1. NS4540 Winter Term 2016 Brazilian Economy
Europa brazil economy

2. Brazil WEF I

3. Brazil WEF II

4. Brazil WEF III

5. Brazil Governance

6. Brazil: Economic Freedom I

7. Brazil Economic Freedom II

8. Economic Freedom: Brazil/Uruguay

9. Economic Freedom: Brazil/Argentina

10. Overview I Brazil is the sixth largest economy in the world
The world’s second largest emerging market
Agricultural production and export of raw materials has historically played a prominent role in Brazil’s economy
However Brazil was one of the earliest industrial powers in Latin America
Coffee production in Brazil in the 19th century resulted in concentration of income in hands of Sao Paulo landed Class
They favored a more diverse investment portfolio
Coffee profits went into transportation and other industrial and commercial enterprises

11. Overview II
Young industries received further boost from interruption of trade during First and Second World Wars – protection
Early as 1947 manufacturing sector had displaced agriculture as country’s principle sector
However manufacturers did not comprise a significant proportion of Brazilian exports until last quarter of 20th century
Although initially dominated by resource-based products– processed foods composition of exports has shifted reflecting technological upgrading of national industries
Sophisticated heavy manufacturers
Telecommunications
Automobiles and aircraft

12. Overview III
As with many countries, consistent economic growth and macroeconomic stability has eluded Brazil, especially in 20th century
However by the first decade of the 21st century Brazilian economy was growing at a record pace of 4.5% per year
This economic growth has been accompanied by equally remarkable improvements in living standards and significant achievements in socio-economic areas
Poverty reduction
Improved literacy
Increased life expectancy

13. Overview IV
These advances in area of human welfare stem from foundation in basic health and education that was constructed in period on inward growth in mid 20th century -- especially
Plan of President Vargas ( ) for industrialization, and
The intensive social welfare programs – Bolsa Familia initiative during 1990s and early 2000s
Shift in Brazilian economic paradigm from inward looking, state-led model of growth – characteristic of region in mid-20the century prompted by
Chronic and hyperinflation from 1980s into the early 1990s

14. Overview V
Hyper inflation generated political capital needed to push through market-oriented reforms
Initiated under President Collor de Mello ( ) and
Strengthened under President Cardoso ( )
Dissatisfaction with fiscal austerity and income and social inequality grew culminating with
Lula de Silva in 2002 and 2006 and
Dilma Rousseff in 2010 and 2014
Concerns that Lula and Rousseff administrations would reverse market-friendly policies proved unfounded
Pragmatism has increasingly characterized Brazil economic policy making regardless of underlying political ideology

15. Overview VI Brazil’s economy in 21st century could be described as
Hybridization of interventionist and free market approaches made possible by Brazil’s large market size
Policy framework has elements that are both export-oriented and foreign investment friendly
Also inward looking and protective of domestic industries.
Fiscal policy favors counter-cyclical stimulus measures
But with a concern for inflation and the exchange rate.
Economic growth is regarded as the means to social ends
Broader access to better education and health
Reduction in poverty and destitution and
Environmental protection and conservation

16. Overview VII
Record prices world markets for primary commodities led to an abundance of foreign reserves in Brazil in 2004
Gave fiscal and monetary authorities enormous policy space
Even when global markets were ensnarled by financial crisis in growing domestic consumer market made it possible for fiscal authorities to delay the immediate effects of the external shock and maintain spending priorities
However, the confluence of
a protracted recovery of global markets falling world commodity prices, and
worsening macroeconomic conditions
Pressing government towards greater fiscal restraint after four years of economic stimulus measures.

17. Brazil: Overview

18. Risk Assessment I Recession to last into 2006
Slipping into recession in 2015 country has few chances of seeing recovery in 2016
Outlook for economy less than encouraging due to
Unfavorable internal and external environment for growth
Household consumption main driver of growth expected to suffer from high cost of credit and lower real wages due to the high level of inflation
Banking sector exposed to household indebtedness will be forced to restrict credit supply because of non-performing loans linked to rise in unemployment
Unemployment around 9% at the end of 2015
Coface January 2016

19. Risk Assessment II
Repercussions of Petrobras scandal and company’s announced cuts to its investment program continue to discourage
Investment and
Activity by related businesses, especially in building trades because of the involvement in the scandal of large groups in the construction industry
Industry is likely to continue suffering from lack of infrastructures and skilled labor
Reflected by costs rising faster than productivity
External trade likely to remain affected by slowdown in Chinese demand and its impact on prices of commodities

20. Risk Assessment III
Export competitiveness set to suffer from weak transport infrastructures and rigid labor laws
Offset any advantage of the ongoing depreciation of the real against the dollar
Worsening Budget Situation Likely to Continue
Inflation and the public deficit have continued to rise
Lack of a majority in Congress and the recession have impacted on the adjustment in the public finances
Led to the decision by two of the rating agencies to downgrade the country to speculative
In 2016 objective of re-establishing equilibrium in the public finances – a primary budget surplus is unlikely
Introduction of new tax package is struggling to gain approval in Congress
Widening deficit would result in an alarming public debt dynamic

21. Risk Assessment IV
Government losing momentum and weakened by the recession and lack of political support
President Dilma Rousseff’s position remains precarious
Image has continued to worsen since she woas re-elected in October 2014
Tainted by Petrobras corruption scandal, president faces growing popular discontent and weak support from the political class including from within her own party.
Government struggling to meet demands of the middle-class
Exasperated by corruption and
Declining purchasing power
Inflation and rising unemployment levels could create increased social unrest.

22. RGE Brazil I

23. RGE Brazil II

24. RGE Brazil III

25. Brazil: State Finances I
Oxford Analytica, Brazil: State taxes rise to cope with recession, February 25, 2016
February 23, Moody’s cut Brazil’s credit rating by two notches with a negative outlook
Became the last of the leading rating agencies to downgrade Brazil to junk status
Agency noted:
Likelihood of a worsening debt position
Challenging political dynamics and
Limited prospects for fiscal reform

26. Brazil: State Finances II
Meanwhile state governments have raised taxes on consumption
Further hurting prospects for short term economic recovery
Action done in environment of rising unemployment and declining spending
Increasing taxation represents another constraint on local businesses which rely on sluggish domestic market.
States of Rio de Janeiro, Minas Gerais and Rio Grande do Sul did not have enough resources to pay year end bonuses – a mandatory benefit for formal workers and pensioners in the public and private sectors

27. Brazil: State Finances III
How system works
As part of the strategy that reduced hyperinflation in mid-1990s
The debt of states and large cities was federalized
Implies that sub-national government owes the federal government
Federal government enforces debt repayment by restricting discretionary transfers in event governors and mayors do not honor payment on due date
27 states owe around 7.6% of GDP to Federal government

28. Brazil: State Finances IV
Implications
Local authorities will have to deal with a fiscal straightjacket for years to come
For political reasons more likely to cut expenditures rather than raise taxes
Small municipalities are the ones facing the greatest problems with the recession
They have low taxation capacity and rely on federal and state transfers to run basic services such as education and health
Will make it difficult for the country to halt the recession anytime soon