Brazil country analysis report

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macro-economic report on BRAZIL

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Brazil country analysis report

  1. 1. COUNTRY ANALYSIS REPORT BRAZIL SUBMITTED TO: SUBMITTED BY: Prof. Swaha Shome PRACHI BAJPAI -13BSP0546 ANURAG UJAWANE -13BSP0130 KUNAL JAJU -13BSP0366 LOKENDRA SINGH CHAUHAN -13BSP0375
  2. 2. Acknowledgement We express our gratitude towards our helpful guide and Professor Ms. SWAHA SHOME for guiding us throughout the project. We are grateful for her teachings in this vast subject of Economics, which is an integral part of management studies according to present scenario proved to be of great help. This project in itself helped us to make use of the class lectures thus landing us all with wider understanding of the concepts.
  3. 3.  INTRODUCTION  BACKGROUND  INFLATIONARY CONDITIONS OF BRAZIL.  GROWTH RATE OF BAZIL  BRAZIL CURRENT ACCOUNT  EXCHANGE RATES OF BLR  EVALUATING THE BASIC REQUIREMENTS  MACROECONOMIC OVERVIEW  MACROECONOMIC STABILITY  CURRENCY MARKET  FINANCIAL MARKETS  STOCK MARKETS  CONCLUSION
  4. 4. INTRODUCTION Displaying an impressive GDP of 2.253 trillion USD and with a population of 198.7 million in 2012, Brazil is the 10th largest economy and the 5th most populous country in the world, as well as the largest market in Latin America and the Caribbean. The presence of rich natural resources and a fairly sophisticated industrial base provides the country with competitive advantages. These factors have also made Brazil the leading foreign direct Investment (FDI) recipient in Latin America, with a US$ 76 billion inflow in 2009-2013. Series Name GDP (real annual growth) Unit % 2007 6.069 2008 5.166 Per capita GDP GDP USD Billion USD % of GDP % of GDP Million % 10,060.00 1,366.39 USD billion Private consumption Public consumption Population Registered unemployment Foreign direct investments 2009 - 0.652 2010 7.515 2011 2,7 10,700.00 1,652.60 10,620.00 1,594.50 11,420.00 2,087.90 11,755 2,144.27 59.897 58.935 61.74 60.574 59.124 20.255 20.189 21.808 21.171 20.676 184.5 9.262 186.5 7.892 188.6 8.083 190.756 6.742 194.7 6.00 34.585 45.058 25.948 78.6 101.7 The achievements and uniqueness of Brazil can be summarized in the table below –
  5. 5. The above remarkable achievements and competitive strengths are not fully reflected to date in Brazil’s performance in terms of economic growth rates, enhanced competitiveness, and better living conditions for its citizens. Indeed, the country has registered average annual growth rates of 0.9 percent for the 2009-2013. Largest 10 economies of world in 2050. Brazil’s evolution in the Global Competitiveness Index (GCI) rankings over the 2005–08 periods has been fairly erratic, with the country placing in middling positions year after year (64th out of 134 countries in the latest computation in 2008–2009). Last but not least, Brazil’s income distribution remains among the most unequal in the world, pointing to the fact that the country’s immense potential has not yet translated into increased prosperity for all Brazilians. For all its negatives, Brazil is the first Latin American country to emerge from recession— and one of the earliest among the G-20 countries to have done so —following a 1.9% quarter-on-quarter expansion in economic activity in the April-to-June period’2009. Whereas the global environment remains difficult and the export sector therefore continues to struggle, the strength of domestic demand has propelled the economy to the start of a recovery. Brazil as a nation has its own strengths & weaknesses. The weaknesses in certain areas are so grave that if not corrected soon, the country couldn’t possiblysustain itself in the globalised world
