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Brazilian Economy

Brazil is the fifth largest country in the world by population and landmass and has the seventh largest economy. Yet Brazil has relatively poor infrastructure, suggesting that there are significant barriers to intra-regional trade and limited domestic market integration.

Brazil’s economy probably shrank by 7 percent in the two years 2015-2016 - around the same amount of growth that occurred in 2010 when Chinese demand for commodities triggered a boom in Latin America’s biggest country. Then China hit a slump and commodity prices dropped.

In January 2019 Brazil’s new far-right President Jair Bolsonaro lowered the minimum wage. He signed a decree that sets the minimum wage to 998 Brazilian reais (approximately US$257) from 1,006 Brazilian reais (approximately US$267) as estimated by former President Michel Temer. This action will be transitory as it has to be approved by the Congress within the next 60 days. Taking the helm of their ministries Wednesday, Bolsonaro's cabinet unveiled sweeping plans to step up privatization, toughen prison sentencing guidelines, and hand control over Indigenous land to the Agriculture Ministry. While Bolsonaro lowered the minimum wage, his Finance Minister, Chicago Boy Paulo Guedes, said he planned to cut Brazil's tax to 20 percent of gross domestic product from 36 percent and reduce the state’s role, which means more economic liberalization and cuts in the welfare system.

GDP grew steadily - except for a dip after the 2008/2009 financial crisis - hitting 7.5 percent in 2010, 3.9 percent in 2011, 1.9 percent in 2012 and 3.0 percent in 2013. Brazil, with an expected economic contraction in 2016 of 2.8 percent, and Venezuela with a catastrophic decline of 4.8 percent, had the weakest outlook by far among seven major Latin American countries. The intensity of Brazil’s downturn, with no parallel in the country’s history, sent the government of President Dilma Rousseff to the brink of collapse and shocked investors who had poured funds into the world’s seventh-largest economy until very recently. Instead of a budget surplus, Brazil had a deficit. The recession, started in early 2015, only deepened.

The Organization for Economic Cooperation and Development (OECD) expected Brazil's economy would shrink by 4% in 2016. According to forecasts released 18 February 2016 as part of the OECD's Interim Economic Outlook report, the Gross Domestic Product (GDP) should be stable in 2017. For 2015, the year-end projected decline was 3.8%. According to the OECD, Brazil was experiencing a deep recession and should only begin to emerge from the downturn in 2017. Brazil's central bank said the economy contracted 4.08 percent in 2015, the worst performance since the indicator was created in 2003.

Five months after removing Brazil's good payer seal, in February 2016 credit rating agency Standard & Poor's (S&P) once again downgraded the country. The rating was reduced from BB+ to BB. The firm also gave Brazil a negative outlook, which means further reductions may be on their way in the upcoming months. S&P had been the first to remove Brazil's investment grade status (which works as a guarantee that the country will not default on its public debt), in September 2015. In December 2015, Fitch followed suit. Among the world's three main agencies, Moody's was the only which kept the country's good payer status.

By 2015 inflation was running at a ten-year high, while Brazil’s currency, the real, had lost over 22 percent of its value against the dollar. Government spending, subsidized lending, protectionist policies and corruption sapped the vitality that led to average growth exceeding 4 percent during the decade before leftist President Dilma Rousseff took office.

Brazil carried out a strategy centered on fiscal consolidation with a view to stabilizing the trajectory of the public debt to GDP ratio and boosting confidence about a new cycle of higher investment and growth. Although spending by the consolidated public sector this year has been revised down to the real level of 2013, a larger-than-expected fall in revenues coupled with budget rigidities – mainly on social security and other social outlays – reduced the originally projected primary surplus target. A package of budget cuts and new tax increases was proposed to Congress to ensure the necessary fiscal balance in 2016.

The economy was forecast to grow by a mere 0.8 percent in 2015. Brazil’s latest fourth quarter results were not the greatest. They are in the midst of a contraction that I think is the worst since the great depression. The third quarter 2015 was weaker than anticipated suffering a broad based contraction on the order of 1.7 percent for the quarter. Gross Domestic Product shrank slightly in the first half of 2014.

