Brazil is the fifth most populous country in the world, Latin America’s largest economy and the seventh largest globally. Brazil is also more creditworthy than most regional peers. Still, growth, the business climate and per capita income are all weaker than the regional average— and the credit rating is slipping.
Brazil is in recession, dragged down by slumping global commodity prices, steep inflationary pressure and fiscal policy mismanagement. We expect the economy to contract 1% in 2016, following a 3% fall in 2015. The Olympic Games to be held in Rio in 2016 will offer some upside to the outlook.
Incompetent public policies have not addressed infrastructure bottlenecks and rigid labour markets. The government has also held down petrol prices at great cost to Petrobras. Large external imbalances have left the economy vulnerable to volatility in global financial markets with the real losing 32% against the greenback since the start of 2015. The sharp currency decline has lifted inflation above the central bank’s 6.5% pa upper limit.
A favourable demographic profile will support growth in the long run. But there must also be adequate services and employment opportunities to fully capitalise on this.
Per capita income has more than doubled between 2004 and 2014 lifting Brazil to upper-middle-income status. The number of people living below the poverty line—defined as citizens earning less than US$1.90 a day—has fallen to 5% from 18% in 2006. Despite these improvements, inequality remains high—the richest 10% of the population holds 40% of total income.
Brazil has an OECD country credit grade of 4 and speculative grade sovereign debt ratings by all three ratings agencies. It was recently downgraded by Moody’s, S&P and Fitch due to deteriorating public finances and the slowing economy.
Brazil is ranked 116 out of 189 economies on the World Bank’s ease of doing business gauge. Starting a business, getting construction permits, trading across borders, and paying taxes are all harder in Brazil than elsewhere in Latin America and the Caribbean. However, connecting electricity, resolving insolvency, enforcing contracts and protecting investors are all relatively easy and inexpensive.
Governance scores are broadly in line with the regional average. However, Brazil underperforms for political stability and absence of violence. Crime and violence are rife in the largest cities, often ranked amongst the world’s most dangerous.
Brazil is Australia’s 31st largest trading partner. Australia exported US$1,226m of goods to Brazil in 2014-2015, mainly coal. Imports from Brazil were worth US$613m and were made up largely of medical products, civil engineering equipment, coffee and fruit juices.
Australian service exports to Brazil were worth A$647m in 2014-2015. Education-related services accounted for the majority, with over 22,000 Brazilian students enrolled in Australian institutions. Brazil is the largest source of international students in Australia outside of Asia. Australia’s top eight universities (Group of 8) recently signed agreements with two Brazilian government agencies promoting Brazilian enrolments in Australian universities.
The number of Brazilian tourists visiting Australia has risen strongly over the last decade—with 39,000 arriving in 2014.
Brazil’s growing infrastructure needs and sizeable mining and agricultural industries present opportunities for Australian firms. There are over 100 Australian companies in Brazil, including Agrichem, BHP Billiton, Macquarie, Pacific Hydro, Rio Tinto and Orica.
A report from Pricewaterhouse Coopers projects Brazil will become the world’s fourth largest economy by 2050 thanks to its favourable demographics and expanding middle class. Australian investment in Brazil rose strongly towards the end of the last decade, peaking at A$23b in 2010 before easing back to A$11b in 2014. Firms have invested heavily in the mining industry. But falling commodity prices have forced businesses to scale back capital spending.
Department of Foreign Affairs