INTERNATIONAL FINANCE ASSIGNMENT (FIN 411)

Country: Brazil

INTRODUCTION: BRIEF COUNTRY PROFILE

Brazil, officially known as the Federative Republic of Brazil, is the largest country in South America. It is the world’s fifth largest country, both by geographical area and by population.

Brazil is the largest national economy in Latin America, the world's eighth largest economy at market exchange rates and the ninth largest in purchasing power parity (PPP), according to the International Monetary Fund and the World Bank.

Brazil has a free market economy with a lot of natural resources. The Brazilian economy has been predicted to become one of the five largest in the world in the years to come. Its current GDP (PPP) per capita is $10,200, putting Brazil in the 64th position according to World Bank data. It has large and developed agricultural, mining, manufacturing and service sectors, as well as a large labor pool.

According to 2007 statistics:

the GDP of Brazil was R$2559bn (approx. US$1067 bn) and

the GDP per head was US$6.938

The inflation rate was 5.9%

The annual growth in Brazil was 2.9%(2005), 3.7% (2006); 5.4% (2007); 5.1% (2008).

Brazilian Exports:

Brazilian exports are increasing. Major export products include aircraft, electrical equipment, automobiles, ethanol, textiles, footwear, iron ore, steel, coffee, orange juice, soybeans and corned beef. The country has

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been expanding its presence in international financial and commodities markets, and is one of a group of four emerging economies called the BRIC countries. Below is a pie chart showing the percentage of different goods and services exported in the year 2006:

Brazilian currency:

The currency in Brazil is called the Real (plural: Reais). However, the name of the money was only taken on in 1994. This was because in the past Brazil had lots of different currency due to fluctuations and changes in the economy.

In the 1980s and early 1990s, Brazil saw very high inflation. For a time the currency or money used in Brazil was called Cruzeiros (until 1986) and then changed to Cruzado. A couple of years later a new currency was introduced to Brazilians called the Cruzados Novos ("new cruzados"). In 1990, the Cruzados Novos were stopped and the Cruzeiros returned! The story did not end there; in 1993, the Cruzeiros had three zeros shaved off them and were turned into Cruzeiros Reais. Finally in 1994, after the development of a new monetary plan, the new currency, the one we know today was born called the Real.

Brazil pegged its currency, the real, to the U.S. dollar in 1994. But, after the East Asian financial crisis, the Russian default in 1998 and the series of unfavorable financial events that followed it, the Central Bank of Brazil temporarily changed its monetary policy to a managed-float scheme while undergoing a currency crisis, until definitively changing the exchange regime to free-float in January 1999.

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THE BALANCE OF PAYMENT AND THE TREND: BRAZIL.

Brazilian Economy: GDP and Labor  

The following chart shows Brazil’s GDP (PPP) during 2007-2009. All figures are in US dollar trillion.

Brazil’s GDP- official exchange range, according to the 2009 estimates, was US$1.482 trillion.

The next chart shows Brazil’s GDP-real growth rate during 2007-2009. All figures are in US dollar trillion.

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The next charts show Brazil’s GDP-Per Capita and GDP- Sector Composition. All figures are in US dollar.

The next chart shows the Brazilian total workforces in percentages. Brazil’s total workforce, according to 2009 estimates, was 95.21 million. The rate of unemployment in 2009 was 7.4%, down from the 2008 estimates when the rate was 7.892%. The following chart shows Brazil’s labor force composition by occupation. All figures are in percentages

(All figures are in percentages in the above table)

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Below is a graph showing the balance of payments in US $ between the years 1996 -2009:

Brazil

Balance of Payments, 1996 - 2009

Source: Banco Central do Brasil.

Balance of Payments: Brazil (2007-2009)

The current account in Brazil in May, posted a deficit of USD 1.7bn. A smaller deficit was expected, of around $1 bn. Indeed, dividends remittance was negative in USD 2.6bn with “other services and income” net negative in USD 1.2bn. However, the surplus in the trade balance of 2.7bn prevented the current account to be even more negative in May. When compared with May'08, current account deteriorated from the USD -0.8bn seen in that month, due to lower trade surplus (USD 4.1bn surplus in May'08).The trade balance result (USD 2.7bn) comparing with April's one (USD 3.7bn) was caused mainly by the fall on exports volume on the margin. On the imports side, volume expanded by 2.4% m/m s.a. in May following a small contraction of 0.9% m/m s.a. in April.

On the capital account side, there was a strong inflow. Indeed, FDI

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reached USD2.5bn and the inflow from Brazilian direct investments were USD 1.4bn. As a result, the net direct investment reached USD 3.9bn, well above the one seen in May'08 of USD -0.1bn. Portfolio flows were also positive, USD 3.0bn, reflecting mainly foreign investments in equities (USD 2.5bn), topping the USD 1.7bn seen in May'08.

Over the last 12-months, the current account deficit went down from -1.4% to -1.5% of GDP. An interesting aspect is the fact that FDI (accumulated in the last 12 months) rose from 2.9% to 3.1% of GDP.