Though unemployment, at five percent, is still at a reasonable level, the inflation of 6.3 percent had become particularly noticeable on goods that are necessary for daily use, and so disproportionately affects low income people. The economic downturn was also affecting tax revenue. Since 2010, Brazil's new debts have risen from 1.4 percent of economic performance to potentially 4.5 percent by the end of 2014, according to the Moody's ratings agency.

By 2015 economists expected the chain reaction set off by the Petrobras scandal will tip an already weak economy into its worst recession in a quarter century, a harsh reversal for a country that was booming just a few years ago. Formally known as Petroleo Brasileiro SA, Petrobras accounts for more than 10 percent of Brazil's investment, 87 percent of oil output and all domestic fuel production. Its annual revenue equals about 8 percent of gross domestic product.

The international credit rating company Standard & Poor's, cut Brazil's debt rating on 24 March 2014. S&P, one of the world's three main credit rating companies, downgraded the country's long-term debt rating Monday to BBB minus, the agency's lowest investment-grade rating. The company said it made the change because of Brazil's slower economic growth and what it called "mixed policy signaling by the government." It also said the government had a constrained ability to adjust policy ahead of presidential elections in October.

After nearly a decade-long economic boom, the country's economy grew less than one percent in 2012, and the annual inflation rate climbed to 6.5 percent. Brazil's growth unexpectedly slowed in the first quarter of 2013, complicating government efforts to revive the economy as it battles inflation. Brazil’s economy grew just 0.6% in the first quarter from the previous three months, making for annualized growth of 2.4%. The official target is 3.1%. Standard & Poor’s downgraded Brazil’s outlook from “stable” to “negative”.

Despite progress in recent years, income distribution in Brazil remains grossly unequal, with 10 percent of the population holding over 50 percent of the nation's wealth. With a total population at 200 million, Brazil is also home to 50 percent of the people who live in extreme poverty in Latin America. President Rousseff made economic growth and poverty alleviation top priorities.

The Brazilian Tax Planning Institute think-tank found the country's tax burden in 2011 stood at 36 percent of gross domestic product, ranking 12th among the 30 countries with the world's highest tax burdens. In 2012 the CIA estimated taxes and other revenues at 38% of GDP, ranking 52nd in the world [#15 was France, at 51.4%, while one estimate placed the United States at #17 with 29.6%]. Such comparisons are fiendishly tricky. Other revenues include social contributions - such as payments for social security and hospital insurance - grants, and net revenues from public enterprises, such as state owned petroleum.

At the end of 2011 Brazil passed Britain to become the world's sixth largetst economy. The London-based Center for Economics and Business Research (CEBR) reported that Brazil had overtaken Britain to rank sixth among top economic powers behind the United States, China, Japan, Germany and France. After a tough recession and a banking crash, Great Britain had fallen to 7th place, behind larger and faster-growing Brazil. Expected to continue to grow in the 4% to 5% range, the Brazilian economy was expected to rise to fifth within the next several years. Brazil's Finance Minister Guido Mantega said in 2011 that Brazil hoped to become the fifth largest economy by 2015, surpassing France. President Lula publicly predicted that Brazil's economy will grow to fifth largest in the world by 2016, and a study by PriceWaterhouseCoopers published on 22 January 2010, predicts this could happen by 2013. Brazil's rise has been relatively swift, taking seventh place from Italy in 2010. The United States, China, Japan and Germany are the four biggest national economies.

Brazil closed the year 2011 with a GDP of $2.5 trillion, behind fifth-place France with $2.8 trillion and ahead of Britain with $2.48 trillion. But Brazil trailed in per capita GDP with a mere $12,916, compared with $48,147 for the United States, $44,400 for France and $39,604 for Britain, according to International Monetary Fund data.

Brazil is also one of the most unequal societies. 5% of the population own 85% of the wealth. Brazil is a diversified middle income economy, but with wide variations in development levels. Most large industry is agglomerated in the South and Southeast. The Northeast is the poorest region of Brazil, but it is beginning to attract new investment.

