Date post: | 07-Nov-2014 |
Category: |
Documents |
Upload: | diego-corredor |
View: | 17 times |
Download: | 0 times |
IMPORTANT NOTICE:
The information in this PDF file is subject to Business Monitor International’s full copyrightand entitlements as defined and protected by international law. The contents of the file are for thesole use of the addressee. All content in this file is owned and operated by Business MonitorInternational, and the copying or distribution of this file, internally or externally, is strictly prohibitedwithout the prior written permission and consent of Business Monitor International Ltd.If you wish to distribute the file, please email the Subscriptions Department [email protected], providing details of your subscription and the number of recipientsyou wish to forward or distribute this information to.
DISCLAIMERAll information contained in this publication has been researched and compiled from sources believed tobe accurate and reliable at the time of publishing. However, in view of the natural scope for human and/ormechanical error, either at source or during production, Business Monitor International accepts no liabilitywhatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part ofthe publication. All information is provided without warranty, and Business Monitor International makes norepresentation of warranty of any kind as to the accuracy or completeness of any information heretocontained.
All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International Limited and its affiliate companies (together “BMI”) accept no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and BMI makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.
Published by BUSINESS MONITOR INTERNATIONAL LTD
BUSINESS FORECAST REPORT
Q2 2013www.businessmonitor.com
BRAZILINCLUDES 10-YEAR FORECAST TO 2022
On The Road To A Modest Recovery
ISSN 1744-8875Published by Business Monitor International Ltd.
Copy Deadline: 18 January 2013
2 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013 B
RA
ZIL
– M
AC
RO
EC
ON
OM
IC IN
DIC
ATO
RS
2012
e20
13f
2014
f20
15f
2016
f20
17f
2018
f20
19f
2020
f20
21f
2022
f
Nom
inal
GD
P, U
S$b
n [2
]2,
225.
762,
290.
472,
369.
942,
527.
412,
770.
803,
063.
633,
412.
213,
851.
244,
408.
955,
065.
925,
675.
23
Nom
inal
GD
P, B
RLb
n [2
]4,
344.
74,
741.
35,
154.
65,
623.
56,
123.
56,
663.
47,
251.
07,
895.
08,
597.
59,
372.
010
,215
.4
Nom
inal
GD
P, E
UR
bn [3
]1,
752.
61,
832.
41,
974.
92,
106.
22,
309.
02,
553.
02,
843.
53,
209.
43,
674.
14,
221.
64,
729.
4
GD
P p
er c
apita
, US
$ [3
]11
,221
11,4
4911
,750
12,4
3213
,527
14,8
5016
,426
18,4
1720
,952
23,9
2926
,653
GD
P p
er c
apita
, EU
R [3
]9,
123
9,38
59,
791
10,3
6011
,273
12,3
7513
,688
15,3
4817
,460
19,9
4122
,211
Rea
l GD
P g
row
th, %
y-o
-y [3
]1.
03.
53.
74.
04.
24.
34.
34.
24.
44.
54.
5
Priv
ate
final
con
sum
ptio
n, %
of G
DP
[3]
61.4
61.1
60.4
59.9
59.5
59.4
59.4
59.5
59.6
59.8
59.9
Priv
ate
final
con
sum
ptio
n, re
al g
row
th %
y-o
-y [3
]1.
33.
22.
53.
13.
54.
04.
34.
54.
64.
84.
8
Gov
ernm
ent fi
nal c
onsu
mpt
ion,
% o
f GD
P [3
]20
.920
.620
.419
.819
.418
.918
.618
.217
.917
.617
.4
Gov
ernm
ent fi
nal c
onsu
mpt
ion,
real
gro
wth
% y
-o-y
[3]
0.8
2.1
2.5
1.0
1.5
1.6
2.8
2.0
2.2
3.0
3.2
Fixe
d ca
pita
l for
mat
ion,
% o
f GD
P [3
]18
.919
.620
.220
.821
.221
.521
.721
.922
.022
.122
.2
Fixe
d ca
pita
l for
mat
ion,
real
gro
wth
% y
-o-y
[3]
-2.5
7.7
7.2
7.0
6.5
5.8
5.2
5.0
5.0
5.0
5.0
Pop
ulat
ion,
mn
[4]
198.
420
0.1
201.
720
3.3
204.
820
6.3
207.
720
9.1
210.
421
1.7
212.
9
Une
mpl
oym
ent,
% o
f lab
our f
orce
, eop
[5]
5.0
5.4
5.5
5.5
5.6
5.7
5.7
5.6
5.7
5.8
5.8
Con
sum
er p
rices
, % y
-o-y
, ave
[3]
5.4
5.5
5.0
5.0
4.8
4.6
4.5
4.6
4.5
4.5
4.4
Lend
ing
rate
, %, a
ve [6
]33
.531
.236
.334
.834
.031
.529
.027
.025
.023
.022
.0
Cen
tral B
ank
polic
y ra
te, %
eop
[7]
7.25
7.50
8.00
7.50
6.50
5.50
5.50
5.50
5.50
5.50
5.50
Exc
hang
e ra
te B
RL/
US
$, a
ve [8
]1.