Forecast for BrazilBelow is a chart showing the future trends of Brazil:

FOREIGN DIRECT INVESTMENT (FDI) IN BRAZIL

Foreign Direct Investment in Brazil had played a significant part in the country's industrialization process in the past few decades as well as in its economic development. FDI inflows into Brazil were attracted mostly by two factors: the size of the vast domestic market and also by favorable government policies.It has been observed that the FDI inflows into Brazil favored the capital intensive or technology intensive industrial production sectors of the economy. Of late the Brazilian services sector has also started to earn FDI inflows. Moreover, FDI inflows into the country are attracted by its big domestic market and the liberalized economy thanks to fair government policies. Most investments in Brazil have been made with a bias on the technological aspects of the economy. However, the service sector has attracted foreign investments too.

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The Brazilian FDI regime has remained liberal and has been reasonable in its sum financial output for its economy. Brazil investment opportunities have a minor number of reservations or limitations

FDI flow into Brazil was encouraged by the existence of a vast, dynamic home market insulated by a host of trade barriers. Since the very beginning the Brazilian government prompted the market seeking behavior of foreign investment. A protectionist trade policy was put in place to guarantee the profitability of these investments.

Certain investment policies were formulated in the 90s to attract more FDI in to the country. The Central Bank of Brazil simplified the registration procedure for FDI inflows in the 90s. In the 90s a platform for promoting investment and technology transfer, SIPRI, was set up as a wing of the “Ministry of Foreign Affairs” in Brazil. In 2002 Investe Brasil was set up to promote investments in Brazil.

FDI figures for Brazil from 2004 to 2006As per an investment brief from UNCTAD in 2007 FDI inflows to Latin America slowed down to some extent in 2006. Brazil recorded a 6% hike in FDI inflow. The following table gives an idea about the FDI inflows in Brazil.

Country Brazil

Year 2004 2005 2006FDI inflow measured in Billions of dollars

18.1 15.1 14.8

Source: UNCTAD

Brazil investment opportunities flourish in the various sectors of the economy; production as well as the service industries. With an economy estimated at $1.3 trillion, foreign direct investments are important in financing the country's payment balance due to investors taking out money from the capital markets and the slow recovery from the global recession.

Brazil's stock of direct foreign investments stands at $318.5 billion, according to 2009 figures. This shows a marked increase from the total FDI revenue from the previous year.

Threats and Solutions:

Brazil halted its 2 year long interest rate cutting program recently amongst concern of inflation.Consumer spending rose 5.7 percent and

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investment rose 14 percent, while industry rose 6.8 percent, services 4.8 percent and agriculture rose 0.2 percent. Excessive rate cuts have contributed to this accelerated rate of consumer spending as Brazilians borrow more.

Since most forecasters are not foreseeing a rate increase, spending in Brazil should at least continue on its current trend which will be favorable for the nation’s economy.

One of the major concerns for investing in Brazil is currency risk, but so far the Brazilian Real has been essentially firm. It’s currently situated at 1.869 per dollar, having appreciated 13.9 percent this year.

Still, Brazil still has some challenges to meet:

Corruption is widespread. Crime is common.

The infrastructure system is in need of repair.

Restrictive business labor laws are still in effect, which has given rise to underground black markets.

The government’s spending is 20% of GDP and debt is starting to move in again.

Brazil is working towards a solution for these problems:

The Brazilian government will be announcing the second phase of its “growth acceleration program.” The original $342 billion infrastructure plan remains held up in bureaucracy, with only 11% of projects outlined completed and half yet to launch.

The government has its monetary instruments in strict control. The country’s fiscal prudence has provided the country with large cash reserves, which helped cushion the country from the downturn by providing quick credit flows.

Brazil is a leading exporter of iron ore, steel, coffee, soybeans, sugar and beef, and they have just uncovered large new oil beds that are expected to increase output in the coming years.

Brazil has big plans for years ahead. In 2014, it will host the World Cup and in 2016, it will host the Summer Olympics in Rio. The country knows that the world will be watching, so they’re working hard to get camera-ready.

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Suggestions to attract more FDI:

Brazil can improve its DFI by adopting respective policies for attracting more investment. They may depend on targeted financial concessions like tax concessions, cash grants and specific subsidies. Moreover, they can focus on improving the infrastructure and skill parameter and create a base for the demands and expectations of foreign investors.

The governments of Brazil can create state agencies to help investors through administrative paperwork. Furthermore, Brazil should enter into international governing arrangements to increase their attractiveness for more investment

Brazil should have a sound investment climate which is important for economic growth. Microeconomic improvements should be aimed at simplifying business regulations, strengthening property rights, improving labor market flexibility, and increasing firms' access to finance are necessary for raising living standards and reducing poverty in Brazil.

REFERENCES:

http://www.economywatch.com/foreign-direct-investment/attract-more-fdi.html

http://www.nationsencyclopedia.com/Americas/Brazil-BALANCE-OF-PAYMENTS.html

http://www.etftrends.com/2010/04/brazil-etfs-robust-economy/

http://streetcapitalist.com/2007/09/24/economic-outlook-brazil/

http://www.allbusiness.com/educational-services/business-schools-computer/981580-1.html

http://en.wikipedia.org/wiki/Economy_of_Brazil

http://www.economywatch.com/world_economy/brazil/

http://www.latin-focus.com/latinfocus/countries/brazil/brabop.htm

http://www.oxfordeconomics.com/Free/pdfs/BRAZDB111208.pdf

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