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
A floating exchange rate, an inflation-targeting regime, and a tight fiscal policy are the three pillars of Brazil’s economic program. From 2003 to 2007, Brazil ran record trade surpluses and recorded its first current account surpluses since 1992. Brazil improved its debt profile in 2006 by shifting its debt burden toward real-denominated (the national currency) and domestically held instruments. In its July 2008 report on Brazil, the IMF praised the country for achieving years of strong growth combined with low inflation and sound macroeconomic policies. The government’s achievements in lowering the public net debt-to-GDP ratios and moving significant amounts of public debt to longer maturity notes was singled out, as was the fact that the country has built up a comfortable cushion of international reserves. All these factors have 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.
The country’s president, Luiz Inacio “Lula” Da Silva, restated his commitment to fiscal responsibility by maintaining the country’s primary surplus during the 2006 election. Following his second inauguration in October of that year, Da Silva announced a package of further economic reforms to reduce taxes and increase investment in infrastructure.
By 2008, the government’s attempt to achieve strong growth while reducing the debt burden had created inflationary pressures. For most of 2008, the Central Bank embarked on a restrictive monetary policy to stem these pressures. Where the Central Bank had reduced interest rates by 850 basis points in the two-year period ending in October 2007, it raised the policy interest rate by 50 basis points in April and June 2008, and by a further 75 basis points in July, to a total interest rate of 13%. The idea was to contain any inflationary momentum and to anchor inflation expectations. At the same time, the onset of the global financial crisis in September 2008, combined with a collapse in the commodity price bubble and rapidly falling orders for commodities from Brazil’s major trading partners rapidly had an impact on Brazil’s currency and its stock market, Bovespa. The stock market had lost 41% of its value by the end of December 2008 and the country’s current account ran up a deficit of more than US$27 billion, the first deficit since 2002. The Brazilian government has said that it will be monitoring both domestic demand for foreign goods (a major driver of inflation) and the impact of the global slowdown carefully, with a view to maintaining macroeconomic stability.
Economic Performance over 12 Months
According to the Brazilian embassy in London, Brazil’s GDP growth for 2008 is likely to be 6.3%, despite zero or near-zero growth for the final quarter of 2008. Brazil attracted record foreign direct investment in 2006 and 2007, with net capital inflows reaching nearly 7% of GDP in 2007, according to the IMF. FDI flows accounted for US$35 billion of this, or 3% of GDP. Brazil trades regularly with more than 100 nations, with 74% of exports represented by manufactured or semi-manufactured goods. Its main partners are the EEC (26%), the United States (24%), Mercosur and Latin America (21%) and Asia (12%).
The country’s agrobusiness sector plays a vital role in its export performance, and for two decades has kept Brazil among the most highly productive countries as far as agricultural production is concerned. Main products include coffee, soybeans, wheat, rice, corn, cocoa, and sugar cane as well as beef. Some 15% of the country’s workforce is employed in agriculture, a sector that accounts for 3.5% of total GDP.
Brazil’s primary budget surplus narrowed sharply in January 2009, according to Reuters, due to a sharp rise in spending and decreases in tax revenues for the third consecutive month, on the back of slowing industrial production. The primary budget fell to US$1.87 billion, or BRL4.25 billion, from a figure that was almost four times larger (BRL15.36 billion) during the same month in 2008. The primary budget surplus includes spending by the Treasury, the Brazilian central bank and the social security system, but excludes interest payments on debt, and transfers to state and local governments. Reuters points out that the primary budget surplus feeds into the consolidated public-sector primary surplus, which is very closely watched by analysts who see it as a measure of Brazil’s ability to pay its debts.
The global slowdown had a major impact on tax revenues, which fell by 7.26%, after adjustments for inflation, to US$25.7 billion, by comparison with 2007 tax revenues. In January 2009, corporate income tax fell by 17.5% on the 2008 figure. The government introduced tax breaks on new car sales during the second half of 2008 in order to boost demand in the economy. The Brazilian Central Bank argued, in its most recent half yearly Financial Stability Report (May 2008), that Brazil had performed better than many other emerging market economies during the global slowdown. Unlike the credit bubble in economies in the developed nations, credit growth in Brazil had not reached the point where it constituted any threat to the solidity of the country’s financial system, the bank said. It noted, however, that the downturn had sharply increased volatility in share prices on the country’s stock markets.
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: 5.2% (2008)
GDP per capita: US$10,300
CPI: 5.8%
Key interest rate: 43.72%
Exchange rate versus dollar: real per US dollar—1.8644 (2008)
Unemployment: 8% (2008)
FDI: US$280.9 billion
Current account deficit/surplus: −US$27.33 billion
Population: 196,342,592
Source: CIA World Factbook except where stated
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