Wednesday, 17 Oct 2012
Overseas Business Risk - Brazil
Political and Economic
The Federal Republic of Brazil is divided into twenty six states and one federal district. The legislative branch is made of a bicameral National Congress which consists of the Federal Senate and the Chamber of Deputies. As a democratic country Brazil holds elections for four-year terms by popular vote. The suffrage is compulsory between 18 and 70 years of age, and voluntary between 16 and 18 and over 70.
Since 1st January 2011, as result of the victory of the Workers’ Party (Partido dos Trabalhadores- PT) in the previous year, Brazil has as President Dilma Rousseff, the first woman in the country’s history in this position. The party also has majority of seats in the Chamber of Deputies.
Some R$4.6bn worth of amendments to the 2009 budget, mostly for local public works projects, was due to expire at the end of this month but Dilma extended the deadline for the release of these funds by three months after congressional leaders had threatened a major rebellion.
President Dilma launched a new social programme to eradicate extreme poverty, ‘Brasil sem Miséria’ (Brazil without Misery). The programme aims to lift the remaining 16 million Brazilians out of extreme poverty during the next four years. Tackling poverty was a key element of Dilma’s election campaign and is her top priority for government.
As expected, Brazil eventually backed Christine Lagarde as the next IMF head, going against its Latin American neighbours. Brazil supported Lagarde’s pro-reform platform, in an attempt to increase the voices of small economies
Brazil remains embroiled in trade disputes, such as the standoff with Argentina. The requirement for non-automatic import licenses remains, though issuance will be sped up to within the 60-day period mandated by the WTO. Although this measure was applied for all countries, there is no evidence that it is affecting UK products.
In the last decade Brazil has shown economic stability and was one of the first countries to recover from the crisis of 2008/2009. The country is a member of Mercosul, and is the biggest economy in South America, accounting for over 50% of the continent’s GDP. The attractiveness to foreign investors is justified by its solid economic fundamentals (with Brazil holding an Investment Grade from all three main ratings agencies) and its large consumer market.
Brazil has a diverse economy with a strong domestic services sector representing 67% of the GDP. Growth in this sector in the past year has been pushed by financial intermediation and insurance services, and retail sales. Industry and agriculture account for 27% and 5% of the Brazilian GDP, respectively. Brazil’s main agricultural products are coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus and beef. Its main industrial products are shoes, chemicals, textiles, lumber, iron ore, cement, tin, steel, aircraft, motor vehicles, machinery and equipment.
Between 2002 and 2010 more than 35 million Brazilians moved from classes D and E to class C. In recent years, Brazil is the only BRIC country that successfully achieved high economic growth rates while reducing inequalities. With a high propensity to consume, growing demand from this new middle class represents a huge opportunity for companies to exploit.
Driven by this emerging middle class, the Brazilian economy grew 7.5% in 2010 and 2.7% in 2011. Annual GDP stands at 4.143 trillion, making Brazil the world’s 6th largest economy, just surpassing the UK. The combination of policies to control rising inflation coupled with a worsening global economy led to a slowdown of the economy. Growth in 2011 was driven by strong domestic consumption (in 2011 household consumption accounted for 60% of GDP) but constrained by a decline in manufacturing. Industry continued to be the major constraint on growth, expanding only 1.6% in the year, leading the Brazilian government to take several measures throughout the year to protect domestic industry. For 2012, the IMF has forecast 3% growth and around 4% annual growth is expected in the medium term.
Against this backdrop, the Brazilian Central Bank has been cutting the basic interest rate to boost growth. In less than one year it fell from 12.5% to 8.5% - it’s lowest ever level. President Dilma has tried to ensure these rate cuts are being passed to consumers and businesses by applying pressure to banks to cut their interest rates. As a result, recent data point to an important decrease in average interest rates (both to individuals and corporate).
Decelerating domestic inflation associated with the subdued economy in 2011 and 2012 created room for these cuts. Inflation – which has always been a key concern after years of hyperinflation – is now under control after the adoption of an inflation targeting system in 1999. The target for both 2012 and 2013 is 4.5% +/- 2pps. The consumer price index (IPCA) grew 0.36% in May leading to 12-month inflation of 4.9%, well under the upper target of 6.5%. Markets have forecast year end inflation for 2012 of 5%.
The conditions in the labor market remain favorable. Unemployment stood at 6% in April, remaining very close to its historical low.
The exchange rate has been heavily affected by the current global uncertainty. The Brazilian Real went from US$1:R$1.73 in January to US$1:R$2.02 in May.
Regarding trade, Brazil remains a balanced but relatively closed economy. Total trade flows equate to around 25% of GDP. Brazilian exports reached US$256 billion in 2011, mostly made up of ores, oil and fuel, transport materials, soybeans, sugar and ethanol, chemicals and meat. In 2011, Brazil’s main buyer was China with a 17.3% share of Brazil’s exports, followed by U.S. with 10%, Argentina with 9%, Netherlands with 5.3%, and Japan with 3.7%.
Brazilian imports were US$ 226.2 billion in 2011, made up mainly of machinery, chemical products, oil, automotive parts, electrical and transport equipment and electronics. In 2011 15% of Brazilian imports came from the U.S., 14.5% from China, 7.5% from Argentina, 6.7% from Germany, and 4.5% from South Korea. Asia was in the first position of buyer for Brazilian products in 2011, surpassing Latin America and the European Union.
