Overseas Business Risk - Brazil

Information on key security and political risks which UK businesses may face when operating in 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.

Economic Overview:

In the last decade Brazil has shown economic stability and was one of the first countries to recover from the crisis of 2008/2009 with a GDP growth of 7.5% in 2010 (about £ 1,300 billion). 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.

Business people in cafe

In Q1 2011, GDP increased 1.3% quarter on quarter and in Q2 GDP growth was 0.8%, also q-o-q. Q3 GDP figures are expected to show a deceleration in the Brazilian economy, and the Central Bank revised down its GDP growth forecast for 2011 to 3.5%. This slowdown is explained by a contractionary monetary policy adopted by the government since late 2010 to avoid the economy’s overheating, combining credit restrictions and increases in the basic domestic interest rate (SELIC) until August 2011, and also as a response to the Eurozone crisis and higher global risk aversion.

The exchange rate has been particularly penalized by the current global uncertainty, and after months of intense volatility should end the year at R$ 1.80. Brazil’s performance after the 2008/2009 crisis and its economic fundamentals though show that the country remains relatively well-placed to face the current crisis.

Inflation – which has always been a key concern after years of hyperinflation – is now under control after the adoption of an inflation target system in 1999. The target for both 2011 and 2012 is 4.5% +/- 2pps. Markets expect year-end inflation to be close to the upper band of the target (6.48%), after touching 7.31% in September. For 2012, the forecast is 5.56%. Within this context of convergence towards the target, the Brazilian Central Bank decided to cut the basic interest rate in its latest meetings by 100bps to 11.5%. Markets expect a one digit basic interest rate in the beginning of 2012 – though the strong labour market will continue to add inflationary pressures.

Unemployment rate reached its lowest level since 2002, 6% and the government expects to create more 2.7 million new positions, totaling 5.5 million in 2011. Many of these ‘new positions’ represent a formalization of jobs from the informal economy, which remains significant.

New data revealed that more than 35 million Brazilians moved from classes D and E to class C between 2002 and 2010. 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, this new middle class represents a huge opportunity for companies to exploit – which will be reinforced by the 13% minimum wage increase next year and a favorable demographic profile for the next 30 years.

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 services of financial intermediation and insurances, and commerce. Industry and agriculture account for 26% and 6% of the Brazilian GDP, respectively. Brazil’s main agricultural products are coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus and beef. Its main industry products are shoes, chemicals, textiles, lumber, iron ore, cement, tin, steel, aircraft, motor vehicles, machinery and equipment.

Regarding trade, Brazil remains a balanced but relatively closed economy. Brazilian exports reached US$ 201.9 billion in 2010, mostly made up of ores, oil and fuel, transport materials, soybeans, sugar and ethanol, chemicals and meat. In 2010, Brazil’s main buyer was China with a 15.3% share of Brazil’s exports, followed by U.S. with 9.6%, Argentina with 9.3%, Netherlands with 5.1%, and Germany with 4%.

Brazilian imports were US$ 181.6 billion in 2010, made up mainly of machinery, chemical products, oil, automotive parts, electrical and transport equipment and electronics. In 2010 15% of Brazilian imports came from the U.S., 14.1% from China, 7.9% from Argentina, 6.9% from Germany, and 4.6% from South Korea. Asia was in the first position of buyer for Brazilian products in 2010, surpassing Latin America and the European Union.

More information on political risk, including political demonstrations, is available in FCO Travel Advice Brazil

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.

Business people on sunny street

Corruption is common in some environments, especially when it comes to speeding up bureaucratic processes. In 2010, Brazil was ranked 69 out of 178 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 Threat

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

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

Intellectual Property

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

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.