group_21_country risk analysis - brazil v1.0

8/9/2019 Group_21_Country Risk Analysis - Brazil V1.0

1/26

Country Risk Analysis Brazil

Group No 21

Alok Srivastava

Bharat AroraManish Gupta

Srinivas

S.Das


2/26

Country History

Brazil became independentnation in 1822 after threecenturies under Portuguese

rule. It is largest and mostpopulous country in SouthAmerica. Today it hasbecome South Americasleading economic power

and a regional leader byexploiting its vast naturalresources and large laborpool.


3/26

Overview Brazil

Major City

City Population Estimated

Sao Paulo 10,328,094 2009

Rio de Janeiro 6,227,355 2009

Brasilia 2,463,923 2009

Key Data

Region : South America

Population : 194,747,347

Area Total : 8,511,965 km2

Area Land : 8,456,510 km2

Coast Line : 7,491 km

Capital : Brasilia

Climate : Mostly tropical, but temperate in south

Languages : Portuguese (official), over 195 indigenous languages,German, Italian, Japanese, Korean, and Balticlanguages also spoken

Currency : 1 real (R$) = 100 centavos

Holiday : Independence Day is 7 September (1822), TiradentesDay is 21 April, Republic Day is 15 November

Ethnic Division

European 53%

Mulatto (mixed European and African) 38%

African 6%

Asian (Japanese) 1%

Middle Eastern (Lebanese, Syrian, Turkish) 1%

Indigenous 1%


4/26

Economic overview

Characterized by large and well-developed agricultural, mining, manufacturing, and servicesectors, Brazil's economy outweighs that of all other South American countries and Brazil isexpanding its presence in world markets

From 2003 to 2007, Brazil ran record trade surpluses and recorded its first current accountsurpluses since 1992.

Productivity gains coupled with high commodity prices contributed to the surge in exports

Brazil's debt achieved investment grade status early in 2008, but the government's attempt toachieve strong growth while reducing the debt burden created inflationary pressures For most of 2008, the Central Bank embarked on a restrictive monetary policy to stem these

pressures. Since the onset of the global financial crisis in September, Brazil's currency and itsstock market - Bovespa - have significantly lost value, -41% for Bovespa for the year ending 30December 2008.

Since 2003, Brazil has steadily improved macroeconomic stability, building up foreign reserves,reducing its debt profile by shifting its debt burden toward real denominated and domestically heldinstruments, adhering to an inflation target, and committing to fiscal responsibility

Brazil experienced two quarters of recession, as global demand for Brazil's commodity-based

exports dwindled and external credit dried up. However, Brazil was one of the first emergingmarkets to begin a recovery. Consumer and investor confidence revived and GDP growthreturned to positive in the second quarter, 2009. The Central Bank expects growth of 5% for2010.


5/26

Monetary conditions

2002 2003 2004 2005 2006 2007 2008

Money (annual var. of M1 in %) 28.8 1.7 16.7 13.2 20.4 32.7 -3.5

Money (annual var. of M2 in %) 23.6 3.9 19.5 18.0 13.6 18.1 37.3



Inflation (CPI, annual var. in %) 12.5 9.3 7.6 5.7 3.1 4.5 5.9

Inflation (PPI, annual var. in %) 35.4 6.3 14.7 -1.0 4.3 9.4 9.8

Interest Rate (SELIC rate in %) 23.0 16.5 17.8 18.0 13.3 11.3 13.8


6/26

Financial Markets

Brazil financial market is one of the most promising global markets right now. From 2003,the financial scenario of Brazil has been going through several positive changes.

The worldwide markets of coffee, soybeans, iron ore and crude oil have developedconsiderably in the recent times. This has stimulated the growth of the financial markets ofBrazil because these are the basic products and minerals, which are exported from thecountry.

In Brazil, the huge surplus have replaced the trade shortages. The value of the Brazilian real is almost half the value of US dollar. On the other hand, the

performance of the stock market of Brazil has been quite satisfactory. The Bovespa indextouched the 52,750 points in May 2007 and the rise in the market is estimated at a rate of18.2%.

The Brazilian sugar industries are doing extremely well and the IPOs offered by theseindustries are the hot favorite of the market. These are attracting huge investment in theBrazil financial market from both the national and international investors.

The foreign currency reserve of the country is also experiencing an upward trend.