  6. 6. BACKGROUND Brazil is the world’s seventh-largest economy, and its population of almost 200 million is heavily concentrated on the Atlantic coast. President Dilma Rousseff, former President Luiz Inacio ―Lula‖ da Silva’s hand-picked successor, became Brazil’s first female president in 2011 and until mid-2013 enjoyed a high popularity rating. Increases in public transportation fares in 2013 provided an excuse for hard-left militants to vandalize property and block roads, but the events also heightened popular grievances against the corrupt political system and slowing economic growth. Brazil has benefited from surging prices for commodity exports. The middle class is growing, and millions have been lifted out of poverty, but heavy government intervention in the economy continues to cause the misallocation of capital, limit mobility, and fuel a sense of injustice. Ensuring security and adequate infrastructure for the 2014 World Cup and 2016 Rio Olympic games will challenge the government’s administrative capacity. INFLATIONARY CONDITIONS OF BRAZIL. The inflation rate in Brazil was recorded at 5.91 percent in December of 2013. Inflation Rate in Brazil is reported by the Instituto Brasileiro de Geografia e Estatística (IBGE). Inflation Rate in Brazil averaged 400.54 Percent from 1980 until 2013, reaching an all-time high of 6821.31 Percent in April of 1990 and a record low of 1.65 Percent in December of 1998. In Brazil, the main components of the consumer price index are: food, alcohol and tobacco (31 percent of the total weight), transport (15 percent), real estate (12 percent), health care (11 percent), clothing (9 percent), communication (5 percent) and education (4 percent). The national index is calculated as the weighted average of the regional indexes. The largest contributors to the national index are: Sao Paulo (32 percent of total weight), Rio de Janeiro (12.5 percent), Belo Horizonte (11 percent), Porto Alegre (8.4 percent) and Curitiba (7.8 percent). In December of 2013, Brazilian annual inflation rate rose 5.91 percent, up from 5.77 percent in November and 5.84 percent a year earlier. While food prices slowed, transport and health prices accelerated the most on the year. Food prices recorded the highest annual increase (8.48 percent), followed by cost of personal expenses such as tobacco, hotels, hairdresser (8.39 percent) and education (7.94 percent). Transport cost accelerated to 3.29 percent, up from 0.48 percent a year earlier and health prices rose 1 percentage point to 6.95 percent. On a monthly basis, the inflation rate accelerated to 0.92 percent, the highest rate in more than 10 years. Food prices rose 0.89 percent (0.56 percent in November) and transport cost increased 1.85 percent (0.36 percent in the previous month). Among regions, Fortaleza, Rio de Janeiro, São Paulo, Brasília and Recife recorded higher
  7. 7. annual inflation rates, while Porto Alegre, Goiania, Belo Horizonte, Belem, Curitiba and Salvador recorded rates of inflation lower than 5.92 percent. GROWTH RATE OF BAZIL The Gross Domestic Product (GDP) in Brazil contracted 0.50 percent in the third quarter of 2013 over the previous quarter. GDP Growth Rate in Brazil is reported by the Instituto Brasileiro de Geografia e Estatística (IBGE). GDP Growth Rate in Brazil averaged 0.74 Percent from 1996 until 2013, reaching an all-time high of 4.50 Percent in the third quarter of 1996 and a record low of -4.20 Percent in the fourth quarter of 2008. Brazil is the seventh largest economy in the world and the largest in Latin America. In recent years, the country has been one of the fastest-growing economies in the world primarily due to its export potential. The country’s trade is driven by its extensive natural resources and diverse agricultural and manufacturing production. Also, rising domestic demand, increasingly skilled workforce along with scientific and technological development, have attracted foreign direct investment. However, bureaucracy, corruption and weak infrastructure remain the biggest obstacles to economic development. In the third quarter of 2013, Brazil’s GDP contracted a seasonally adjusted 0.5 percent quarter-on-quarter, first decline in two years. An increase in government and household spending was not enough to offset a drop in exports and investment. On the production side, agriculture recorded the highest drop (-3.5 percent qoq), followed by the manufacturing sector (-0.4 percent qoq) and construction (-0.3 percent qoq). In contrast, mining advanced 2.9 percent and production of water, gas and electricity rose 0.9 percent. The services sector advanced a meager 0.1 percent qoq, hurt by a contraction in finance and insurance and real estate activities (-0.2 percent qoq, respectively). The retail sector showed no growth over the previous quarter.