From the late 1960s through 1982, Brazil followed an import-substitution, high-growth development strategy financed, in large part, by heavy recourse to foreign borrowings. Foreign debt grew at an accelerated pace in response to the oil shocks of the 1970s and, when international interest rates rose sharply in 1979-80, the resulting accumulated external debt became one of Brazil’s most pressing problems in the decade that followed. See “Public Debt—Debt Crisis and Restructuring”. The debt crisis of the 1980s and high inflation substantially depressed real growth of Brazil’s GDP, which averaged 2.3% per year from 1981 to 1989. The public sector’s role in the economy also expanded markedly, with many key economic sectors subject to Federal Government monopoly or subsidized participation, and significant structural distortions were introduced through high tariffs and the creation of subsidies and tax credit incentives. Significant increases in the money supply to finance a large and growing fiscal deficit further fueled inflationary pressures.

Efforts to address these problems during the late 1980s and early 1990s were largely unsuccessful. High inflation and the recurrent threat of hyperinflation during this period prompted the Federal Government to pursue a series of stabilization plans, but these plans were undermined by a variety of factors. Stabilization measures implemented at that time relied on mechanisms, such as price and wage freezes and/or unilateral modifications of the terms of financial contracts, that were not supported by fiscal and monetary reforms. A central problem during this period was the public sector, which ran operational deficits averaging more than 5% of GDP during the five-year period from 1985 to 1989, while monetary policy was compromised by the short-term refinancing of public sector debt. These problems were aggravated by the 1988 Constitution, which limited the ability of the Federal Government to dismiss public sector employees and reallocated public resources, in particular tax revenues, from the Federal Government to the States and municipalities without a proportional shift of responsibilities to them, thereby further constraining the effectiveness of Federal Government fiscal policy. The practice of inflation indexation in the economy, which made prices downwardly rigid, also helped to undermine stabilization measures.

Prior to the introduction of the real as Brazil’s official currency in July 1994 pursuant to the Plano Real, Brazil’s economic performance had been characterized by macroeconomic instability, including extremely high rates of inflation and significant and sudden currency devaluations. Pre-Plano Real stabilization efforts, which included wage and price controls, failed to contain inflation for any extended period. The Plano Real, which the Federal Government announced in December 1993 and fully implemented in July 1994, succeeded in lowering inflation from an annual rate of 2,708.4% in 1993 and 909.6% in 1994 to 14.8% in 1995, 9.3% in 1996, 7.5% in 1997 and 1.7% in 1998, as measured by the IGP-DI. The inflation rate increased to 20.0% in 1999, however, following the decision of the Central Bank in January 1999 to permit the value of the real to float against that of the dollar. The inflation rate subsequently declined as a consequence of the implementation of the inflation targeting regime by the Central Bank in June 1999, registering 9.8% in 2000 and 10.4% in 2001.

The Brazilian economy’s solid performance during the financial crisis and its strong and early recovery, including 2010 growth of 7.5%, contributed to the country’s transition from a regional to a global power. As of 2010 leading Brazilian bank Itau Unibanco estimated that the Brazilian economy was likely to grow over the next decade at an average of 4.5 percent annually. The main drivers for this growth included a significant boost in expected investment in areas such as energy, including the offshore pre-salt oil development anticipated through 2025, and public infrastructure. According to Itau, private research suggested that investment in the pre-salt oil fields will exceed $55 billion over the next ten years. Likewise, research institutions such as Fundacao Getulio Vargas predict continued strong demand from a growing domestic sector and Brazilian middle class.

During the administration of former President Lula, surging exports, economic growth and social programs helped lift tens of millions of Brazilians out of poverty. For the first time, a majority of Brazilians are now middle-class, and domestic consumption has become an important driver of Brazilian growth. President Dilma Rousseff, who took office on January 1, 2011, has indicated her intention to continue the former president’s economic policies, including sound fiscal management, inflation control, and a floating exchange rate.

Rising employment and strong domestic demand pushed inflation to nearly 6% in 2010, leading the central bank to boost interest rates and the Rousseff government to announce cuts in 2011 spending. The economic boom and high interest rates have attracted foreign currency inflows that have driven up the value of the currency (the real) by nearly 40% since the start of 2009. In an effort to limit the appreciation, the government has increased dollar reserves and capital controls.

Brazil is generally open to and encourages foreign investment. It is the largest recipient of foreign direct investment (FDI) in Latin America, and the United States is traditionally the top foreign investor in Brazil. Since domestic savings are not sufficient to sustain long-term high growth rates, Brazil must continue to attract FDI, especially as the government plans to invest billions of dollars in off-shore oil, nuclear power, and other infrastructure sectors over the next few years. The major international athletic competitions that Brazil will host every year until the 2016 Rio Olympics are also leading the government to invest in roads, airports, sports facilities, and other areas.

