This document provides an overview of Brazil's economy and recent developments. It discusses Brazil's GDP growth averaging over 3% annually from 2003-2009. Inflation has remained low and stable since the Real Plan in the mid-1990s. Brazil has the 7th largest GDP by PPP and experienced a smooth transition to democracy in the 1980s. The current political environment remains stable with President Dilma Rousseff recently elected.
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PR - 2011 - microsoft - brazil-the future is arriving
1. 1
Luiz Nelson Porto Araujo
Redmond, April 18th, 2011
Brazil – The Future is Arriving
Microsoft – Brazil Workshop
2. 2
Brazil and the World Economy
Recent Developments
Perspectives
Business Opportunities
3. 3
Brazil and the World Economy
Recent Developments
Perspectives
Business Opportunities
4. 4Source: Dani Rodrik e Arvind Subramanian (2003): The Primacy of Institutions; Delta analysis
Economic development
Integration
Institutions
Geography
Income
capacity to trade
natural
resources and
institutions
distance from
markets
Health of
population and
agricultural
productivity
demand
for good
institutions
efficiency and
dissemination of
technology
demand
for foreign
goods and
services
openness and transparency
property rights and
rule of law
5. 5
Overview
• 8.5 million km2
• More than 5,500 cities
• 7,500 km coastline
• 84% of households in urban areas
Geography
• 190 million (census 2010)
• Growth rate: 12.3% over 2000
• Life expectancy: 72 years
• Poverty: 11% of population
Population
• Illiteracy rate: 11%
• 80% of households with water
• 90% of households with electricity
• Ranks 73rd (0.699) in UN’s HDI
Education and
living standards
• Labor force: 100 million
• Urban unemployment: 7,0%
Labor
• Public/private investments
• Main gaps: roads, railways, ports, airports
Infrastructure
Source: IBGE, Bacen; Delta analysis
6. 6
Overview (cont.)
GDP growth
(% py)
Inflation rate
(% py)
Gov. surplus
(% GDP)
Interest on
debt (% GDP)
PSBR
(% GDP)
1995/1998 2,5 9,4 -0,2 6,0 6,2
1999/2002 2,1 8,8 3,2 7,3 4,1
2003/2006 3,5 6,4 3,6 7,3 3,7
2007/2009 3,6 4,9 3,0 5,6 2,6
Unemploym.
(%)
Poor
(% of pop)
Gini index Household
income
(R$ of 2009)
Years of
education
1995/1998 7,33 38,24 0,60 528,44 4,4
1999/2002 9,36 38,65 0,59 509,39 5,0
2003/2006 9,16 35,09 0,57 521,41 5,6
2007/2009 7,91 25,79 0,55 617,47 6,0
Source: IBGE, FGV, Bacen; Delta analysis
PSBR – Public Sector Borrowing Requirements is a measure of public setor deficit
Individuals in poverty refer to E class individals, whose total household income corresponds to R$ 705, at most, at 2009 prices, according to PNAD microdata
Gini index is a measure of inequality; upper bound is 1.0
8. 8
Overview (cont.)
GDP PPP Inflation GDP growth Poverty Reserves
US$ billions % % % of pop US$ billions
Argentina 596,0 22,0 7,5 30,0 53,9
Bolivia 48,0 7,2 3,8 30,3 9,7
Brazil 2.194,0 4,9 7,5 26,0 290,4
Chile 260,0 1,7 5,3 11,5 26,1
Colombia 431,9 3,1 4,4 45,5 28,5
Ecuador 115,3 3,3 3,7 33,1 3,6
Mexico 1.560,0 4,1 5,0 18,2 116,4
Paraguay 33,3 7,2 14,5 18,8 4,1
Peru 276,9 1,5 8,7 34,8 44,1
Uruguay 48,4 6,9 8,5 20,9 7,7
Venezuela 344,2 29,8 -2,8 37,9 29,5
data for 2010
PPP – purchasing power parity
Inflation – consumer price
Population below poverty line
Source: United Nations, International Monetary Fund, Economic Commission for Latin America; Delta analysis
9. 9
Economic powers – new and emerging
Source: NASA; Delta analysis
The economics of agglomeration and development
10. 10
Economic powers – new and emerging (cont.)
