the jobless rate from a historic high of more than 13 percent that year to 6.7 percent in September 2010

• Brazil is struggling with an image of corruption that is aggravated by frequent scandals involving high-level politicians and bureaucrats

• The government wants more control over resources and has very little desire to allow the international community to profit from the exploitation of the country's vast new oil frontier

• The political economy that has evolved since 1994 across two two-term presidential administrations has made it possible for Brazil to re-position itself in the global arena

• An overvalued currency is hurting Brazilian exports and pushing up domestic prices. A Big Mac now costs around $6.16 (1.5$ in 2003 ) compared to 4.07$ of US

• The government wants more control over resources and has very little desire to allow the international community to profit from the exploitation of the country's vast oil frontier

Facts and Figures for Unemployment

• Current Brazil unemployment rate is 5.8%. • It has come down from 9.3% in 2001. • Employment in agriculture was 28.6% in 1985

and 19.3% in 2006. • Employment in industry in Brazil it was reported

AS 21.4% in 2006 and 22.1% in 1985. • Employment in services in Brazil it was reported

as 49.3 % in 1985 and 59.1% in 2006. • The Employment to population ratio; 15+; total

(%) in Brazil was reported at 63.90 in 2008

Rate of Unemployment

Causes

• Firstly, the period of higher economy growth for Brazil was also a highly dynamic for the whole world. So as the world saw huge growth in GDP (especially BRIC nations), even Brazil grew. (Exports/investments grew)

• Secondly, since late 2007 the world economy has been on decline due to the financial crisis brought about by the US subprime market (mortgages). This crisis only hit the Brazilian labor market in the second half of 2008.

Government initiatives

• Unemployment insurance

• Public Employment Service

• Training programs

• Microcredit programs

• Cash transfer programs

Poverty • Brazil is one of the most unequal nations in the world,

although it is one of the wealthiest.

• According to the United Nations Development Program (UNDP), income are as high as those of some very poor African countries such as Sierra Leone, or Namibia.

• However, the World Bank ranks the Brazilian economy among the 10 richest in the world, with a Gross Domestic Product (GDP) of $1.7 trillion PPP, equal to the Italian GDP.

• Per capita GDP is in the order of $ 9,000 PPP.

Facts and Figures

• Income share held middle 20% in Brazil is reported as 19.62% in 2008 and it is continuously in 19 % from last 10 yrs.

• Income share held by lowest 20% in Brazil is 3.02% in 2008, increased from 2.45 in 2001.

• Income share held by highest 20% in Brazil is 58.73% in 2008 and has decreased from 62% in 2000.

• Percentage of poverty in urban population in Brazil is 17.5% in 2005.

• Percentage of poverty in rural population in Brazil was reported as 41% in 2005 and 51.4% in in 2000.

Poverty level from 90-09

Causes for poverty

• Extreme inequality of land tenure.

• High levels of illiteracy

• Limited access to basic infrastructure and services

• Lack of access to water, credit and improved technologies that would help boost productivity.

Government initiatives

• Plano Brasil Sem Miséria (Brazil Without Poverty)

• Bola Familia ( monthly cash transfers)

• Brazil Without Misery ( monthly cash transfers to rural poor)

• New policies and programs have been introduced to make land available to poor landless people

• National Program for Strengthening Family Farming