  8. 8. On the expenditure side, only household and government consumption accelerated in the third quarter (1 percent and 1.2 percent respectively, from 0.3 percent and 0.5 percent respectively in the previous three-month period). In contrast, gross fixed capital formation recorded the largest drop (-2.2 percent), followed by exports (-1.4 percent) and imports (-0.1 percent). Year-on-year, the GDP expanded a weaker-than-expected 2.2 percent. BRAZIL CURRENT ACCOUNT Brazil recorded a Current Account deficit of 8677.60 USD Million in December of 2013. Current Account in Brazil is reported by the Banco Central do Brasil. Current Account in Brazil averaged -1194.93 USD Million from 1980 until 2013, reaching an all time high of 3068.40 USD Million in July of 2006 and a record low of -11371.20 USD Million in January of 2013. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). CURRENT ACCOUNTS - Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. And a current account surplus is usually associated with trade surplus. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contribute to a current account surplus as the value interest or dividends generated abroad is bigger than the value of interest or dividends generated from foreign capital in the country. Net transfer payments are very important part of the current account in poor and developing countries as workers' remittances, donations, aids and grants and official assistance may balance high trade deficits.
  9. 9. EXCHANGE RATES OF BLR The currency abbreviation symbol for the Brazilian real (BRL), the currency for Brazil. The Brazilian real is made up of 100 centavos and is often presented with the symbol R$. The Brazilian real (plural reais) is regulated by the Central Bank of Brazil's (BCB) Monetary Policy Committee (COPOM). The Brazilian real was first adopted as the official currency in July 1994, replacing the Cruzeiro real at a rate of 1 real to 2750 cruzeiro real. This change was in accordance with the Plano Real ("Real Plan"). In 1994, the real was anchored to the U.S. dollar. This lasted until 1999, when inflationary pressures forced the real to partially float against the dollar.
  10. 10. The statistic shows Brazil's budget balance in relation to GDP between 2003 and 2013. A positive value indicates a budget surplus, a negative value indicates a trade deficit. In 2012, Brazil's trade deficit amounted to around 2.1 percent of GDP. Brazil recorded a Government Budget surplus equal to 1.80 percent of the country's Gross Domestic Product in 2012. Government Budget in Brazil is reported by the Banco Central do Brazil. Government Budget in Brazil averaged 2.03 Percent of GDP from 1998 until 2012, reaching an all-time high of 2.80 Percent of GDP in 2008 and a record low of 0.80 Percent of GDP in 1998. 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.
  11. 11. Current exchange rate of BRAZALIAN REAL with other currencies of world. BRAZALIAN REAL 1 US DOLLAR 0.42 INDIAN RUPEE 26.14 CHINESE YUAN 2.52 EURO 0.30 AUSTRALIAN DOLLAR 0.48 JAPANESE YEN 42.67 EGYPTIAN POUND 2.90
  12. 12. EVALUATING THE BASIC REQUIREMENTS HEALHCARE & EDUCATION A healthy and literate work force is a basic requirement for national productivity and competitiveness. Workers who are ill tend to be less productive, adding significant costs to businesses. At the same time, basic education increases workers’ efficiency and enables them to get training for, and adapt to, more advanced production processes and techniques. Historical evidence supports the key role of basic education and health as a key enabler of competitiveness. Also many studies highlight the importance of the quality of basic education, on top of enrolment rates. HEALTHCARE In Brazil there exists a two-tiered system of healthcare. Those with sufficient means, or whose employers provide health coverage, have access to a private system of healthcare that provides quality treatment on demand. The rest of the population relies on a system of public clinics and hospitals called the SUS (Sistema Único de Saúde). The Brazilian Government’s healthcare reforms of the nineties and its long-term commitment to improve the healthcare situation in the country, has benefited the country and the healthcare industry. In recent decades the country has experienced significant shifts in its socio-demographic profile which can be summarized as follows: • Urbanization and metropolization • Significant increase in life expectancy (66 in 1991 to 72 years in 2004), and decrease in infant mortality rate. • Aging population (by 2010, 9.7% of the population will be over the age of 60 years).
