Doing Business in Brazil Brazil: Country Highlights Brazil has the largest economy in South America Brazil, along with India & China has highest.

Doing Business in Brazil

Brazil: Country HighlightsBrazil has the largest economy in South

AmericaBrazil, along with India & China has highest

rates of growthSince 2000 Brazil accounts for 52% of FDI

into South America, the 2nd largest FDI receiver

In 2002 Brazil had the 12th largest economyBrazil is cofounder of Mercosur & a key

promoter of FTAA – A champion of free trade

Brazil – Geographic InfoBrazil is 5th Largest Country by AreaA land area of 8.5 million square KmsA population of 172 MillionEquatorial weather with largest rain forestBecame a republic in 1889Divided into 5 regions and 26 statesA country of immigrants – Europeans,

Africans, Asians & pacific islanders

Population & LaborIn 2002, 24% of labor force employed in

Agriculture, 56% in service sector & 20% in manufacturing

Population is migrating towards costal & urban centers, 81.7% of population live in cities

Brazil has 31 major metropolitan centers with population of greater than 1 million

Brazilian EconomyBrazil is an emerging industrial-service

economy, Agriculture accounts for less than 10% of GDP

Brazil initiated Market reforms since 1990’sInflation has fallen to 9.3% (still high) in 2003

from 2,708% in 1993 – “Real Plan” Real Plan was initiated to stabilize economy in

the aftermath of ContagionReal was devaluated in 2001 & IMF extended

$41 Billion loan to bail Brazilian economy

Real Stabilization PlanReal Stabilization Plan imposed a serious

burden on Brazil’s growth During 1990 to 2001 Brazil’s economy grew by

8% from US$465 Billion in 1991 to $504 Billion in 2001

In Contrast Chinese economy grew from $387 Billion in 1990 to $1.1 trillion in 2001

Brazil’s GDP declined in second half of 90’sHigh interest rates & inflation is hurting

growth

Economic Crisis of 2001Real Stabilization plan imposed a high exchange rate

against US Dollar to keep local prices under controlIn 1999 nominal interest rates reached 45%, high debt

level of 61% of GDP coupled with Asian Crisis & Mexican Peso crisis pressurized ‘Real’ to be devalued in 2001 $41 Billion loan from IMF in 2001 $15.7 Billion loan in 2002, additional $30 Billion standby

loan in 2002

High debt levels makes Brazil dependent on FDI

Comparison with Brazil Mexico Chile

GDP in US$ Billion 502.5 617.8 63.5

GDP % Growth 1.5 4.4 3.2

Real Interest Rate 11.8% 3.5% 2.9%

Annual Inflation 7.4% 5.5% 3.8%

Exports $61.7B $171.2B $16.1B

Exports of Goods & Services/GDP

13.4 27.6 31.8

Imports of Goods & Services/GDP

14.4 30.0 30.8

High Tech Exports in Billions of USD

18.6 22.4 3.4

PV of External Debt $223.8B $157B $34.9B

Total Debt Service (% of exports)

90.7 30.2 26Source: World Bank database 2002

A fragile EconomyHigh levels of debt ($223.8 Billion) requires

high debt servicing, 90.7% of exports Brazil trails Mexico in terms of high tech

exports & overall exports Brazil had a lower growth rate all through

1990’sHigher interest rates and inflation when

compared to Mexico & Chile

Brazil’s CompetitivenessBrazil is ranked:

46th in Growth Competitiveness Index (GCI) 35th in Technology Index (TI) 45th in Public Institutions Index 67th in Macroeconomic Environment Index

Korea in Comparison is 21st in GCI, 18th in TI, 10th in Macroeconomic Environment Index

Brazil has upside potential to increase its competitiveness given its natural resources

Brazil’s Factor EndowmentsBrazil is rich in natural resources

Land, minerals, Water, ForestsBrazil has an advanced technology

telecom infrastructure Skilled labor Indigenous technology sector Booming Biotech Industry

Brazil has established core sector Leading producer of Aluminum & Steel

Brazil has a young & skilled population Over 250,000 are enrolled in Graduate program in 2002

Technology FocusImport Substitution program created a strong

local industryGovernment encouragement of Aerospace,

biotechnology sectors has built strong tech sector

Brazil has built a strong engineering, Automobile, Aerospace industry

Firm Strategy and RivalryLiberalization in 90’s and FTA agreements

increased competitiveness of local firms Eg: Number of Auto models has increased from 40

to 400 MNC’s, Local firms compete for customers with

more than 70,000 consumer products

Intense Rivalry at home market has helped firms like Norberto, Embraer Odebrecht etc to compete globally

Related & Supporting IndustryBrazil’s Auto & Engineering industry is

benefited by steel, rubber & auto parts industryBrazil has a strong Agribusiness sector with

chemicals, pesticides, seeds etcA strong higher education system supplies

industry with talented employees

Demand ConditionsA strong home demand exists in BrazilA population of 172 MillionA strong demand for consumer products,

Autos etc at home supports expansion abroad by Brazilian companies

Free Trade Area agreement with other South American countries creates a larger market

FDI in BrazilBrazil attracts large amount of FDI

$117 Billion in FDI from 1995-2000

US is the largest investor – Over 40% of FDIMNC’s are the major source of FDI80% of Fortune 500 firms have invested in

Brazil Government policies favor FDI & has

abolished state monopolies Predictable & transparent rules reduces red tape

FDI IncentivesGovernment incentives encourage FDI

70% of FDI are in services, 28% in manufacturing Low wages & skilled labor availability 34% of banking is done by MNC banks

Investments in Amazon region, Northeast region is tax exempt

Export Processing Zones created to promote FDI and exports

Investments in technology sector is exempt from income tax and has several other benefits