7/26

Theexternal economy

2002 2003 2004 2005 2006 2007 2008

Exchange Rate (Real/US$ eop) 3.53 2.89 2.65 2.34 2.14 1.77 2.34

Capital Account (US$ m) 8,004 5,111 -7,523 -9,464 16,299 89,086 29,352

Current Account (US$ m) -7,637 4,177 11,679 13,985 13,643 1,551 -28,192

Trade Balance (US$ m) 13,199 24,912 33,842 44,930 46,456 40,028 24,745

Exports (US$ m) 60,439 73,203 96,677 118,529 137,807 160,649 197,942

Imports (US$ m) 47,240 48,291 62,835 73,599 91,351 120,621 173,197

Int. Reserves (US$ m) 38,376 49,254 52,937 53,800 86,901 180,334 206,806

Int. Reserves (months of imports) 9.7 12.2 10.1 8.8 11.4 17.9 14.3

External Debt (US$ m) 210,711 214,930 201,374 168,860 172,589 193,219 198,340


8/26

Macro-economy analysis


9/26


(USD billions or percentage) 2005 2006 2007 2008(e) 2009(f) 2010f

Economic growth (%) 2.9 4.0 5.7 5.2 -1.0 3.0

Inflation (period-end rate) 6.9 4.2 3.6 5.8 4.5 4.4

Public sector balance (%GDP) -3.0 -3.0 -2.3 -2.0 -2.2 -2.1

Exports 118.3 137.8 160.7 197.7 159.6 180.2

Imports 73.6 91.4 120.6 174.6 145.8 165.7

Trade balance 44.7 46.5 40.0 23.1 13.8 14.5

Current account balance 14.0 13.6 1.7 -28.9 -28.2 -31.0

Current account balance (%GDP) 1.6 1.3 0.1 -1.8 -2.2 -2.3

Foreign debt (%GDP) 21.8 20.2 21.4 20.7 24.6 24.4

Debt service (%Exports) 39.5 30.7 28.2 19.5 20.6 18.9

Foreign currency reserves (in months ofimports)

5.1 6.7 10.9 9.1 9.2 8.3


10/26


GDP (purchasing power parity) - $2.024 trillion (2009 est.)

GDP(official exchange rate) - $1.482 trillion (2009 est.)

Currency: Real

GDP Growth rate 0.1% (2009 est.) 5.1% (2008)

6.1% (2007)

GDP per capita (PPP) $10,200 (2009 est.)

Gini Index (Distribution of family income) 56.7 ( Year 2009)

Unemployment Rate 8% of total labor force

Internal Savings/GDP ratio 27%

Investment to GDP ratio - 20.1 % of GDP


11/26


Gross Domestic Savings/Gross Domestic Fixed investment Gross Domestic Saving 16%

Labor Force 95.21 million (2009 est.)

Labor Force By occupation Agriculture 20%

Industry 14% Service 66%

GDP Composition by sector

agriculture: 6.5% industry: 25.8% services: 67.7% (2009 est.)

Population Below poverty Line 26%(2008)


12/26


Public Debt 46.8% of GDP (2009 est.)

Agriculture Products - coffee, soybeans, wheat, rice,corn, sugarcane, cocoa, citrus; beef.

Industries - textiles, shoes, chemicals, cement, lumber,iron ore, tin, steel, aircraft, motor vehicles and parts, othermachinery and equipment

Current account balance - $11.28 Billion(2009)

Reserve of Foreign exchange and gold - $238 Billion.

Debt External - $216.1 billion (31 December 2009 est.)


13/26

BOP Analysis - Liquidity Ratio

Curr unt( )

-

-

-

-

-

-

Curr nt Account( )


14/26

BOP Analysis - Solvency Ratio

Net Public debt/GDP

43.42

41.75

39.51

37.56

34

35

36

37

38

39

40

41

42

43

44

2007 2008 2009 2010

Net Public debt/GDP


15/26


16/26

BOP Analysis Insolvency Trend


17/26


18/26

Index of Non-transparency

- Opacity IndexThe Opacity Index is a measure of five components that

may be thought of as negative social capital. These are -

Corruption,

Legal system inadequacies, economicEnforcement policies

Accounting standards and corporate governance

Regulation.

Together, these five factors spell CLEAR. A high scoreOn the Index indicates higher levels of opacity in each of

these areas


19/26

Index of Non-transparency

- Opacity Index

Source - kurtzmangroup.com

In the current update of the Opacity Index, each point of opacity translates into a loss of $1,367 in per capita GDP

Opacity constrains overall growth rates due to the frictional effects that result from poorly functioning institutions

For every 1-point increase in opacity, foreign direct investment as a percent of GDP decreased by 0.15 percentagepoint.

For every 1-point increase in opacity, the Capital Access Index score decreased by 0.1 percentage point

For every 1-point increase in opacity, market capitalization as a percent of GDP decreased by 3.4 percentage points

For every 1-point increase in opacity, trading of equity market as a percent of GDP decreased by 5.1 percentagepoints

For every 1-point increase in opacity, bank asset as a percent of GDP decreased by 9.5 percentage points

Country 20092009 Opacity

Score

2008 Opacity

Score

2009 country

Rank

2007-2008

Country RankC L E A R

UK 24 9 35 11 10 18 17 10() 9

Brazil 64 49 47 36 20 43 46 42(-) 42

India 56 45 43 29 33 41 44 37() 40

China 57 40 40 40 33 42 45 38() 41

United States 31 21 30 20 7 22 23 13(-) 13

Finland 4 11 21 1 6 9 9 1(-) 1

Honkong 21 10 14 1 12 12 12 2(-) 2


20/26

Risk Analysis

Transnational Issues Dispute (International)

Unruly region at convergence of Argentina-Brazil-Paraguay borders is locus of moneylaundering, smuggling, arms and illegal narcotics trafficking, and fundraising forextremist organizations.

