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Business Intelligence, Security and Risk

Business Intelligence, Security and Risk Management

This is the Executive Summary from a recent extensive report into the Political, Economic, Social, Technological, Environmental, Legal, Operational and Security aspects of modern day Brazil. An index of the full report and contact details to allow clients to obtain a copy are given at the bottom of this page.

EXECUTIVE SUMMARY

Brazil offers significant opportunities to foreign investment and trade. Brazil has the sixth largest economy by nominal GDP in the world, and seventh largest by purchasing power parity. The economy is larger than all other South American nations combined, and is the second largest in the western hemisphere. Brazil has been one of the fastest-growing major economies in the world, manifesting an average annual GDP growth rate of over 5 percent. With a population approaching the 200 million mark (or having exceeded it), and abundant natural resources, it offers one of the ten largest markets in the world.  Brazil hosts the fourth largest company in the world by market valuation (Petrobras) and has a flourishing and diverse industrial base.  Energy self-sufficiency was achieved in 2006-07, and the country is set to become a major hydrocarbon exporter. Brazil has vast hydro-electric capacity, growing wind and solar generation, mature ethanol production, and newfound oil discoveries, the offshore, so-called ‘pre-salt’ fields. Brazil is the world’s biggest producer of iron ore; it is the largest exporter of beef, sugar, coffee, and orange juice; and the largest exporter of soybeans. [1] Brazil will overtake the UK by nominal GDP within the next decade, and may have already done so. [2]

Key Issues to Watch

Brazil hosts the World Cup in 2014.  Following the recent wave of mass civil protests – the largest in over 20 years affecting 100 towns and cities – it is likely that activists or other disaffected groups may seek to publicize their causes with more protests or acts of civil disruption.

Although it is unlikely that any stadiums will remain unfinished before the start of the World Cup, it is likely that a number of infrastructure projects will fail to meet the deadline, putting the government under pressure.  The cost of the stadiums alone (BRL 8 billion) has raised public concern.

2014 is also election year with the presidency and a proportion of the legislative seats in Congress and the Chamber of Deputies at stake.  To date, President Dilma Rousseff has managed to hold together the unwieldy ruling alliance of parties.  As the election date approaches it is likely that relations within the alliance will become more fractious, and some parties may quit opportunistically to weaken the ruling Workers’ Party (PT). The legislative program is likely to stall and there will be few opportunities for major reforms. Government bureaucracy, already judged cumbersome, is likely to slow, in anticipation of a new government.

As inflation remains stubbornly above the target of 4.5 per cent, attention will fall on the Selic rate (benchmark interest rate).  It is likely that the independent Central Bank will be forced to raise the Selic which has been bumped 175 basis points in 2013 alone (from 7.25 per cent to 9 per cent). While bearing down on inflation, an increase in the Selic rate may have the negative effect of adding volatility to the Brazilian real, which has recently experienced a 17 per cent swing in a 3 month period, the highest of any major currency. [3]

In 2012, Brazil received a record USD 65 billion in foreign direct investments.  Focus will now be on whether the country can sustain this level of FDI, and whether investors retain confidence in Brazil.  To realize its ambitious infrastructure development plans the government must attract more investment and private sector involvement, but uncertainty over government policy and slow bureaucracy may act as disincentives.

To exploit Brazil’s newly discovered vast offshore oil reserves the country must attract more investment and open to foreign majors. To date, the government has taken a protectionist stance over the state oil company Petrobras, delaying and adding costs to programs. Government policy with regards to the hydrocarbon industry will continue to be closely watched as petroleum companies seek opportunities in the predicted boom (both BP and Shell are already well established in Brazil).