952.
072.
172.
222.
212.
172.
122.
051.
951.
851.
80
Exc
hang
e ra
te B
RL/
EU
R, a
ve [8
]2.
482.
592.
612.
672.
652.
612.
552.
462.
342.
222.
16
Bud
get b
alan
ce, U
S$b
n [1
,6]
-57.
9-6
0.0
-59.
2-5
0.5
-49.
9-3
9.8
-44.
4-4
2.4
-52.
9-5
0.7
-56.
8
Bud
get b
alan
ce, %
of G
DP
[1,6
]-2
.6-2
.6-2
.5-2
.0-1
.8-1
.3-1
.3-1
.1-1
.2-1
.0-1
.0
Goo
ds a
nd s
ervi
ces
expo
rts, U
S$b
n [6
]28
4.3
284.
029
9.3
329.
136
4.0
404.
044
3.7
488.
754
3.7
603.
765
8.7
Goo
ds a
nd s
ervi
ces
impo
rts, U
S$b
n [6
]30
3.0
300.
031
7.0
325.
035
5.0
387.
042
0.0
459.
050
4.0
549.
059
9.0
Bal
ance
of t
rade
in g
oods
and
ser
vice
s, U
S$b
n [6
]-1
8.7
-16.
0-1
7.7
4.1
9.0
17.0
23.7
29.7
39.7
54.7
59.7
Bal
ance
of t
rade
in g
oods
and
ser
vice
s, %
of G
DP
[6]
-0.8
-0.7
-0.7
0.2
0.3
0.6
0.7
0.8
0.9
1.1
1.1
Cur
rent
acc
ount
, US
$bn
[7]
-50.
4-4
9.8
-52.
5-3
0.6
-21.
8-1
3.6
-7.1
-2.8
7.2
22.2
27.2
Cur
rent
acc
ount
, % o
f GD
P [6
]-2
.3-2
.2-2
.2-1
.2-0
.8-0
.4-0
.2-0
.10.
20.
40.
5
Fore
ign
rese
rves
ex
gold
, US
$bn
[7]
379.
038
5.0
390.
039
2.0
395.
040
0.0
407.
041
5.0
425.
044
5.0
455.
0
Impo
rt co
ver,
mon
ths
g&s
[6]
20.3
20.1
19.3
18.1
16.3
15.0
13.8
12.7
11.7
11.1
10.3
Not
es: e
BM
I est
imat
es. f
BM
I for
ecas
ts. 1
Gen
eral
Gov
ernm
ent B
udge
t (A
ccum
ulat
ed C
urre
nt P
rices
). S
ourc
es: 2
IBG
E, I
MF;
3 IB
GE
/BM
I cal
cula
tion;
4 W
orld
Ban
k/U
N/B
MI;
5 IB
GE
; 6 B
CB
/BM
I cal
cula
tion;
7
BC
B; 8
BM
I cal
cula
tion.
3Business Monitor International Ltd www.businessmonitor.com
Contents
Executive Summary ................................................................................................................................. 5Core Views ......................................................................................................................................................................................5Major Forecast Changes ................................................................................................................................................................5Key Risks To Outlook ....................................................................................................................................................................5
Chapter 1: Political Outlook .................................................................................................................... 7SWOT Analysis .......................................................................................................................................................... 7BMI Political Risk Ratings ........................................................................................................................................ 7Domestic Politics ...................................................................................................................................................... 8Rising Violence Highlights Operational And Security Risks .....................................................................................................8
The recent increase in crime and violence in São Paulo highlights the continued spread of the Primeiro Comando da Capital gang in recent years, as well as the relative fragility of the security situation in some of the country's urban areas. Moreover, with anti-crime programmes likely to ramp up in both São Paulo and Rio de Janeiro over the coming quarters, we see potential for operational and security risks to head higher as well.
TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................ 8
Long-Term Political Outlook .................................................................................................................................. 10Significant Policy Challenges Ahead .........................................................................................................................................10
President Dilma Rousseff's administration faces myriad tough policy choices over the next few years, and many of these may not be addressed until after the 2014 general elections. The country's impressive economic performance under President Luiz Inácio Lula da Silva has significantly raised the bar for any future administration, and Rousseff now faces a delicate combination of policy objectives, from continuing to improve living standards and addressing widening domestic economic imbalances to meeting security and infrastructural challenges ahead of the FIFA World Cup in 2014 and the Rio de Janeiro Olympic Games in 2016.
Chapter 2: Economic Outlook ............................................................................................................... 13SWOT Analysis ........................................................................................................................................................ 13BMI Economic Risk Ratings ................................................................................................................................... 13Economic Activity ................................................................................................................................................... 14Upswing In 2013, But No Return To Boom Years ......................................................................................................................14
Following Brazil's unexpectedly-weak Q312 growth data, which showed that both fixed investment and the banking sector continue to drag down economic activity, we have revised down our average real GDP growth forecast for 2012 to 1.0% (from 1.5% previously). That said, we anticipate a significant pickup in economic activity in 2013, as we expect a backlog of infrastructure projects and a modest uptick in private consumption will boost growth to 3.5% in 2013.