Area Rank Population Rank GDP PPP Rank
thous km2 millions US$ billions
Russian Federation 17.075,2 1 138,8 9 1.477,0 6
Canada 9.984,7 2 34 37 1.335,0 15
United States 9.826,6 3 313,2 3 14.720,0 1
China 9.597,0 4 1.336,7 1 9.872,0 2
Brazil 8.512,0 5 203,4 5 2.194,0 7
Australia 7.686,9 6 21,8 55 889,6 17
India 3.287,6 7 1.189,2 2 4.046,0 4
Argentina 2.766,9 8 41,8 32 596,0 23
Kasakhstan 2.717,3 9 15,5 64 197,7 53
Sudan 2.505,8 10 45,1 29 98,8 70
population estimated for July 2011
PPP – purchasing power parity
Source: United Nations, International Monetary Fund, Economic Commission for Latin America; Delta analysis
11. 11
Economic powers – new and emerging (cont.)
Source: World Bank, International Monetary Fund, Goldman & Sachs; Delta analysis
• By the year 2050, the E7, the world´s seven emerging
economies – China, India, Russia, Brazil, Indonesia, Mexico and
Turkey – will overtake the economies of the G7 – US, Japan,
Germany, UK, France, Italy and Canada
Size
• This will create exciting business and investment opportunities
across multiple markets, including consumer, agricultural,
industrial, banking and logistics
Opportunities
• In this scenario Latin America still faces significant economic
challenges: i) public governance, ii) social inclusion, iii)
infrastructure and iv) cost of doing business
Challenges
12. 12
World crisis – challenges
Developed economies
• banking crisis
• employment
• confidence
BRICs
• exports
• growth and inflation
• international governance
Brazil and Latin America
• social inclusion
• infrastructure
• public governance
Source: Delta analysis
13. 13
Global trends – risks and opportunities
Source: Monitor(2010): A Vision into the Future; Delta analysis
• The BRICs are receiving
significant attention
• Population aging
Demographics
Megacities
Societal values
Technology and Knowledge
• Each country will present
a unique set of
opportunities and risks
• Growing domestic
incomes, relative political
stability, and open foreign
investment environments
• Political and regulatory
risks will pose ongoing
challenges to foreign firms
14. 14
Demographics – population
Population (millions) Population in 2050 (millions)
1950 1975 2007 Low Medium High
World 2.535 4.076 6.671 7.792 9.191 10.756
More developed regions 814 1.048 1.223 1.065 1.245 1.451
Less developed regions 1.722 3.028 5.448 6.727 7.946 9.306
Least developed countries 200 358 804 1.496 1.742 2.002
Other less developed countries 1.521 2.670 4.644 5.231 6.204 7.304
Africa 224 416 965 1.718 1.998 2.302
Asia 1.411 2.394 4.030 4.444 5.266 6.189
Europe 548 676 731 566 664 777
Latin America and the Caribbean 168 325 572 641 769 914
Northern America 172 243 339 382 445 517
Oceania 13 21 34 42 49 56
% of Latin America and the
Caribbean
6,8 8,0 8,6 8,2 8,4 8,5
Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat (2007). World Population Prospects: The 2006
Revision; Delta analysis
15. 15
Demographics – income distribution
Source: United Nations, UNCTAD; Delta analysis
5%
26% up
to US$
30.000
53% up to US$
6.000
16% up to US$ 1.000
13%
45% up to
US$ 30.000
36% up to US$ 6.000
6% up to US$ 1.000
2007 2030
Population
6.7 billions
Population
8.5 billions
1.8
6.7
3.6
1.0
3.1
0.6
2.8
1.1
upper class
middle class
low income
class
poverty/extreme
poverty
GDP PPP per capita 2007
75 countries that represent 97% of the world´s GDP and 90% of world population
16. 16
• Criation of jobs and opportunites for
local residents
• Atraction and retention of
investments and capitalization of
competitive advantages
• Efficient environmental management
and optimization of growth
opportunities
• Sustainable fiscal management to
attract and retain talents (quality of
life and business)
Source: Delta analysis
Megacities (cont.)