Export promotion is a main component in plans to generate growth and reduce what is seen as a vulnerability to international financial market fluctuations. To increase exports, the government is seeking access to foreign markets through trade negotiations and increased export promotion as well as measures to promote exports.

Brazil has been a leading player in the World Trade Organization’s Doha Round negotiations and continues to seek to bring that effort to successful conclusion. To further increase its international profile (both economically and politically), the Rousseff administration is also seeking expanded trade ties with developing countries, as well as a strengthening of the Mercosul (Mercosur in Spanish) customs union with Uruguay, Paraguay, and Argentina. In 2008 Mercosul concluded a free trade arrangement with Israel, and another arrangement with Egypt was signed in 2010. Mercosul is pursuing free trade negotiations with Mexico and Canada and resumed trade negotiations with the EU. The trade bloc also plans to launch trilateral free trade negotiations with India and South Africa, building on partial trade liberalization agreements concluded with these countries in 2004. China has significantly increased its purchases of Brazilian soy, iron ore, and steel in recent years, becoming Brazil's principal export market and an important source of investment.

Agriculture is a major sector of the Brazilian economy, and is key for economic growth and foreign exchange. Agriculture accounts for about 6% of GDP (25% when including agribusiness) and 36% of Brazilian exports. Brazil enjoyed a positive agricultural trade balance of $55 billion in 2009. Brazil is the world's largest producer of sugarcane, coffee, tropical fruits, frozen concentrated orange juice (FCOJ), and has the world's largest commercial cattle herd (50% larger than that of the U.S.) at 170 million head. Brazil is also an important producer of soybeans (second to the United States), corn, cotton, cocoa, tobacco, and forest products. The remainder of agricultural output is in the livestock sector, mainly the production of beef and poultry (second to the United States), pork, milk, and seafood.

Brazil has one of the most advanced industrial sectors in Latin America. Accounting for roughly one-third of the GDP, Brazil's diverse industries include automobiles and parts, machinery and equipment, textiles, shoes, cement, computers, aircraft, and consumer durables. Brazil continues to be a major world supplier of commodities and natural resources, with significant operations in lumber, iron ore, tin, other minerals, and petrochemicals. Brazil has a diverse and sophisticated services industry as well, including developed telecommunications, banking, energy, commerce, and computing sectors. The financial sector is secure and provides local firms with a wide range of financial products, yet interest rates remain among the highest in the world. The largest financial firms are Brazilian (and the two largest banks are government-owned), but U.S. and other foreign firms have an important share of the market.

Government-initiated privatization after 1996 triggered a flood of investors in the telecom, energy, and transportation sectors. Privatization in the transportation sector has been particularly active over the last 20 years. Many antiquated and burdensome state management structures that operated in the sector were dismantled, though some still exist. The Brazilian railroad industry was privatized through concession contracts ranging from 30 to 60 years, and the ports sector is experiencing similar, albeit less expansive, privatization. In response to the dramatic deterioration in the national highway system, the federal government granted concessions for existing highways to private companies, which in turn promise to restore, maintain, and expand these highways in exchange for toll revenues generated. New opportunities are expected to arise with the opening of the Brazilian civil airports to private management and investment through a federal concession model, but the initiative faces obstacles due to questions surrounding sovereignty and opposition from airport unions. The United States and Brazil signed an Air Services Liberalization Agreement in 2008 that increased commercial air travel between the two countries. In 2010, they initialed an air transportation agreement and an air transportation memorandum of understanding that, when they are signed and enter into force, will continue and expand this process.

Like its supply of carbon-based fossil fuels, Brazil’s proven mineral resources are extensive. Large iron and manganese reserves are important sources of industrial raw materials and export earnings. Mining companies, most of them Brazilian, tend to prefer to explore the deposits of nickel, tin, chromite, bauxite, beryllium, copper, lead, tungsten, zinc, gold, and other minerals. High-quality, coking-grade coal required in the steel industry is in short supply.

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Page last modified: 09-01-2019 18:51:49 ZULU