TABLE: ECONOMIC ACTIVITY ............................................................................................................................................................................. 14
Monetary Policy ....................................................................................................................................................... 16Economic Recovery And Price Pressures Underpin Modest Rate Hike .................................................................................16
While we believe that a slow economic recovery and significant pressure on households is likely to keep Brazilian interest rates on hold for the majority of 2013, we maintain our view for a 25-basis-points hike by end-year, bringing the Selic rate to 7.50%. This comes as inflation expectations have headed higher in recent months and we believe significant currency depreciation and other supply-side price pressures will keep headline inflation elevated as well.
TABLE: MONETARY POLICY ............................................................................................................................................................................... 17
Exchange Rate Policy ............................................................................................................................................ 19BRL: Inflation Concerns To Limit Currency Weakness ............................................................................................................19
Since our last currency forecast update, the Brazilian real has continued to trade broadly sideways. While a sell -off in late 2012, which brought the unit to a low of BRL2.1384/US$ in early December, initially made us think that the Banco Central do Brasil (BCB) might allow a weaker currency, the unit's subsequent rally confirmed that the real is likely to range trade over the coming months. As such, we expect the unit to continue trading within a tight band of BRL2.0000/US$ and BRL2.1000/US$ over the coming months, forecasting an average exchange rate of BRL2.0700/US$ this year, slightly stronger than our previous forecast of BRL2.1300/US$.
TABLE: CURRENCY FORECAST ......................................................................................................................................................................... 20
Balance of Payments .............................................................................................................................................. 21Stronger Trade Outlook Underpins Current Account Improvement .......................................................................................21
Following a substantial trade slowdown in 2012, we expect a modest recovery in exports, due to favourable base effects and a cyclical upswing in Chinese growth, will bolster the current account in 2013. Mean while, although we expect the financial account surplus to
4 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
remain off its recent highs, we believe it will continue to comfortably offset the current account deficit.
TABLE: CURRENT ACCOUNT .............................................................................................................................................................................. 21
Fiscal Policy ............................................................................................................................................................. 23Expenditures To Keep Fiscal Deficit Substantial In 2013 .........................................................................................................23
While we see some upside for revenue growth in 2013 following a significant slowdown in 2012, we believe expenditures will head higher as well, meaning that we anticipate no improvement in Brazil's nominal fiscal deficit this year. Moreover, with the government indicating that it is looking to loosen Brazil's fiscal framework, we believe the administration will miss its primary balance target in 2013.
TABLE: FISCAL POLICY .......................................................................................................................................................................................23
Regional Economic Activity .................................................................................................................................. 25What If We Are Wrong On Chinese Growth? Assessing The Regional Implications ............................................................25
Signs of a recovery in China's economy present substantial upside risks to our current 'hard landing' scenario. Higher-than-anticipated economic growth in China over the coming years would have profound implications for Latin America's economic trajectory, and we highlight Chile and Peru, and Brazil to a lesser extent, as most affected in the event of stronger growth in Asia's biggest economy. 25
TABLE: CHINA'S CONSUMPTION OF SELECTED COMMODITIES, % OF GLOBAL CONSUMPTION ........................................................... 25
Chapter 3: 10-Year Forecast .................................................................................................................. 31The Brazilian Economy To 2022............................................................................................................................. 31Imbalances To Unwind, Three Potential Scenarios ..................................................................................................................31
Vast natural resources and strong domestic demand will keep investor interest rooted in Brazil over the coming decade. However, there is a pressing need for the authorities to address some of the country's deeply- rooted structural issues, stemming from too much consumption and not enough production, which is likely to lead to slower growth and a weaker currency at some point over the next 10 years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS ................................................................................................................................... 31
Chapter 4: Business Environment ........................................................................................................ 35SWOT Analysis ........................................................................................................................................................ 35BMI Business Environment Risk Ratings ............................................................................................................. 35Business Environment Outlook ............................................................................................................................. 36Institutions ............................................................................................................................................................... 36TABLE: BMI BUSINESS AND OPERATION RISK RATINGS .............................................................................................................................. 36
Infrastructure ........................................................................................................................................................... 37TABLE: BMI LEGAL FRAMEWORK RATING ....................................................................................................................................................... 37TABLE: LABOUR FORCE QUALITY ..................................................................................................................................................................... 38
Market Orientation ................................................................................................................................................... 39TABLE: LATIN AMERICA – ANNUAL FDI INFLOWS .......................................................................................................................................... 39
Operational Risk ...................................................................................................................................................... 40TABLE: TRADE AND INVESTMENT RATINGS .................................................................................................................................................... 40
Chapter 5: Key Sectors .......................................................................................................................... 43Autos ....................................................................................................................................................................... 43TABLE: BRAZIL AUTOS SALES BY SEGMENT – HISTORICAL DATA AND FORECASTS, 2010 – 2017 ....................................................... 45TABLE: FOOD CONSUMPTION INDICATORS – HISTORICAL DATA & FORECASTS, 2010-2017 .................................................................. 50
Other Key Sectors ................................................................................................................................................... 53TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS ................................................................................................................................. 53TABLE: PHARMA SECTOR KEY INDICATORS ................................................................................................................................................... 53TABLE: TELECOMS SECTOR KEY INDICATORS ............................................................................................................................................... 53TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS ..................................................................................................................... 54TABLE: FREIGHT SECTOR KEY INDICATORS ................................................................................................................................................... 54
Chapter 6: BMI Global Assumptions .................................................................................................... 55Global Outlook ......................................................................................................................................................... 55Growth May Be Turning The Corner ..........................................................................................................................................55TABLE: GLOBAL ASSUMPTIONS ........................................................................................................................................................................ 55TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS ................................................................................................................ 56TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%) ......................................................................... 56TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS ............................................................................................................... 57
5Business Monitor International Ltd www.businessmonitor.com
Executive Summary
Core Views Following a massive slowdown in 2012, we expect the Brazilian
economy to rebound in 2013. This view is underpinned by our projec-
tion that fixed investment will pick up over the coming quarters as the
government pushes through projects in advance of the expiration of
the PAC II growth acceleration programme and FIFA World Cup in
2014. That said, we continue to expect that a period of household
deleveraging will constrain private consumption growth in coming
years, in line with our forecast for average real GDP growth of 3.5%
between 2012 and 2017.