Two uncontested boundary disputes with Uruguay over Isla Brasilera at the tripointwith Argentina at the confluence of the Quarai/Cuareim and Uruguay rivers, and in the235 square kilometer Invernada River region over which tributary represents thelegitimate source of the Quarai/Cuareim River.

A fluvial island on the Rio Mamore, under Bolivian administration in 1958, butsovereignty remains in dispute

Illicit Drugs- Second-largest consumer of cocaine in the world. Illicit producer of cannabis. Trace amounts of coca cultivation in the Amazon region, used for domestic

consumption. Illicit narcotics proceeds are often laundered through the financial system; significant

illicit financial activity in the Tri-Border Area (2008)


21/26


22/26

Risk Analysis

Putting the deterioration ofpublic finances into perspective

As a result of the international crisis, which required implementation of counter-cyclical measures,the public finances situation was weakened with public spending remaining too rigid, the structureof domestic debt deteriorating, and already high public debt growing further and consequentlyimpeding investment in infrastructure. Sovereign risk will nonetheless remain manageable in viewof the relatively moderate cost of the economic stimulus programme and the net creditor externalposition maintained by the public sector since 2008.

Foreign trade has been following the trend in world trade and will thus be likely to benefit from theupturn expected this year. In 2009, however, for the first time since 1978, exports of staplecommodities exceeded those of manufactured products, a trend likely to continue with Brazil'sexport performance driven by sales to China, consisting mainly of commodities. With the servicesdeficit likely to grow, the current account deficit will widen slightly. But foreign direct investment isexpected to cover half of external financing needs, which have declined sharply since 2008.

Foreign debt will grow substantially in 2010, with an increase in the proportion of private debt, andthe burden of serving that debt remaining high in relation to exports. But Brazil's externalvulnerability will likely remain manageable. As a result of the relatively bright outlook overall, thereal is expected to remain at fair levels with foreign exchange reserves increasing to record

levels. Although the banking sector is solid, the sharp rise in loans granted by state-run banks inthe framework of the stimulus programme constitutes a potential risk.


23/26

Risk Analysis

Race for the presidential election next October but alagging pace on reforms

In the presidential race, the centrist opposition candidate

Jos Serra (PSDB) is leading Dilma Rousseff, designatedby President Lula (who is barred by the constitution fromseeking a third term) to represent the government partyPT. Whatever the outcome of the election, however,economic policy is expected to remain essentiallyunchanged. But the political system makes government-

by-coalition inevitable, which tends to complicateadoption of structural reforms in a country still marked bysevere inequality.


24/26

Risk Analysis

Improvement in payment behavior

Despite the financial crisis, the growth of credit wassubstantial in 2009 with very active state-run banks

compensating for the reserved stance of private banks.Even before the return of growth in 2010, the situationhas improved and this trend will likely continue: largecompanies have been renewing their credit lines on goodterms and credit is readily available to smaller companiesand households. And companies handicapped by the

exchange rate trend have been focusing on the vastdomestic market. In this context, corporate paymentbehaviour will likely continue to improve.


25/26

Risk Assessment Strengths &

WeaknessesStrengths

Brazil is endowed with extensive andvaried natural resources and its economyhas been diversifying.

Manufactured products represent agrowing proportion of production and

exports. Policy continuity on the pursuit of

macroeconomic stability seems assured. The capacity to cope effectively with

international financial market volatilityhas increased.

Brazil's domestic market potential andcompetitive labour costs enhance itsattractiveness to foreign investors.

Weaknesses

To achieve sustainable growth, structuralreforms will be necessary notably ineducation, social security, theemployment market, taxation, and theregulatory framework but they have

come up against major politicalobstacles. A lack of investment has resulted in

deficient energy, rail, road, port andairport infrastructure with public/privatepartnership difficult to set up.

Brazil remains exposed to fluctuations inworld prices for certain commodities.

Public debt remains high and exposed to

domestic interest rate trends with itsmaturity still too short.


26/26

Sources

Central Intelligence Agency (CIA) Cofacerating Country Watch World Bank The Institute of International Finance (IIF) International Monetary Fund (IMF) Latin Business Chronicle OECD Rating & Investment Information

Standard & Poors Transparency International Kurtzman Group Equifax Brazil SCI

group_21_country risk analysis - brazil v1.0

Documents