Political Summary

Brazil is a federative republic with nearly 40 political parties, dominated since the restoration of democracy in 1985 by four main parties: the Workers’ Party (PT), the Brazilian Social Democracy Party (PSDB), the Brazilian Democratic Movement Party (PMDB), and the Democrats (DEM).  The current national leader is President Dilma Rousseff, a left-wing politician, incarcerated and tortured during the military dictatorship, who was anointed heir by the charismatic Lula da Silva, leader of the Partido dos Trabalhadores-PT (Workers’ Party). There are 26 states, each with their own constitutions, governors and unicameral legislatures.  Brazilian politics is consequently highly fragmented and dominated by numerous alliances. Bargaining and consensus are paramount.  For foreign businesses investing or exporting to Brazil, state, district and municipal politics are more important than national politics.

In late May-June, President Dilma Rousseff’s government was challenged by widespread street protests, the first in Brazil in over 20 years. The unrest coincided with the staging of the Confederations’ Cup provoking international embarrassment.  The first protests were sparked in the northern town of Natal, Rio Grande do Norte over a hike in bus fares, but quickly spread by social media across Brazil. The Revolta do Busão or ‘Bus Rebellion’ attracted wide support from students, the middle-classes, and activist groups. By the third week of June, protests in over 100 cities and towns had rallied over 2 million people forcing the President to address the nation. Following emergency meetings with the 27 state governors, Rousseff bowed to protestor demands and agreed to undertake reforms related to fiscal management, public transport, health care and education. The social unrest did not threaten foreign businesses, beyond gesture protests against symbols of multinational corporations, conducted by fringe, activist groups.

Despite the protests, Rousseff has rebounded and remains a relatively popular president.  July polls showed a 58 per cent personal approval rating, and 31.3 per cent approval rating of her government. [4] Opposition parties have been unable to exploit the government’s transient weakness as a result of the June strikes.

Brazil remains politically stable.  The 2010 general elections placed the PT as the largest party in in the Chamber of Deputies (17.5 per cent of the vote and 88 seats), and the second largest in the Federal Senate (14 senators).  Overall, the PT national coalition gained control of over 300 seats in the lower house and 50 in the upper house.  The PT also won in 13 out of 27 state governorships. With such a majority, Rousseff has enjoyed a strong mandate to promote progressive policies. Broadly, the PT has pursued a mix of statist, interventionist policies, combined with some free market reforms.

President Rousseff is the front-runner in the October 2014 presidential elections.  Her main rivals are Marina Silva (the environmental movement), Aecio Neves (leader of the opposition Partido da Social Democracia Brasileira–PSDB (Brazilan Social Democrat Party), and Eduardo Campos, Governor of Pernambuco State.

The main political threat to foreign business in Brazil is corruption.  Despite many legislative initiatives, the resignation or sacking of officials caught up in corruption scandals remains a feature of Brazilian national and local politics.  Rousseff lost six ministers within her first year in office. The latest high profile case (known as the Mensalao, or ‘big monthly allowance’) involves the chief of staff of former President da Silva, and three top politicians in the PT.

Economic Summary

Brazil offers significant opportunities to foreign investment and trade. Brazil has the sixth largest economy by nominal GDP in the world, and seventh largest by purchasing power parity. The economy is larger than all other South American nations combined, and is the second largest in the western hemisphere. Brazil has been one of the fastest-growing major economies in the world, manifesting an average annual GDP growth rate of over 5 percent. With a population approaching the 200 million mark (or having exceeded it), and abundant natural resources, it offers one of the ten largest markets in the world.  Brazil hosts the fourth largest company in the world by market valuation (Petrobras) and has a flourishing and diverse industrial base.  Energy self-sufficiency was achieved in 2006-07, and the country is set to become a major hydrocarbon exporter. Brazil has vast hydro-electric capacity, growing wind and solar generation, mature ethanol production, and newfound oil discoveries, the offshore, so-called ‘pre-salt’ fields. Brazil is the world’s biggest producer of iron ore; it is the largest exporter of beef, sugar, coffee, and orange juice; and the largest exporter of soybeans. [5] Brazil will overtake the UK by nominal GDP within the next decade, and may have already done so. [6]