17. 17
Brazil and the World Economy
Recent Developments
Perspectives
Business Opportunities
18. 18
Political environment
Source: Delta analysis
Military regime
1964-1985
• Military coup in
March
• Sucession of
militaries in the
presidency (five)
• No election for
president,
governors, and
mayors (state
capitals)
• Initial transition in
1974 – opposition
wins general
elections
Transition to democracy
1985-1995
• Smooth transition;
different than
Argentina and Chile
• José Sarney elected
president in 1985
• Fernando Collor
elected president in
1990; impeached
in 1992
• Itama Franco (vice-
president) took
office
• General elections –
no conflict
Democracy
1995-present
• Fernando Henrique
Cardoso elected
president in 1994;
reelected in 1998
• Luiz Inácio Lula da
Silva elected in
2002; reelected in
2006
• Dilma Roussef
elected presidente
in 2010
• General elections –
no conflict
19. 19
Political environment (cont.)
Results and inaugural speech
• Dilma Rousseff, from the Labor Party (PT),
was elected president with 56% of valid
votes
• The runoff for several state elections also
took place: in the end, 16 out of 27 elected
state governors are from parties within the
PT's coalition. This adds to an already
favorable picture in Congress, where
support for Dilma is about 70% in both
houses
• Inaugural speech:
• fight inflation
• domestic economy
• social policies to end poverty and
homelessness
Votes in second round
Votes %
Dilma 55.745.867 56,0
Serra 43.707.472 44,0
Dilma Rousseff
José Serra
RR
RO
AM
AC
AP
PA
PI
MA
MT
MS
TO
DF
GO
CE
RN
PB
PE
AL
SE
BA
MG
ES
RJSP
PR
SC
RS
Total electors
135.804.433
Source: Tribunal Superior Eleitoral; Delta analysis
20. 20
Economic environment
High GDP growth and
better income
distribution
Low interest rates
and public debt
Increase in public
and private
investments
Low and stable
inflation
Agenda
Source: Delta analysis
Economic agenda
• Local governments
have tried to
maintain a
credible economic
agenda, with a few
exceptions. The
challenges are
tremendous and
should not be
underestimated
• Sudden shifts in
the current
agenda are not
expected
27. 27
13,1
27,6
5,1 8,1
56,8
42,6
16,3 14,6
8,7 7,1
GDP and population
Inequalities
• South/Southeast account for
73% of GDP and 57% of
populations
• Slow income level
convergence
• South/Southeast
• slower growth of GDP and
population
•North/Northeast/Middle-west
• new frontier
% of GDP
% of population
data for 2010; GDP per capita US$ 10.900
Source: IBGE; Delta analysis
122,6
111,6
133,3
47,5
63,0
Middle-west
South
Southeast
Northeast
North
% of GDP per capita
28. 28
Productive structure
Natural resources
• Iron ore, manganese, bauxite, nickel, uranium, gemstones, oil, wood,
and aluminum
• 14% of world´s renewable fresh water
Agriculture
• 6% of GDP
• Coffee, soybeans, sugarcane, cocoa, rice, livestock, corn, oranges,
cotton, wheat, and tobacco
Industry
• 26% of GDP
• Steel, iron ore, coal, commercial aircraft, chemicals, petroleum,
machinery, motors, vehicles, auto parts, consumer durables, cement,
and lumber
Services
• 68% of GDP
• Mail, telecommunications, banking, transportation, commerce and
computing
Source: IBGE; Delta analysis
30. 30
Productivity
Growth rate of Total Factor Productivity (TFP) TFP relative to
United States
1981-1992 1993-2003 2004-2007 1981-2007 2007
United States 0,8 0,9 1,1 0,9 1,00
Brazil -3,6 -1,9 1,5 -2,1 0,63
Chile 0,4 1,4 1,7 1,0 0,86
South Korea 2,0 0,1 0,8 1,1 0,65
China 3,3 3,3 7,0 3,8 0,52
India 0,1 1,1 3,4 1,0 0,56
Source: Giambiagi and Porto (2011), Penn World Tables, Barro and Lee (2010); Delta analysis
TFP is the portion of output not explained by the amount of inputs
used in production. As such, its level is determined by how
efficiently and intensely the inputs are utilized in production
31. 31
Firms
Source: companies, Economática; Delta analysis
68,1
73,8
23,3
34,6
21,8
8,2
61
77,4
32,3
99,2
56,7
55,7
14,7
27,7
18,4
7,1
51,5
59,5
29,2
96,5
