Friday, 10 Jan 2014
Overseas Business Risk - Brazil
UKTI’s Brazil Business Guide is an essential read to help you avoid some of the common pitfalls businesses can face in Brazil. The getting started, business issues and considerations pages of the guide offer a wide range of initial advice on issues such as: finding the right customer or partner, due diligence, employing staff, language, marketing and branding, daily communications, interpreters, protecting intellectual property rights, certification and standards, getting paid and financial issues, insurance management, control and quality assurance, bribery and corruption and how to avoid scams.
Political and Economic
The Federal Republic of Brazil is divided into twenty six states and one federal district. The legislative branch is made up 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.
The current president, Dilma Rouseff, from the Workers’ Party was elected in January 2011. She has continued in a similar manner as her fellow party compatriot Luiz Inacio Lula da Silva who was president for the previous two terms. The current government do not have an overall majority but form coalitions in order to pass laws and implement government projects.
Like her predecessor, social programmes remain high on the agenda of the president. Building on Lula’s “Bolsa Família” programme (Family grant programme), President Dilma launched a new initiative with the aim of eradicating extreme poverty called ‘Brasil sem Miséria’ (Brazil without Poverty). The programme already has 48 million Brazilians registered and aims to lift the remaining estimated 700,000 Brazilian families out of extreme poverty.
In the last decade Brazil has shown economic stability and was one of the first countries to recover from the 2008 global economic crisis. The country is a member of the Mercosul trading bloc, and is the biggest economy in South America, accounting for close to 50% of the continent’s GDP. The attractiveness for foreign investors is justified by its solid economic fundamentals, with Brazil being labelled Investment Grade from the three main ratings agencies Moody’s, S&P and Fitch, and its large consumer market.
Brazil has a diverse economy with a strong domestic services sector, representing more than half of GDP. Growth in this sector in the past year has been boosted by financial intermediation and insurance services, and retail sales. Industry and agriculture also account for a considerable proportion of Brazilian GDP. 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.
Business people at table
In the past 10 years, more than 35 million Brazilians were lifted out from extreme poverty and poverty. In recent years, Brazil has been the only BRIC country that has successfully achieved a high economic growth rate while reducing inequality. With a high propensity to consume, the growing demand from the ever-expanding middle class represents a huge opportunity for companies to exploit.
Driven by the emerging middle class, the Brazilian economy grew 7.5% in 2010 and 2.7% in 2011 and it is expected to grow by around 2.5% in the year 2013. Brazil has oscillated between the world’s 6th and 7th largest economy in the past 3 years,. The combination of policies to control inflation along with a worsening global economy outlook, have led to a recent slowdown in the Brazilian growth rate.
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. According to Moody’s, the inflation rate estimate for 2013YE is 5.5%.
The conditions in the labour market remain favorable. Unemployment stood still at 5.4% in October 2013, remaining very close to its historical low. Trade flows equate to around 25% of GDP. Brazilian exports reached US$177.650.454.523 in October 2013, mostly coming from ores, oil and fuel, transport materials, soybeans, sugar and ethanol, chemicals and meat. In 2013, Brazil’s main buyer was China with a 20.21% share of Brazil’s exports, followed by U.S. with 10.35%, Argentina with 8.4%, Netherlands with 6.5%, and Japan with 3.3%.
Brazilian imports were US$ 179 billion in October 2013, mainly coming from machinery, chemical products, oil, automotive parts, electrical and transport equipment and electronics. In October 2013 15.51% of Brazilian imports came from the China, 14.9% from U.S., 7.1% from Argentina, 6.28% from Germany, and 3.99% 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.
The low quality provision of basic rights such as public education and public healthcare system, contribute to the poor human rights standards in Brazil. Brazilian education is among the 35 worst education systems rated by the World Economic Forum in 2013. The public education system is ineffective and substandard. Regarding healthcare, only 8.7% of the federal budget was directed to healthcare in Brazil contrasting with an 11.7% world average of investment in the sector, although the country’s situation was even worse 10 years ago (4.7%). To improve education and healthcare standards, 75% of drilling royalties the Brazilian government receives from oilfields in the so-called "pre-salt" layer are to be invested in education and 25% on health.
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 children 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 recognized as Brazil is often cited for its strong legal framework. Protests and public demonstrations, some of them focussed on corruption, were massive in 2013. Millions of people went to the streets to protest against corruption and high taxations, which in the long term should decrease and diminish corruption in Brazil.
Business people on street
Corruption is common in some environments, especially when it comes to speeding up bureaucratic processes. In 2013, Brazil was ranked 72 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.
Terrorism is not a significant threat in Brazil.
However, its perceived attractiveness as a potential target for international terrorism is likely to increase, as Brazil hosts the World Cup in 2014 and the Olympic Games in 2016. Brazil will have to be aware of international terrorism, considering that these major sport events can be targets. There is some growing awareness of this in official circles.
The threat against any foreign interests in Brazil is still considered to be very low.
Protective Security Advice
The Centre for the Protection of National Infrastructure also provides protective security advice to businesses
Robbery, mugging and street violence 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 mobilised to monitor Internet activities - the Safernet project is one example.
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.
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, then 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 WIPO.
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.
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)
More information is available on overseas business risk in a range of markets.