Brazil: Risk Assessment
Country Rating1
Rating: A3
Business Climate Rating1
Rating: A4
Risk Assessment2
More moderate growth in 2011
The rebound in private consumption and private investment was particularly strong in the first half of 2010, underpinned by tax incentives, better access to credit, and by increased public spending in the run-up to presidential elections in October. The economy has shown signs of overheating in the second half, with a rise in inflationary pressures. With the withdrawal of some tax incentives, the increase in the Selic rate in July, and the implementation of credit tightening measures, economic growth eased to more reasonable levels.
The new administration has pursued monetary and fiscal tightening that seems bearing fruits. Year on year, the activity continued to slow in the first quarter 2011, growth should recover well throughout the year, a more sustainable pace. Inflation has declined. However the labor market has remained tight, which has contributed to the persistence of inflationary pressures. In view of the lack of infrastructure, economic activity will derive support from investments in preparation for the 2014 World Cup of football and the 2016 Olympic Games. Private consumption is affected by higher interest rates that are increasing the debt burden of households, 60% of them being indebted.
The payment behavior of corporates is maintained at the global average.
All sectors recorded good performance in 2010, particularly the industrial sector and distribution, which drove growth. They are thus more directly affected by the economic slowdown in 2011. Large companies will likely continue to finance their operations in international markets while smaller companies unable to self-finance could have more difficulty in view of the credit tightening carried out. Export companies penalized by the Brazilian real appreciation will tend to focus more on domestic market where the outlook is still bright despite the slowdown in domestic demand. The payment behavior of Brazilian companies has in general suffered less from the crisis than the world average. The improvement in payments recorded in 2010 correlates with the world average, a trend likely to continue in 2011.
Brazil's financial position bears watching
The objectives set by the new administration as regards controlling inflation and public-sector debt are expected to result in a slowdown in current fiscal spending. It may nonetheless prove difficult to make a clean break with policies that resulted in increased domestic consumption. The fiscal deficit may thus remain at levels comparable to those prevailing in 2010.
Brazil's external financial position will continue to bear watching. Including amortization of the debt, financing needs remain very large and continue to grow sharply. Although the country will be unlikely to experience any great difficulty in covering those needs, a high proportion of the foreign capital generally involved is volatile in nature and vulnerable to a crisis of confidence in the markets. A sudden flight of capital could cause the real to depreciate. Although Brazil's ample foreign exchange reserves would provide it with good capacity to cope with such a situation, the risk nonetheless bears watching in view of the implications for the capacity of private Brazilian companies to repay the debts.
Political continuity
As was generally expected, the candidate of the Partido dos Trabalhadores (PT), Dilma Roussef, won the presidential election on 31 October 2010. The new president will be likely to maintain the continuity of prudent economic policies, which is reassuring to the markets. She has inherited a country now ranked as the world's 8th largest economy and as one of the four leading emerging economies with Russia, India, and China, the so-called BRIC countries. As regards reforms, the policies will be likely to remain conservative. Brazil's temporary seat at the United Nations until the end of 2011 is expected to contribute to enhancing its stature and geopolitical influence even more.
Strengths
- Abundant and varied natural resources
- Significant proportion of manufactured products in total production and exports
- Policy of maintaining fundamental macroeconomic equilibrium
- Size and potential of the domestic market
- Competitive labor costs
- Continuation of inflation targeting policy
Weaknesses
- Lack of investment in energy, rail, road, port, and airport infrastructure
- High public debt exposed to domestic interest-rate trends and maturity that is still too short
- Vulnerability to external shocks
- Lack of skilled labor