Electric power
Commerce
Construction
Transportation
Auto & parts
Textile
Steel
Chemicals
Food & beverages
Telecom
20,1
32,5
58,6
24,8
18,6
16,1
18,3
30,0
10,5
2,8
19
14
13
11
10
9
9
8
6
6
sample of 168 firms; all had profits; 162 increased their profits
Gross revenues
R$ billions, 2010
EBITDA
R$ billions, 2010
# firms % change
2010-2009
32. 32
Brazil and the World Economy
Recent Developments
Perspectives
Business Opportunities
34. 34
Sustainable development (cont.)
Sustainable development
Economic policy
- inflation targeting
- floating exchange rate
- fiscal control
Social policy
- protection
- focalization
- efficiency
Regional policy
- incentives
- scale and scope
- relocation
• GDP growth and low inflation
• Infrastructure expansion and new development vectors
• Expansion of brazilian firms abroad
• Income distribuition and reduction of poverty
• Change in labor force – higher qualification
Expected results
(2011-2015)
• Good fundamentals
• Growth of production, employment and income
• Improvement in regulatory framework and risk mitigation
• Social inclusion and income transfer programs
Virtuous cycle
Source: Delta analysis
35. 35
Social agenda
The social agenda is
managed by the
federal government,
with initiatives
throughout the
Executive
Education
Social
inclusion
Technology
Employment
Source: federal government; Delta analysis
Fundamentals
• Announced by former president Lula,
in 2007, the objectives of the social
agenda are:
• consolidate Social Policy as a
guaranty to citizen´s rights
• reduce social inequality
• integrate initiatives to promote
opportunities and emancipation of
poor families
• enhance and improve the
integration of inter governmental
agents, and articulate with States
and Cities
36. 36
Competitiveness
Source: World Economic Forum; Delta analysis
0
1
2
3
4
5
6
7
Institutions
Infrastructure
Macroeconomic
environment
Health and primary
education
Higher education
and training
Goods market
efficiency
Labor market
efficiency
Financial market
development
Technological
readiness
Market size
Business
sophistication
Innovation
Brazil
Efficiency-driven economies
Global competitiveness index
2010-2011
1
Transition
1-2
2
3
Factor driven
Efficiency driven
Brazil
Innovation driven
Transition
2-3
Stage of development
Overall rank – 58th
37. 37
Innovation
Source: Delta analysis
Pillars for sustainable development
Priority for investment,
innovation &
competitiveness
Challenges: clean production;
competent labor force;
renewable energies; health;
urban infrastructure; e-gov
Industrial policy as a
permanent State policy
The need to strengthen intra-
State cooperation in industrial,
S&T, infrastructure and
education policies
Public-private interaction
Essential for success
Main challenge is to develop capacity for innovation and
competitiveness in the manufacturing industry, and promote
global presence of Brazilian companies (vs. significant challenge
due to exchange rate appreciation)
38. 38
Brazil and the World Economy
Recent Developments
Perspectives
Business Opportunities
39. 39
Social and economic dynamics
• Demographics
• Savings
• Employment
• Income
• Spending
• Social inclusion
Individuals
• Growth
• Investment
• Cash flow
• Operational costs
• Depreciation
• Taxes
Firms
Houses
Commerce
Leisure
Food
Offices
Health
Education
Infrastructure
Utilities
Urban mobility
Source: Delta analysis
40. 40
Business climate
Vibrant financial markets with a full array of financial products and
services
Openness to Foreign Direct Investment (FDI); Brazil is the largest
recipient of FDI in Latin America and one of the top four in the world
Prudent monetary and fiscal policies, solid macroeconomic position
and controlled inflation
Domestic consumption-led growth
Booming middle class – better educated, more disposable income
and spending
Increasing demand for imports – consumption and investment goods
Source: Delta analysis
41. 41
Business climate (cont.)