Under the Cardoso and da Silva presidencies (1993-2010), Brazil followed consistent economic policies that succeeded in taming the twin scourges of national stagnation and hyperinflation. These included inflation targeting by the Central Bank; more transparent public accounts; rigorous fiscal targets to drive down public debt; and more open attitudes to foreign trade and private investment. [7]

Under Rousseff, these liberal policies have been gradually reversed in favour of state-intervention.  Market reforms have stalled and rigorous fiscal responsibility has slackened. National spend as a proportion of GDP has increased and the Finance Ministry has boosted lending to state banks.  Faced with low growth, partly attributable to the 2008 global credit crisis, Rousseff subsequently encouraged the independent Central Bank to cut interest rates against a background of inflation running at 6.5 per cent.  Forced spending cuts were not balanced by a raft of tax breaks and tariff rises aimed to promote favoured indigenous industries.  Brazil’s consumption and credit boom, fuelled by easy credit during the da Silva presidency, has also stalled and the trade account has moved into deficit.  The real has begun to lose value helping exporters, but is also likely to boost inflation.  Limited reforms have been announced: the Central Bank has pushed up interest rates, and the government is abandoning interventionist fiscal policies to stimulate the economy.  As a consequence, foreign investors have recently grown more confused about Brazil’s economic policies; performance has been mediocre compared to the previous decade; and Brazil has manifested the lowest growth and highest inflation in Latin America. [8]

The drift towards statist policies has been evident in Brazil’s most important sector: the energy sector.  Petróleo Brasileiro (Petrobras, the state-owned oil company), aspires to double production by 2020, from the current 2.1 milllion bpd.  To achieve this goal, the government has been pursuing an industrial policy with high local content rules for the provision and supply of equipment and capabilities.  The state development bank (Banco Nacional Desenvolvimento Econômico e Social– BNDES) has been playing an important role through a heavy investment lending portfolio at low, subsidized interest rates.  Action has also been taken to mitigate exchange-rate appreciation, and there have been changes to corporate tax structure to stimulate domestic production.  Pragmatically, the government has recognized that more private-sector participation is necessary and this has been reflected in the construction and transport sectors. [9]

More positively, all the major credit-rating agencies have already granted Brazil investment grade, and it is the case that Brazil has become an extremely attractive destination for foreign investment due to the combination of economic stability with a large and dynamic internal market. Among the huge opportunities for foreign investors are the preparations to host major sporting events in the coming years – the World Cup in 2014, and the Olympic and Paralympic Games in Rio de Janeiro in 2016 – and the need to develop the resources required to exploit the vast offshore oil fields that have recently been discovered. [10] The former, it is claimed, will create nearly a quarter million jobs and generate more than USD 116 billion in direct and indirect economic benefits. [11]

Social Summary

Brazil has been transformed since the end of the military dictatorship and economic chaos of the 1970s. In the past quarter-century a better labour market and a basic social safety net have cut poverty by two-thirds. In the last decade the income of the poorest 10 per cent of Brazilians has almost doubled in real terms, whereas that of the richest 10 per cent has grown by less than a fifth. Brazil’s Gini coefficient, a measure that expresses income inequality, is at a 50-year low. As a consequence, more than half of Brazil’s population of 200 million now belongs to a new lower-middle class, living in households with a monthly income per person of between 291 and 1,019 reais (USD127-446). Most of these gains in income have come from earnings, though government transfers have made an important contribution, especially in the poor north-east. Tens of millions of Brazilians now live in proper houses equipped with cookers, fridges and washing machines. Their material expectations and the aspirations of Brazilian youth are higher than those of their parents.

These gains should not mask the many challenges that Brazil still faces. The country is still one of the world’s most unequal countries. Brazil has a murder rate that rivals Mexico’s. Public health care is highly unequal with two-fifths of Brazilians not covered by local primary health care. Fewer than half of Brazilian secondary school pupils leave school fully literate, and children attend school in two, sometimes three shifts a day. [12]

Technological Summary

Brazil is an advanced technological country.  It boasts a nuclear industry, a space program, a thriving aerospace industry, booming ship-building and a maritime industry, an indigenous IT industry which is one of the largest in the world, and a successful pharmaceuticals sector.  Internet penetration will soon reach half the population and online retail growth is one of the fastest in the world.  Successive Brazilian governments have promoted and funded R&D and recently Brazil has become more open to foreign partnerships, although technology transfer remains a strong aspect of such deals.