Given our view for economic activity to remain below-trend in the next
few years, we believe the monetary authorities will prefer to keep
the policy rate accommodative, implying that low interest rates are
here to stay. However, with inflation expectations having increased
in recent months and supply-side pressures likely to remain elevated
over the coming months, we forecast 25 basis points of hikes by
end-2013, bringing the Selic target rate to 7.50%.
We maintain our view that fiscal consolidation will remain off the cards
for Brazil until after 2014 at the earliest. This is underpinned by our
expectation of substantial spending related to the second phase of
the country's growth acceleration programme and the 2014 general
election, fiscal stimulus aimed at bolstering near-term growth, and
indications the President Dilma Rousseff's government is looking
to relax Brazil's fiscal regulations.
Major Forecast Changes We have downgraded our 2012 real GDP growth estimate to 1.0%
and our 2013 forecast to 3.5% as we believe Brazil's economic
recovery is progressing more slowing than we initially anticipated.
That said, we continue to anticipate a substantial uptick in economic
activity this year, as a rebound in fixed investment boosts growth.
We anticipate that a modest recovery in exports on the back of the
current cyclical upswing in Chinese growth, favourable base effects
and strong agricultural harvests will bolster Brazil's external accounts
this year. As such, we forecast the current account deficit will come
in at 2.2% of GDP in 2013, a modest improvement from an estimated
2.3% of GDP deficit in 2012. In addition, while we continue to believe
financial inflows will remain off their previous highs, we expect the
financial account surpluses will still comfortably cover the current
account shortfalls for the foreseeable future.
We believe an uptick in expenditures will offset a modest increase in
revenues in 2013, meaning that the nominal fiscal deficit will remain
substantial at 2.6% of GDP this year. Moreover, in line with recent
statements by members of President Dilma Rousseff's administra-
tion, we now believe the government will miss its 2013 primary fiscal
balance target of 3.1% of GDP, as it looks to have done in 2012.
Key Risks To Outlook Downside Risks To Growth Forecast: Should fixed investment
disappoint in 2013 on the back of project delays, as it did in 2012,
economic activity could remain weaker than we currently expect in
the coming quarters. Such a scenario would pose major downside
risks to our 2013 real GDP growth forecast of 3.5%.
Downside Risks To Interest Rate Forecast: Given our expectation for
economic activity to pick up over the coming quarters, while supply-
side price pressures remain elevated, we forecast 25 basis points of
hikes by end-2013, bringing the Selic rate to 7.50%. However, the
central bank's rhetoric continues to indicate that rates will remain
on hold at the current 7.25% level. Should growth pick up more
modestly than we currently anticipate over the coming months, we
could see the monetary authorities hold the policy rate at 7.25% or
even cut this year.
Brief Methodology
7Business Monitor International Ltd www.businessmonitor.com 7Business Monitor International Ltd www.businessmonitor.com
SWOT Analysis
Strengths President Dilma Rousseff has largely followed in the footsteps of her
predecessor Luiz Inácio Lula da Silva, maintaining market-friendly
policies and ensuring broad policy continuity. Such developments
underscore the country's democratic credentials ahead of the 2014
general election as well.
Although corruption scandals plague the political landscape, Rouss-
eff's crackdown on corrupt officials has boosted confidence in the
executive's commitment to tackling the issue.
Weaknesses Rousseff's 'house cleaning' of allegedly corrupt officials in recent
years means she must focus on maintaining a workable coalition to
push ahead with important reforms prior to the 2014 general election.