  13. 13. EDUCATION: The 1988 Brazilian Constitution states that "education" is "a right for all, a duty of the State and of the family, and is to be promoted with the collaboration of society, with the objective of fully developing integral development of the human personality and his/her participation in the work towards common welfare. Education in Brazil is regulated by the Federal Government, through the Ministry of Education, which defines the guiding principles for the organization of educational programs.Local governments are responsible for establishing state and educational programs following the guidelines and using the funding supplied by the Federal Government. Brazilian children must attend school a minimum of 9 years. Structure of education The medium of instruction is Portuguese. In Brazil education system is structured into 4 categories:1. Pre-School Education: It is for age below 6 years. The main aim is to develop cognitive and social skills. 2. Fundamental Education: It is for age between 6 to 14 years. The main aim is to increase the literacy. 3. Secondary Education: Minimum duration is of 3years.It aims to Increase the level of competence and skills. 4. Higher Education: They are 4 year courses. It is specialization in specific courses. MACROECONOMIC OVERVIEW • • Literacy (Total Population): Primary Enrollment: • Public expenditure per student as % of GDP per capita Primary school, 2004 Secondary school, 2004 88.6 % 94.4 % 12.8 % 11.5 % Although Brazil has achieved almost universal net primary enrollment (94.4 percent), the quality of primary education seems to be an area in particular need of improvement. A quality higher education and training system is an essential precondition for a well-
  14. 14. functioning economy, since it provides the national production system with an adequate pool of qualified human resources able to adapt to the changing needs of the latter. This is especially the case for economies such as Brazil, which increasingly derive their competitiveness from more advanced production processes requiring well-qualified and trained workers. Unfortunately, Brazil has been somewhat late in providing access to basic education for all school-age children. In the 1960s, access to schooling for Brazilian children was similar to most countries in Asia; by 1990, the country had still a long way to go. It was only in 1997 that the target of putting every child in school was established. As a result, 10 percent of Brazil’s adults are considered illiterate and 74 percent are functionally illiterate (they are able to write their names but unable to read a book)—a total of 84 percent of the adult population of the country is at a serious disadvantage. Moreover, only 65 percent of enrolled children finish primary school, and only 42 percent of enrolled children finish secondary school. The mean years of schooling of the adult population is 7.4; it is important to note that one additional year of schooling in the country has the power to improve workers’ income by around 10 percent. There is visible growth in this area over previous years, but the speed of the change is low. Unfortunately, there is still a long way to go. Brazil has performed poorly in the OECD’s programme for International Student Assessment (PISA) test given every three years to 15-year-old students in 57 countries to assess their scholastic capabilities in reading as well as their mathematic and scientific literacy. Brazil has participated since 2000 and has consistently been among the worst performers in all three tests given since then. As a large middle-income country, Brazil still has several underdeveloped regions. Its educational system is accordingly plagued by many deficiencies and racial and regional disparities The nation invests 4.3% of GDP on Education - the federal government aims to increase gradually this number to 7% in the years to come.