Foreign TradeSince 1990, Brazil has enacted radical changes in

foreign trade policies Computerized trade documentation Lowering of tariffs to 5-32%

Custom clearance is still cumbersomeRestrictions on import of used cars, machinery &

consumers products existImport of food & drug products require government

clearancesGovernment purchases favors local productionImport restrictions on services

Free Trade ChampionFounder Member of Mercosur (South

American Free Trade area)Active in promotion & creation of FTAAFTAA will boost exports from Brazil Brazil exports $60 billion worth goods to US

in 2002 Steel, Chemicals, Soy, Paper & pulp, coffee etc

US accounts for 24% of Brazil’s exports, Argentina accounts for 10%

Brazil contributes just 0.9% of global trade

Infrastructure - TransportationInfrastructure varies largely based in economic

disparities Urban centers in South & South east have good

facilities Rural areas are quite undeveloped

Road transportation accounts for 63% freight 1.7 million kms of roads, only 10% is paved

Rail transport is very limited Only 28,000 Kms

Air & Waterways are still developing

Infrastructure - TelecomTelephone services was privatized in 1990’sHigh growth seen in cellular networks

29.2 million Cell phones

Less than 3% of population have internet access. Digital divide is a major problem E-Commerce is developing slowly

Infrastructure - PowerInstalled capacity of 65,000 MW – Mostly

HydroelectricPower shortages existBuilding new gas based power plantsExperimenting with Ethanol – A sugarcane

byproduct as fuelBolivia-Brazil Gas pipeline will help ease

energy shortages by supplying 30 million cubic meters per day

Consumer MarketsConsumer expenditure in year 2002 was $300

billion! – Largest in S.AmericaSao Paulo region alone accounted for $96

billionRio de Janeiro accounted for $35 billionUnequal income distribution is hampering

consumer salesOnly 17.4% of population have bank accounts

About 30 million peopleRural consumption is very low

Consumption patternsClass A & B – Upper class & Upper middle

class accounts for 52% of consumption Class A & B make 10 times or more of the

minimum wages

Class C consumers ( 4-10 times the minimal wages) account for 28% of consumption

Class D & E ( 1-3 times the minimum wages) account for the rest 20%

Local products, Local brands concentrate on Class C & lower consumers (30% of market)

Privatization Brazil had a huge state owned enterprisesPrivatization started in 1990’s raised $105

billion

CultureBrazil is multi-cultural with Africans, Arabs,

Europeans & Native AmericansAs a whole Brazilians favor conciliation and

tolerance Avoid direct confrontation and are good hostsPay importance to relationshipsValue family ties but are individualisticBrazilians take time to trust foreigners Facial gazing & touching is common

Culture and Business

Hot Sectors – Oil & GasInvestments is encouraged in hot sectors

which offers excellent opportunities for investors

Oil & Gas Exploration & drilling State owned enterprise Petrobras has 49% market

share, Private sector controls the rest 15% growth rate, contributes 5.7% of GDP Opportunities in offshore drilling, offshore

equipment, and services Rising energy demand promises good returns Oil & Gas equipment market is estimated at $6

billion

Hot Sectors – Banking Inadequate banking services offers excellent

opportunity in retail banking About 60 million bank accounts currently exist 6 MNC banks have 33% of market share

Banking sector accounts for 8.6% of GDPIncreasing middle class will attract more retail

banksMarket for financial services is growing

Hot Sector - AutomobilesBrazil’s transportation sector depends on roadsBrazil has about 15 car manufacturersLow cost labor and high quality is promoting

auto parts industry primarily for exports2002 revenues in auto parts exports was $11

billionMNC’s control 69% market share Auto parts

Hot Sector – Pharmaceuticals Brazil is the largest market for

Pharmaceuticals – 2002 market was $5.2 Billion

Imports $2.5 Billion worth of medicines and drugs

Generic drugs are gaining popularity and accounts for 30% of the market

MNC investments are for generic drugs

Hot Sector – Power & TelecomBrazil’s expansion in gas based power plants

has created a market for electric power equipment - $2Billion a year

Alternatives such as renewable sources such as solar power equipment is being encouraged

Privatization is enabling a fast growth in telecom sector Currently, 40 million land lines, 29 million cell

phones Total revenues of $8 Billion

Hot Sector - RetailingBrazil has a sophisticated retail sector with

self service type stores and giant retailers like Wal-Mart & Carrefour etc.

FDI in retail sector was $1.6 billion in 2001Brazil’s retailing sector is no par with US and

EuropeOpportunity exists in food retailing and

targeting class C consumersA strong TV media helps advertisers and FDI

in TV & other media is encouraged

IT Services & ComputersBrazil lags other countries in IT infrastructure,

computer usage and Internet accessGovernment encouragement will help grow IT

sectorSales of computers and IT related goods and

services is estimated to be $14 billion in 2003Digital divide (caused by wide disparity in

income levels) is pulling down Brazil’s IT sector

Closing ThoughtsBrazil is a country of contrasts.

A high tech industry in Aviation, deep sea oil exploration, machinery etc

Yet 34% of population live below poverty line Income disparity is very high

Economic liberalization is driving the economy Increasing the fiscal discipline, controlling inflation, &

lowering deficits is the key for economic stability Higher Social investments in education and health care is

needed Government is also pursuing spending plans to increase

wages, aid to farmers

Brazil’s current economic growth and stability can be upset by: High spending plans which is ballooning domestic

debt High real interest rates in hampering investments Pension fund & tax reforms are urgently needed

Globalization and exports are key for Brazil’s economy

Brazil needs to address the medium term economic issues for future success