Opportunities The recently passed 'barrier' electoral law, which restricts federal
campaign financing for smaller parties, may help improve Brazil's
highly fragmented party environment by fostering coalition building.
Brazil's growing political influence in the region may pave the way for
the country to assume the role of regional leader, pioneering closer
integration among Latin American countries.
Threats The smaller members of the ruling legislative coalition could stir up
trouble for Rousseff if they feel she has assigned too many cabinet
posts to other parties or disagree with her policy trajectory. This
would be particularly problematic for the president heading into the
2014 general election.
BMI Political Risk RatingsBrazil's political risk profile remains highly stable and continues to place
Latin America's largest economy among the higher ranks of social stabil-
ity and broad policy continuity in the region, buoying the country in our
proprietary political risk ratings. We highlight, however, that the region
as a whole does not instil the same degree of confidence in our political
risk assessment, suggesting that rising political risk and social tensions
in Argentina, Venezuela, Bolivia and some Central American countries,
will present some degree of 'spill-over' risk going forward.
Chapter 1: Political Outlook
S-T Political Rank TrendChile 76.7 1 +Uruguay 74.8 2 -Colombia 72.5 3 =Costa Rica 72.5 3 =Panama 71.9 5 =Brazil 70.8 6 +Peru 67.5 7 =Mexico 65.6 8 =El Salvador 57.9 9 =Nicaragua 55.2 10 -Ecuador 55.0 11 -Bolivia 50.6 12 +Argentina 50.2 13 =Venezuela 48.1 14 -Guatemala 47.5 15 =Paraguay 45.6 16 =Honduras 43.8 17 -Regional ave 61.3/Global ave 65.5/Emerging Markets ave 63.1
L-T Political Rank TrendChile 84.2 1 =Costa Rica 71.8 2 =Uruguay 71.4 3 =Panama 67.9 4 =Mexico 67.1 5 =Brazil 66.5 6 =Colombia 62.8 7 =Argentina 61.9 8 =Peru 61.5 9 =Paraguay 60.4 10 =El Salvador 58.9 11 =Honduras 53.3 12 =Ecuador 50.6 13 =Venezuela 48.8 14 =Guatemala 45.8 15 =Nicaragua 44.7 16 =Bolivia 44.2 17 =Regional ave 61.3/Global ave 63.2/Emerging Markets ave 59.6
8 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Domestic Politics
Rising Violence Highlights Operational And Security Risks
BMI VIEWThe recent increase in crime and violence in São Paulo highlights the
continued spread of the Primeiro Comando da Capital gang in recent
years, as well as the relative fragility of the security situation in some
of the country's urban areas. Moreover, with anti-crime programmes
likely to ramp up in both São Paulo and Rio de Janeiro over the coming
quarters, we see potential for operational and security risks to head
higher as well.
Crime has surged in the state of São Paulo in recent months,
reportedly on the back of a confrontation between police and the
Primeiro Comando da Capital (PCC) gang in May. This increase
in violence highlights the fragility of security in some of Brazil's
urban areas, as well as increased potential for violence to spread
outside of the state. Furthermore, with anti-crime initiatives
likely to ramp up in São Paulo and Rio de Janeiro in the lead
up to the 2014 FIFA World Cup and 2016 Olympic Games in
Rio de Janeiro, we see potential for operational and security
risks in the country to head higher as police increasingly come
into conflict with gangs.
Local media report that 102 police officers were killed in the
city of São Paulo in 2012, more than double the number killed
in 2011. The surge in violence recalls a period of deadly con-
frontation between the PCC and police in 2006, during which
the gang allegedly organized a series of attacks that killed about
TABLE: POLITICAL OVERVIEW System of Government Parliamentary democracy, universal suffrage: 513-seat Chamber of Deputies (four-year
term). Executive power rests with president.
Head of State President (Dilma Rousseff), one four-year term
Head of Government President Dilma Rousseff
Last Election Parliamentary – October 1 2010
Presidential – October 31 2010
Composition of Current Government Coalition comprising Partido dos Trabalhadores, Partido Comunista do Brasil, Partido Republicano Brasileiro, Partido Socialista Brasileiro, Partido do Movimento Democrático Brasileiro, Partido Liberal, Partido Progressista and Partido da Mobilização Nacional
Key Figures Vice President – Michel Temer (Partido do Movimento Democrático Brasileiro), Chief of Staff – Gleisi Hoffmann (Partido dos Trabalhadores), Defence Minister – Celso Amorim (Partido do Movi-mento Democrático Brasileiro), Finance Minister – Guido Mantega (Partido dos Trabalhadores)
Main Political Parties (number of seats in parliament) Partido dos Trabalhadores (88 seats): Left-wing social-democratic party founded in 1980 by a group of intellectuals and workers at the Colégio Sion in São Paulo. The party was led by former president Luiz Inácio Lula da Silva since its formation until 1994. The party is currently led by Rui Falcão.
Partido do Movimento Democrático Brasileiro (78): A centrist party, succeeding its predecessor the Brazilian Democratic Movement in 1981. The party is largely made up of liberals and former guer-rillas of the MR-8 group. The party is currently led by Michel Temer.