More information on political risk, including political demonstrations, is available in FCO Travel Advice Brazil.
Unlike when under its previous military dictatorship (1964-1985), Brazil is now a democratic state, and ensures freedom of expression, but there is some consideration that the military regime left marks that persist until today. Brazil is marked by deep economic and social inequalities. Despite growing and continuous efforts to raise the profile of human rights and democratic concepts, there are still areas where Brazil’s adherence to human right principles could be improved.
There is a lack of respect for the rights of indigenous people, mainly in Mato Grosso do Sul state, as well as under-development in rural areas, leaving families without basic living conditions. The low quality provision of basic rights such as public education and public health, also contribute to the poor human right standards in Brazil.
Prisoners’ rights are much discussed. The penitentiary system is considered to have failed in Brazil, in which crowded, dangerous prisons and terrible hygiene conditions fail to facilitate rehabilitation. Women’s rights are also a concern, specifically the issue of domestic violence. Many actions have been taken in the past years including the law of “Maria da Penha”, to protect women who suffer from violence at home, but the number of women and child unassisted by the justice system is still alarming.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
Brazil is among the world's leading investment destinations. However, despite a formally well-functioning business environment, corruption and bribery are still serious obstacles to doing business in Brazil. Especially in business dealings with the government at the local levels, corruption reportedly represents a serious threat.
Some positive developments in relation to corruption and investment can be recognised as Brazil is often cited for its strong legal framework expected to decreasing corruption, and the country is occasionally used as a role model for other developing countries, yet effective enforcement of laws is a problem.
Corruption is common in some environments, especially when it comes to speeding up bureaucratic processes. In 2012, Brazil was ranked 69 in the Transparency International’s corruption perception index (CPI).
There is a wide range of regulatory agencies due to the federal structure of the political system, which may increase the likelihood of demands for bribes by public officials.
Multiple corruption scandals have emerged over the years, involving politicians and bureaucrats taking kickbacks from companies in exchange for awarding public contracts.
The Brazilian tax system is complex and reportedly prone to corruption. It is reported that tax collectors frequently ask for bribes to relax assessments and inspections, to refrain from pursuing acts of tax fraud or to give advice on the legal possibilities of reducing tax obligations.
Entrepreneurs may find difficulties in navigating complex systems and vested interests when setting businesses up in Brazil. UK businesses should consider, in most cases, engaging a local partner when establishing interests in Brazil.
Local labour law is complex and onerous and requires careful handling to avoid incurring potentially expensive liabilities. There is a well-developed system of HR managers and lawyers that can offer expert advice on how best to manage employment. This is again another area where the right local partner could be essential for successful market entry.
Read the information provided on our Bribery and corruption page.
Terrorism is not a significant threat in Brazil.
However, as the profile of Brazil increases, its perceived attractiveness as a potential target for international terrorism is likely to increase. There is some growing awareness of this in official circles, but little evidence of effective planning or action to handle the potential threat.
The threat against any foreign interests in Brazil is still considered to be very low.
Read the information provided on our Terrorism threat page
Protective Security Advice
The Centre for the Protection of National Infrastructure also provides protective security advice to businesses
Robbery, mugging, street violence and "quicknapping" (where individuals are forced to withdraw funds from ATM machines) are not uncommon in Brazil. The risks vary widely between cities and between districts in each city. Care should be taken not to advertise wealth or vulnerability. Local advice should be sought on when and where it is safe to travel. Given these sensible precautions, most visitors do not encounter problems.
Brazil has yet to enact a legal framework to provide a safer environment for IT business - the Cybernetic Crime Act is still being debated in Parliament. However, civil society has already mobilized to monitor Internet activities - the Safernet project is one example.
Cyber crimes grew 318% in Brazil on 2008.
The Government and its public access sites and the private sector, face increasing hacking activities. Investment in technology to tackle this risk is already being made.
Read the information provided on our Protective security advice page
IP rights are territorial, that is they only give protection in the countries where they are granted or registered. If you are thinking about trading internationally, they you should consider registering your IP rights in your export markets.
Brazil has been strengthening its IP and copyright protection rules and is now a member of the IPO.
The Government has a National Anti-Piracy Plan, which created the National Council for Combating Piracy and Intellectual Property Crimes.
Intellectual Property Rights, however, remain a risk area in Brazil.
The Patent and Trademark Office is improving, but can still be bureaucratic.
Most UK businesses (providing they register their IP on arrival in market) do not encounter significant problems with IP theft. However, specialized legal advice should be sought in this area.
Counterfeit goods are common in Brazil.
Read the information provided on our Intellectual Property page.
Organised crime is still a significant problem in some parts of Brazil.
Illegal organisations connected to drug trafficking are strongly linked to piracy and financing through counterfeit products.
Organised crime is also present in the society's high-income strata. Illegal activities range from Government procurement manipulation to cargo theft.
A broader scheme encompasses also money laundering (illegal gambling such as the "jogo do bicho" and jackpot slot machines) and tax evasion through havens.
Despite these threats, the Brazilian Government is tackling organised crime with increased vigour prior to the World Cup in 2014 and the Rio de Janeiro Olympics in 2016. It is undertaking a variety of operations to clean-up a number of places where organised crime resides (favelas for instance)
Read the information provided on our Organised crime page.
More information is available on overseas business risk in a range of markets.