Growth and consumption
• Macroeconomic stability
• Growth led by domestic consumption and investiment
• Emerging middle class
Investment
• Gaps in infrastructure
• Higher demand for durable and non-durable goods
• Attraction of foreign investment
Demographics
• Changing structure
• Better educated
• Higher income per capita
Financial markets
• Consolidated
• Social inclusion
Source: Delta analysis
42. 42Source: federal and local governments, companies; Delta analysis
Multiplier effects
• derived demand
• income and employment
• new frontiers
• new markets
• new clusters
• South/Southeast
• focus – scale and scope
• sectors – oil & gas,
education, agribusiness,
energy (including biomass),
construction
• North/Northeast/Middle-west
• Focus – frontier (new
industries)
• sectors – agribusiness,
retail, construction
pré-sal
energy
steel
sugar cane
ports
cattle
soybean
Regional development
SOUTH
MIDDLE-WEST
NORTH
NORTHEAST
SOUTHEAST
railroads
43. 43
Clusters
Context for
firm strategy
and rivalry
Factor
conditions
Demand
conditions
(+) domestic credit
supply
(+) company spending
on R&D
(+) research
institutions
(-) education (math &
science)
(-) logistical
infrastructure
(+) sophisticated
corporate environment
(+) subsidies
(-) weak institutional
environment
(-) labor rigidity
(-) cumbersome and
distortive taxes
(+) large and growing
(-) inequality
(improving)
(-) low purchasing
power and consumer
base (improving)
(+) sophisticated
financial market
(+) availability of latest
technologies
(+) state of cluster
development
Related and
supporting
industries
Source: Delta analysis
44. 44
Growth Acceleration Program 2
city
citizenship
housing
water and
energy
transport
energy
and pre-
sal
Source: federal government; Delta analysis
PAC 2
(2011-2014)
• PAC Cidade Melhor – major cities
challenges
• PAC Comunidade Cidadã – state
presence
• PAC Minha Casa Minha Vida –
housing deficit
• PAC Água e Luz Para Todos –
universalization
• PAC Transportes – expansion and
interconnection
• PAC Energia – renewable energy
and development of pre-sal
Planning
Investment
Development
45. 45
World soccer cup 2014
States Cities
North AM Manaus,
Northeast CE, RN, PE e BA Fortaleza, Natal, Recife and
Salvador
Southeast MG, RJ e SP Belo Horizonte, Rio de Janeiro
and São Paulo
South PR e RS Curitiba and Porto Alegre
Middle-west MT Brasília and Cuiabá
Potential market – main drivers
• North: infrastructure (transport/energy),
housing
• Northeast: infrastructure
(transport/energy/telecom), industrial
location, housing
• Southeast: infrastructure
(transport/telecom), housing
• South: housing
• Middle-west: infrastructure
(transport/energy/telecom), housing
NORTHEASAT
SOUTHEASAT
MIDDLE-WEST
SOUTH
NORTH
Source: Delta analysis
47. 47
• Founded in 2000, Delta is a firm with a very large experience and knowledge in economics and finance
• Delta offers sophisticated solutions in economics and finance for the infrastructure, services and industry
sectors. The difference in these solutions is the usage of theory/practice and analytics
• Delta provides consulting services in Local Develpment & Logistics, Strategy & Operations, Corporate Finance,
and Economic Regulation
Corporate Finance Economic Regulation
Local Development & Logistics Strategy & Operations
48. 48
são paulo sp
fone +55 11 2667.3754
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