Partido da Social Democracia Brasileira (54): One of the largest and most prominent Brazilian par-ties, it is the party of former president Fernando Henrique Cardoso. The social-democratic party is associated with the Third Way movement in Brazilian politics. The party was founded in 1988 and is currently led by Sérgio Guerra.
Democratas (Partido da Frente Liberal) (43): Considered to be the main centre-right party in Brazil, it is the party of the former military regime which ruled Brazil between 1964 and 1985. The party was founded in 1985 as the Liberal Front after splitting from the Democratic Social Party. The party's leader is José Agripino Maia.
Partido Progressista (41): This centre-right party was founded in 1995 as the Brazilian Progressive Party and is regarded as conservative. The party changed its name to Progressive Party in 2003. It is currently led by Francisco Dornelles.
Other parties represented in parliament include: Partido da República, Partido Socialista Brasileiro, Partido Democrático Trabalhista, Partido Trabalhista Brasileiro, Partido Popular Socialista, Partido Verde, Partido Comunista do Brasil, and Partido Social Cristão.
Next Election Parliamentary – 2014
Presidential – 2014
Key Relations/ Treaties Brazil is member of Mercosur, which includes Argentina, Paraguay and Uruguay. Associate mem-bers of the economic bloc include Chile, Ecuador, Peru, Bolivia and Colombia. Brazil has increas-ingly strong ties with the EU.
BMI Short-Term Political Risk Rating 70.8
BMI Structural Political Risk Rating 66.5
Source: BMI
9Business Monitor International Ltd www.businessmonitor.com
POLITICAL OUTLOOK
200 people in retaliation against a government programme de-
signed to isolate leaders of the PCC in prison. The most recent
conflict between the two groups has resulted in the deaths of
numerous police officers, particularly those in the force's lower
ranks. Despite government efforts to cut down on crime and
gang activity in some of country's most notorious slums, the
most recent surge in violence highlights the fragility of security
in urban areas.
Anecdotal evidence also suggests that the PCC's grip on the
Brazilian prison system continues to grow – the group was
formed as a union to defend prisoners' rights in 1993 – and local
press report that the PCC is an important force in the majority
of São Paulo's prisons, using them as bases from which to run
the gang's operations. In addition, while São Paulo and neigh-
bouring states remain the PCC's main power base, the gang
reportedly has a presence in 21 of the country's 27 states, and
gang membership continues to rise.
The PCC has also expanded its narco-trafficking operations in
recent years. According to the UN, federal cocaine seizures have
more than tripled in Brazil since 2004 to reach 27 tons in 2010,
and perceived cocaine usage has continued to grow since then.
Bolivian anti-narcotics authorities have stated that the PCC is
present in Bolivia as well and obtains much of its cocaine from
the country. Bolivia's Interior Minister, Carlos Romero, high-
lighted in October 2012 that 54% of Brazilian cocaine comes
from Bolivia, underscoring links between the drug trade in both
countries. There is also evidence that Brazil's narco-traffickers,
including the PCC, have infiltrated neighbouring Paraguay in
recent years, as the country is a regional narcotics transshipment
point and a marijuana producer. The PCC's growing presence
beyond São Paulo and its increasingly important role in the drug
trade implies that the risk of violence between the police and the
gang spreading outside of São Paulo is greater than in previous
years. While this is not our core view, we will be watching the
situation closely for any potential trigger events, which could
see violence spread. Indeed, such a situation would likely see us
downgrade the security component of our short-term political
risk rating for Brazil.
In addition to the surge in violence in São Paulo in recent months,
we highlight potential for the highly visible police pacification
programme ongoing in Rio de Janeiro's favelas to result in
significant confrontations between police and gangs over the
coming quarters. Indeed, the current programme utilizes raids
and increased law enforcement presence by special police forces
to rid the favelas of narcotics traffickers and local militias in
an attempt to reduce violence. As these initiatives continue we
anticipate that rising violence between the police and gangs,
such as the Comando Vermelho, could pose increased risks to
firms' operating in the city.
Assessing The Implications Of Gang ViolenceThe surge in violence in São Paulo, as well as the relative
tenuousness of the security situation in some urban areas has
important implications for political and business environment
risk in Brazil. Indeed, with conflicts between the police and
gangs likely to increase over the coming quarters, we see po-
tential for firms to be impacted on the operational and security
fronts. While we believe most investment is likely to go ahead
in spite of these risks, we note that signs of violence spreading
Strong Rating At Risk?Latin America – Short-Term Political Risk Ratings
20
40
60
80
Policy-making process
Social stability
Security/external threats
Policy continuity
BrazilColombiaPeruMexico
Source: BMI
Potential For DeteriorationLatin America – Short-Term Political Risk Ratings
62
64
66
68
70
72
74
Colombia Brazil Peru Mexico
Source: BMI
10 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
into more affluent areas could make foreign investors wary.
