Trade Guide: Brazil

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Brazil (official name: the Federative Republic of Brazil) is the fifth largest country in the world, both in terms of population and geographic area. It is the seventh largest economy in the world, the largest country and economy in South America.

Economic Overview

The Brazilian economy is large and diversified, featuring well-developed agricultural, mining, manufacturing, and service sectors, supported by demand from an impressive domestic market of roughly 192 million.  By 2020, Brazil is projected to have the fifth largest consumer market in the world, ahead of France and the United Kingdom.

Over the past decade or so, Brazil has been one of the great success stories among emerging markets.   During this time, Brazil has enjoyed strong growth rates of 5% or higher, reaching a peak of 7.5% in 2010 – the highest level in 25 years.   Brazil’s macroeconomic stability began steadily improving in the early 2000s, and by 2008 the country was awarded investment grade status by two rating agencies.

The country’s steep decade-long ascent pulled an estimated 40 million Brazilian out of poverty.  At the same time, unemployment levels were low, and wages were rising, helping to stoke consumer confidence, and allowing domestic consumption to become a major driver of the economy.   

In recent decades, Brazil has embarked on a policy of privatizing state-owned enterprises --  the largest coming in 1998 with the privatization of the state-owned telecommunications companies.  State and semi-state participation in strategic sectors such as transport and utilities continues to varying degrees, however.

Growth in Brazil slowed sharply in 2011, dropping to 2.7%, and falling further to 0.9% in 2012.  A variety of factors contributed t the slow down, including a slowdown in exports to Asia and Europe, and dampened consumption which weakened the competitiveness of the manufacturing sector. Limited gains in productivity during the high growth years also served to undermine competitiveness, as did the cumulative effect of years of over consumption and under investment. 

One of the primary engines of Brazil’s growth has been the world-wide boom in commodity prices, driven by strong demand for raw materials from China and other large emerging markets. With China now entering a new and more moderate-growth chapter in its economic evolution, demand for raw materials has also dropped, and the boom in world commodity prices has begun to wane.   Cooling Chinese demand and lower prices for Brazilian commodity exports, especially of soy and iron ore, have hit local producers and exporters hard.

Strains in the Brazilian infrastructure have also become more pronounced, and business confidence was weakened by government interventions into the economy which were seen as clumsy and ineffective.  Traditionally high interest rates have encouraged large capital inflows in recent years which have pushed up the value of the Brazil’s currency and further dampened export competitiveness. 

 By the end of 2013 however there were some signs however that Brazil could be beginning to bounce back.  Fourth Quarter growth for 2013 turned out to be more than double (0.7%) the expected rate, while investment jumped by 6.3%.  

Key economic challenges moving forward include successfully managing hot money inflows to prevent an export-dampening appreciation of the currency, and finally beginning to upgrade infrastructure.

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