Environment Summary

Although most of Brazil lies in the tropics, more than 60 per cent of the population live in areas which are cooled either by altitude, sea winds or polar fronts. While the coastal cities of Rio de Janeiro, Recife and Salvador can get extremely hot, plateau cities such as São Paulo, Brasília and Belo Horizonte have mild climates, and the southern cities of Porto Alegre and Curitiba have a climate similar to that of southern Europe.  The Brazilian territory encompasses the largest rainforest in the world in the Amazon basin, and the government is cognisant of the threat of climate change to this unique resource.

Legal Summary

The Brazilian corporate legal system is commonly described as over-complex, particularly in matters of taxation. According to the World Bank ‘Doing Business Report 2013’, Brazil ranks 130th out of 185 countries for ease of doing business. Business surveys cite ‘tax rates’ and ‘tax regulations’ as the top two most problematic factors for doing business in Brazil, followed closely by ‘inadequate supply of infrastructure’, ‘labour regulations’, and ‘inefficient government bureaucracy’. A recent study by the International Chamber of Commerce ranked Brazil as the most protectionist of the 20 biggest economies. Brazil’s import tariffs remain high and its customs procedures onerous.

Operational Summary

Brazil has a tradition of trade union activism and has recently witnessed mass popular protest.  Labour costs are relatively high, as is the so-called custo Brasil (‘Brazil cost’). The country suffers from relatively poor infrastructure but the government has embarked on significant programs to develop transport, logistics and other national resources. Poor infrastructure creates high freight charges and office rents can be exorbitant (Rio has the highest in all the Americas).  Brazil is free from major natural hazards, such as earthquakes, but large swathes of the country remain wild with concomitant risks. There are no major medical hazards.  Despite the challenges, Brazil remains an attractive destination for foreign investment and last year achieved third place globally, after the US and China.

Security Summary

Brazil manifests a very high homicide rate but this is localized, primarily in the favelas of large urban conurbations, fuelled by the drug trade.  Kidnapping, extortion and petty crime rates are also relatively high in these areas. The high crime rate drives up security costs (there are an estimated 650,000 security guards in Brazil).  Police corruption is common but concentrated in just two states, São Paulo and Rio de Janeiro.  Brazil has no external threats and a very low threat of terrorism. Political and ethnic violence, largely provoked by land disputes, occurs in the Amazon region.

 

References:

[1] PWC, ‘Crunch time for Brazilian infrastructure’, spring 2013.

[2] GDP projections from PwC: how China, India and Brazil will overtake the West by 2050 – PwC, January 2011.

[3] http://www.bloomberg.com/news/2013-09-02/brazilian-real-rises-as-tombini-cites-tools-to-reduce-volatility.html

[4] CNT/MDA poll, August-September 2013.

[5] PWC, ‘Crunch time for Brazilian infrastructure’, spring 2013.

[6] GDP projections from PwC: how China, India and Brazil will overtake the West by 2050 – PwC, January 2011.

[7] The Economist, A Fall from grace, 8 June 2013.

[8] Ibid.

[9] EIU May 2012.

[10] Brazil Embassy London.

[11] PWC, ‘Crunch time for Brazilian infrastructure’, spring 2013.

[12] The Economist, ‘Grounded’, 28 September 2013.

 

And this is the contents page from the 83 page full report.

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This Executive Summary and the Report from which it was drawn was prepared by Durham Specialist Risk Management from whom a copy can be obtained :

Email: enquiries@durhamrisk.co.uk

Tel: 0191 645 7475

Skype: durhamrisk-md

Website: http://www.durhamrisk.co.uk

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