Moreover, should we see signs that the influence of the PCC
or Comando Vermelho is rapidly increasing outside of Brazil's
urban areas in the fashion of the Mexican drug cartels, this
could weigh heavily the country's investment outlook over the
medium to long term.
Long-Term Political Outlook
Significant Policy Challenges Ahead
BMI VIEWPresident Dilma Rousseff's administration faces myriad tough policy
choices over the next few years, and many of these may not be ad-
dressed until after the 2014 general elections. The country's impressive
economic performance under President Luiz Inácio Lula da Silva has
significantly raised the bar for any future administration, and Rousseff
now faces a delicate combination of policy objectives, from continuing
to improve living standards and addressing widening domestic eco-
nomic imbalances to meeting security and infrastructural challenges
ahead of the FIFA World Cup in 2014 and the Rio de Janeiro Olympic
Games in 2016.
The 2000s for Brazil are likely to be associated with the country's
ascent as a global economic force as a result of its rich natural
resources, a burgeoning consumer sector and broader macroeco-
nomic stability. The emergence of Brazil as a regional economic
heavyweight enabled the government of former president Luiz
Inácio Lula da Silva to pull millions of households out of pov-
erty and helped to steer the economy out of recession in 2009.
Yet while the turbulent days of hyperinflation, endemic finan-
cial market volatility and poor investor confidence appear for
now to be a thing of the past, future administrations in Brazil
will carry the burden of higher voter expectations and frequent
comparisons with the seemingly untouchable image of Lula.
We therefore expect immense pressure on President Dilma
Rousseff and any future president to live up to expectations over
the coming decade. In our view, the growing need for reforms
to tackle many unaddressed policy issues in Brazil could lead
to a significant polarisation of the electorate.
Key Challenges To Governance And StabilityClosing The Income Gap: Since the emergence of a vibrant
consumer segment, the political landscape has become increas-
ingly geared towards a social development agenda, ensuring
that a growing number of Brazilians have access to affordable
housing and retail goods via cheaper credit. While we expect this
trend to slow somewhat over the coming years, consolidation
of a rising middle class and its ambition to close the 'income
gap' with Western economies will remain of paramount politi-
cal importance. This will place a considerable straightjacket on
future policy efforts to unwind public spending programmes
initiated under Lula, such as 'Bolsa Familia' and the Growth
Acceleration Programme, restricting the room available to plug
the government's fiscal holes and potentially making the eventual
reduction of the government's role in the economy that much
more painful when it does come.
Rising Fiscal Uncertainty: Enormous public spending commit-
ments and a highly inefficient tax collection system will further
challenge the capacity of Brazilian authorities to rein in the fiscal
shortfall over the coming years. Therefore, a pick-up in economic
activity does not automatically guarantee a narrowing of the budget
deficit, suggesting that more will need to be done on the spend-
ing side. Indeed, our long-term political risk rating for Brazil is
weighed down primarily by a poor rating in the 'scope of state'
category, largely due to the large size of public spending as a
percentage of GDP. Reforming Brazil's highly complex and often
conflicting tax code will be another enormous challenge for any
future government, and we believe that a tangible improvement
in tax collection will remain unattainable until the latter end of
our forecast period, and possibly beyond.
High Labour Market Rigidity: Brazil has some of the highest
hiring costs in the world, forcing employers to commit large
sums to pension funds and pay enormous penalties for firing
workers. This places an additional burden on the public sector
to ensure high employment numbers, as an inflexible labour
market will have private-sector employers thinking twice before
re-hiring after a recession. Moreover, we caution that a large
grey economy will exacerbate the country's tax collection inef-
ficiency, in turn prolonging the government's fiscal woes over
the coming years.
High Entry Barriers: Although Brazil has plenty to offer
to foreign investors, we highlight that the country remains a
challenging market in which to invest. High entry barriers are
manifested through conflicting regulatory frameworks across
different states, high taxes, significant local content and hiring
requirements, and local companies aided by state subsidies.
Moreover, some of Brazil's largest and most successful businesses
remain firmly in state hands, further raising entry barriers for
11Business Monitor International Ltd www.businessmonitor.com
POLITICAL OUTLOOK
foreign companies looking to set up shop in the country. Given
the proximity of highly competitive regional economies with
strong growth outlooks, Brazilian policymakers may ultimately
risk alienating non-portfolio investors, undermining the long-
term growth potential for Brazilian businesses.
Regulating Offshore Reserves: The discovery of vast offshore
subsalt oil deposits in the Santos basin has turned Brazil into a
potential petroleum exporting giant. Policymakers will be under
enormous pressure to draw up a suitable regulatory framework
for the offshore reserves. Regulating these vast reserves formed
an important basis of the ruling Partido dos Trabalhadores (PT)
election campaign in 2010. However, with the government using
the record share issuance by state oil giant Petrobras to increase
its control over the company, we caution that the country risks
losing out on international investment. Foreign oil companies
will likely operate under a production sharing agreement under
this proposal, meaning that overcoming the technological chal-
lenges of bringing the oil and by-products efficiently to market
will remain a major policy challenge. In addition, significant
local capital requirements and hiring restrictions mean that
Brazil's oil industry may continue to be plagued by capacity
constraints for years to come.