  15. 15. MACROECONOMIC STABILITY CURRENCY REGULATION Since 1994, the Brazilian currency has been the Real (plural: Reais), symbol is R$. Because of the very high inflation rates which Brazil had in the 1980s and early 1990s, the country had to change currency several times: Brazilians were used to dealing with Cruzeiros until 1986; that year, an economic plan cut three zeros from the bills and changed the currency to Cruzado; a few years later, another three zeros were dropped, and Brazilians were introduced to the Cruzados Novos ("new cruzados"). In 1990, the Cruzados Novos were retired, and the Cruzeiros were back; in 1993, the Cruzeiros lost another three zeros and were turned into Cruzeiros Reais. In 1994, after the deployment of a new monetary plan, the new currency, called Real, came to life. Since 1994, inflation has been maintained at civilized levels (2003, consumer prices rose by about 8%; in 2005, the inflation target is around 6%), and the Brazilian citizens had the chance, for the first time in a long period, to get accustomed to a stable currency. There are bills of R$1, R$2, R$5, R$10, R$20, R$50 and R$100. Coins exist in values of 1 cent (R$0.01), 5 cents, 10 cents, 25 cents, 50 cents and 1 Real. Coins vary in size and color. CURRENCY MARKET Differently from most countries, Brazilians are not used to seeing foreigner currency bills; even the American dollar and the euro have limited course; traveller checks are also restricted (usually, foreigners must exchange the currency before paying their bills, in Reais). Brazilians have no authorization to have bank accounts in dollar; Brazilian firms (including hotels) must provide invoices and receipts in Reais. Currency exchange businesses exist in all major cities. "Casas de Cambio" are establishments that deal only with currencies; a few branches of a few banks also trade currencies, but not at an advantageous rate to the customer. Brazilian banks have developed an efficient Information Technology infrastructure; holders of major credit cards can use Brazilian ATMs to access their accounts and withdraw cash
  16. 16. (other transactions are limited). • 1 Brazil real = 0.42U.S. dollars. • Official reserve assets $ 221,628.70 • Foreign currency reserves (in convertible foreign currencies) $211,366.28. • The currency suffered a gradual depreciation until late 2002,as many Brazilians fearing another default or a resumption of heterodox economic policies purchased tangible assets as an inflation hedge or just simply took their money out of the country. At its worst point in October 2002, the Real actually reached its historic low of almost R$4 per US$1. • Through orthodox macroeconomic policies (including inflation-targeting, primary fiscal surplus and floating exchange rate, as well as continued payments of the public debt) the real has been getting stronger and stronger against the dollar and, since the beginning of 2005, most other world currencies as well. In the year of 2007, in spite of the various attempts of the Brazilian Banco Central (Central Bank) to keep real low, it has grown stronger against the dollar. In May 2007, the real became worth more than 50 U.S. cents for the first time in recent years FINANCIAL MARKETS Efficient financial system is an important feature of any competitive economy—more so for countries at higher stages of development. Cross-country analyses tend to find that financial depth predicts future economic growth, physical capital accumulation, and improvements in economic efficiency, even after controlling for initial income levels, education, and a variety of policy indicators. Some studies even suggest that developing deep and efficient financial systems is not only correlated with a healthy economy, but can also reduce poverty and income inequality. Development of the financial system contributes to economic growth by reducing the costs of acquiring and processing information, helping investors diversify risks, and reducing monitoring costs. As a consequence, it improves resource allocation.
  17. 17. STOCK MARKETS Corporate financing through the stock market has enjoyed substantial growth over the past several years, thanks notably to efforts to encourage a culture of equity financing through regulatory changes, including measures to protect the interests of minority shareholders. The Novo Mercado is a prime example. Brazil’s main stock exchange, Bovespa, is the largest in Latin America for its market capitalization, which has grown significantly as a percentage of GDP
  18. 18. CONCLUSION Brazil economy is recovering gradually from the slowdown that begun in mid-2011. Its growth has been mainly supported by consumption, with some rebalancing towards investments more recently. Supply side constraints have restrained near term growth and exacerbated inflationary pressures. The external CAD has widened. Net capital inflows, particularly portfolio flows, subsided through 2012, a tendency that has been exacerbated by the recent volatility in global financial markets.Financial conditions have tightened but credit growth remains relatively strong, driven by public bank lending. After a prolonged period of policy easing, the authorities have started to focus on alleviating supply-side constraints and containing inflation. Talking further with outlooks and risks involved we found out:  The gradual recovery that started in 2012 is expected to continue through 2013, supported by a sustained pick-up in investment  Inflation is expected to fall gradually towards the mid-point of the target range.  The external current account deficit is projected to increase further through 2015,  Partly as a result of the recovery of investment.  Brazil’s medium-term challenges are to bolster growth through higher productivity   and investment, while mobilizing domestic saving to keep the external current deficit at moderate levels. The authorities anticipate a continuation of the economic recovery and a sustainedpick-up in private investment. The authorities indicated that they would tighten macro policies, including fiscalpolicy if the recovery proceeds as anticipated.

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