Economy and Trade
After three centuries under Portuguese rule, Brazil made a peaceful transition to independence in 1822. By far the largest and most populous country in South America, Brazil has vast natural resources and continues to push for industrial and agricultural growth. It is the leading economic power in South America. The economy is characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, and Brazil continues to expand its presence actively in world markets. Since 2004, Brazil’s growth has yielded year-on-year increases in employment and real wages, although highly unequal income distribution is still a major problem. The economy enjoyed commodity-driven current account surpluses combined with sound macroeconomic policies that bolstered international reserves to historically high levels. The government reduced public debt year-on-year from 2004, and allowed a significant decline in real interest rates, which nevertheless remained high by world standards.
Economic Policy over 12 Months
Brazil has weathered the global economic downturn better than many more advanced economies. According to the International Monetary Fund (IMF), this is mainly because the country was well placed before the financial crisis began. In a July 2009 report, the IMF praised the authorities for building a strong macroeconomic framework over the previous decade, a development that had served to increase the country’s resilience to the global economic crisis.
In particular, the IMF noted the government’s sustained fiscal discipline and said that the implementation of an inflation-targeting regime had reduced fiscal and external vulnerabilities, while a flexible exchange rate regime had played a key role, allowing the economy to adjust quickly to external shocks. The IMF added that public debt had been lowered in relation to GDP, and substantial international reserves had been accumulated. All these factors significantly improved the country’s ability to cope with external shocks, a fact reflected in the decision of the ratings agencies to upgrade Brazil’s debt to investment grade early in 2008. In March 2010, the ratings agency Standard and Poor’s said that Brazil’s sovereign debt ratings were “well anchored” and possible upgrades would have to be based on stable economic growth rates. The ratings agency said that it saw no specific factors triggering an immediate change in Brazil’s ratings outlook or an upgrade.
Economic stimulus measures caused the primary budget surplus to fall to an eight-year low of 2% of GDP in 2009, down from 4.1% in 2008, but the government pledged a primary budget surplus in 2010 of 3.3% of GDP, and in April 2010 froze R$21.8 billion (US$12.22 billion) of spending from its budget. In 2010, there were signs that the public finances were improving. The central bank reported that the monthly public sector primary budget surplus rose sharply in January to R$16.19 billion (US$8.8 billion), from R$276 million in December, and up from R$7.36 billion in January 2009. The central bank also reported that net public sector debt fell in January to R$1.32 trillion, or 41.7% of GDP, from R$1.35 trillion, or 42.9% of GDP, in December.
Monetary policy was eased substantially following the onset of the global economic downturn. Inflation began to trend downwards from July 2008, giving the central bank scope to cut interest rates. These fell to a record low of 8.75% in July 2009, where they stayed throughout the remainder of 2009 and the first quarter of 2010. With inflation rising in 2010, interest rates are expected to increase significantly from the second quarter of 2010 onwards.
Economic Performance over 12 Months
Initially, the economy was sharply affected by the global crisis, with GDP shrinking by 4.5% in the two quarters to March 2009. The global downturn affected Brazil through a sudden curtailment in external credit, as well as a decline in commodity prices and export demand, according to the IMF, which added that the disruption in global financial markets also led to a liquidity squeeze for Brazilian corporates and financial firms. Access to credit became limited, especially for small and medium-sized firms. The weakening of external conditions also led to pressures on the currency, which depreciated by about 23% against the US dollar between mid-September and end-December 2008.
However, the high credibility of Brazil’s economic policies allowed the authorities to adopt countercyclical measures, and there were signs that the economy had begun to improve in the second quarter of 2009, supported by private consumption and a healthy financial system. Overall, the economy shrank by just 0.2% during 2009, but Brazil became among the first countries to come out of the global financial crisis in 2009, and is expected to grow by 5.45% in 2010, according to a weekly central bank survey published in April. Fueled by tax cuts, record low interest rates, and a boost in lending by public banks, domestic demand helped lift Brazil out of recession. The economy continued growing throughout the rest of 2009, reaching the fastest growth in two years in the last quarter of the year.
The strength of the jobs market in 2010 has underlined the robustness of the economic rebound. Brazil’s economy added a record number of jobs for the month of February. The Labor Ministry said that it registered 209,425 jobs in February, compared with 181,419 registered jobs created in January. The Labor Minister Carlos Lupi said that Brazil would generate more than 2 million jobs in 2010. The unemployment rate rose to 7.2% in January 2010, after equaling a 6.8% record low in December 2009.
Consumer prices are expected to rise 5.1% in 2010, according to a weekly central bank survey of leading financial institutions published in April—above the official 4.5% inflation target—plus or minus 2 percentage points. Inflation amounted to 4.3% in 2009.
Brazilian financial institutions, which were not exposed to impaired assets abroad, have built strong capital buffers in recent years, albeit at levels varying across institutions. Bank liquidity ratios have recovered after some dipping in the fourth quarter of 2008, according to the IMF.
Support for Inward Investment and Imports
Investe Brazil is a publicly and privately run agency whose mission is to attract investment into the country. It is assisted by Brazil Trade Net, a Foreign Affairs Ministry agency which is responsible for promoting Brazil to potential investors. The Brazilian Ministry of Labor and Employment is also charged with facilitating matters for foreign investors.
Tax Exemptions
The basic rate of tax on corporate profits is 15%, with an additional surtax of 10% on all profits in excess of US$80,000 per year (2003). There is also a “social contribution” of a further 9%.
Statistics
GDP growth: 0.2% (official, 2009)
GDP per capita: US$10,200 (2009 est.)
CPI: 4.3% (official, 2009)
Key interest rate: 8.75% central bank (2009 est.)
Exchange rate versus US dollar: R$2.0322 (2009)*
Unemployment: 6.8% (official, 2009)
FDI: US$318.5 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$11.28 billion (2009 est.)
Population: 201,103,330 (July 2010 est)
* Brazilian real
Source: CIA World Factbook except where stated
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