Brazil: Risk Assessment

Country Rating1

Rating: A3

Business Climate Rating1

Rating: A4

Risk Assessment2

In principle, recovery in 2013

Activity is expected to accelerate in 2013, in the wake of fiscal and monetary measures taken to support the economy in 2012. As before, household consumption will drive activity. Wage rises will be extensive after the minimum wage increased by 9% on 1 January 2013, while employment looks set to rise again, stabilizing unemployment at around 5%. Higher unemployment benefit and welfare payments under the Bolsa Familia program, targeted on poor families, will also have a positive impact. However, consumption growth is likely to remain contained with households seeking to control their borrowing and loan interest payments, which in late September 2012 reached 44% and 22% of their income. Investment looks set to pick up with the approach of two major sporting fixtures (Football World Cup in 2014 and Olympic Games in 2016) and the development of public/private partnerships for energy and transport infrastructure construction. Construction of social housing will continue under the Minha casa minha vida program. Exports will benefit from the stop to the appreciation of the real, achieved thanks to control on capital inflows, interventions on the foreign exchange markets and a cut in the key SELIC rate. However, the contribution of external trade to growth could be slightly negative as imports are growing more rapidly. Industry, especially automotive (20% of industry), are expected to be the major beneficiaries of the recovery, while agriculture and services will continue to post good performances. The economic improvement together with the different underlying government measures will benefit companies. Paper, steel and petrochemicals will nonetheless be weaker as their margins will be hit by falling prices.

External and public accounts under control

Despite the primary surpluses (i.e. excluding debt interest payment) and debt reduction of recent years, the public accounts are still in deficit and liabilities significant and well above the emerging country average. The weight and rigidity of current expenditure, with salaries and pensions representing 70% of the budget and generally index-linked, the already high level of taxes (37% of GDP), the cost of fighting poverty and the need to increase investment spending, even if it involves turning to private finance, will limit progress. However, cautious management of the debt, low external debt and an improved debt profile will keep sovereign risk at a satisfactory level.

Trade occupies a modest position in the economy (22% of GDP) and is weakly in surplus (amounting to less than 1% of GDP). Unprocessed or little-processed products (iron ore, soya, oil, beef, chicken, sugar, coffee, orange juice, paper pulp…) make up 60% of exports with the remainder made up of manufactured products (chemical and metallurgical products, motor vehicles, aircraft, and machines). They are therefore very susceptible to fluctuations in world prices. Against this, they are sent to very diverse destinations in Asia, Europe, the United States and the region. Trade in services and revenues are largely in deficit due to the scale of Brazilian tourism spending, the use of foreign freight carriers and the importance of revenue repatriation by foreign investors. But net inflows of foreign investments more than cover the resulting current account deficit. External debt as a percentage of GDP (14%) is modest and stable. The share of public borrowers have fallen in favor of the private sector as Brazilian companies need to attract foreign capital to mitigate the shortfall in domestic savings monopolized by public domain.

Many challenges for President Dilma Roussef

For over a decade, namely since the coming to power of President Lula, inequalities have reduced and the standard of living risen. Under President Dilma Roussef continuity is the order of the day. The political system is fragmented and the firm stance taken by the President against corruption and environmental damage (the Amazon) has led to discontent within the coalition and her party, which frustrates her ability to act. The 16,000 kilometer border, through the Amazon, with Colombia, Peru and Bolivia is no barrier to cocaine trafficking. Despite belonging to Mercosur, trade relations with Argentina are marked by mutual implementation of protectionist measures. With the automotive trade in deficit, Brazil succeeded in getting Mexico to limit its automotive exports to the country. Oil policy is also at stake, with Petrobras (the state-controlled company), the development of ultra-deep water drilling, high imports of refined oil products and petrol price control.

Strengths

  • Attractive scale and potential of the market
  • Mineral and agricultural resources
  • Significant manufacturing industry
  • Capacity to resist exogenous shocks: considerable foreign exchange reserves
  • Infrastructure offensive

Weaknesses

  • Lack of skilled labour 
  • Insufficient domestic savings and heavily dependent on foreign capital 
  • Weak investment (19% of GDP) and infrastructure shortcomings
  • Exposed to raw materials price fluctuations
  • Considerable public debt and still high interest rates
  • Heavy taxes 
  • Corruption and inequalities

1Country and Business Climate Ratings courtesy of Coface (08/2013)
2Risk Assessment and methodology courtesy of Coface (08/2013).

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