Tackling Deforestation: Brazil possesses the largest stretch
of the Amazon rainforest. The Brazilian government will
increasingly come under international and domestic politi-
cal pressure to ensure the preservation of the Amazon and to
restrict uncontrolled deforestation. The policy implications of
overseeing logging activity and illegal deforestation will be
an enormous challenge for any future administration, as the
sheer size of Brazil's rainforest presents significant practical
challenges for any legal response. Additionally, the highly
lucrative timber industry takes on considerable political dimen-
sions in the affected regions, as local governors, who often
bring a strong local electorate to the negotiating table, tend
to benefit from the proceeds of the logging, cattle and soy
cycle responsible for much of the unregistered deforestation
activity in the country.
Cracking Down On Gang Violence: High levels of gang activity
will come under the spotlight over the coming decade, as Brazil
hosts high-profile sports events such as the FIFA World Cup
in 2014 and the 2016 Olympic Games in Rio de Janeiro. Rio
in particular is home to favelas dominated by notorious gangs
and often the location of drug-related violence and killings.
Despite previous efforts, the federal government has virtually
no control over the affected areas. Moreover, with the influence
of São Paulo's Primeiro Comando da Capital (PCC) gang on the
rise, we anticipate increased anti-crime initiatives there as well.
As such, we believe gang violence will become an increasingly
prominent challenge for the Brazilian authorities to overcome
ahead of both the FIFA World Cup and the Olympic Games.
Much attention will focus on the ability of security forces to
establish federal control over these areas to guarantee security
for visitors and athletes.
Drug Trafficking Risk To Stability: While Brazil traditionally
experiences little or no insurgent and paramilitary activity on its
territory compared with neighbouring Colombia and Peru, the
regional drug trade continues to weigh heavily on the political
risk profile of Latin America. The illicit drug trade has helped
finance guerrilla groups such as the Fuerzas Armadas Revolucion-
arias de Colombia (FARC) and the Sendero Luminoso (Shining
Path) in Peru, severely exhausting federal government efforts
to crack down on these illegal organisations. In Mexico's case,
drug cartels look set to be a major challenge for the incoming
administration of president-elect Enrique Peña Nieto. In addi-
tion, with Brazilian narcotics traffickers increasingly expand-
ing their operations into Bolivia and Paraguay, we believe the
destabilising potential of the regional drug trade suggests that
neighbouring countries may require the assistance of the Brazil-
ian government to avert deeper political crises. While not our
core scenario, the heightened political risk profile of the region
certainly suggests that a concerted regional effort may be a key
policy objective in the 2010s.
Consolidation Over, What Now?Since taking office in January 2011, Rousseff has asserted her
authority by clamping down on corruption, which resulted in
significant changes in the composition of the cabinet, much
of which was a legacy of her illustrious predecessor. The next
few years will be crucial in determining not only the electoral
fortunes of her party in 2014, but also the political and economic
trajectory of Brazil beyond the next electoral cycle.
No Let-Up In Spending Commitments: In keeping with
our long-held view, we expect policy continuity to be the key
theme of Brazilian politics over the medium term. We do not
envision a sharp unwinding of existing public spending commit-
ments anytime soon, despite pronouncements by the Rousseff
administration of the need for fiscal consolidation, since slower
global and domestic growth, as well as the need to secure capital
investment ahead of the FIFA World Cup and Olympic Games
will see continued reliance on institutions such as the Banco
Nacional do Desenvolvimento.
12 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Bottlenecks Hinder Growth: Despite its immense potential,
Brazil's growth trajectory remains constrained by structural
weaknesses, most notably in the form of a highly regulated la-
bour market, an overly complex and burdensome tax system and
dearth of access to long-term credit. Our worst-case scenario is
that these bottlenecks – coupled with country's underdeveloped
infrastructure – sour the taste in foreign investors' mouths over
the coming years. We believe that under such a scenario Brazil
would begin to slip from investors' radar screens and risk losing
out to more competitive investment destinations in the region.
13Business Monitor International Ltd www.businessmonitor.com
SWOT Analysis
Strengths The government's commitment to primary fiscal surpluses has in-
stilled confidence in the economy in recent years and bolstered the
country's sovereign credentials.
Weaknesses Large-scale social spending programmes have seen the govern-
ment's fiscal balance deteriorate at an alarming rate. Increased
use of populist rhetoric in the face of weaker global growth could
destabilise the public coffers for a prolonged period.
High levels of labour market rigidity and an enormous public sector
threaten to jeopardise Brazil's economic growth, as employers will
be less keen to hire new workers.
Opportunities Brazil's massive mineral and oil wealth combined with solid sovereign
dynamics will ensure continued foreign investment into the country.
The successful bid to host the 2016 Olympic Games in Rio de Janeiro,
only two years after the FIFA World Cup in Brazil, should also keep
investor interest in Brazil firmly anchored.
A recently passed public sector pension bill, which limits monthly
payouts to retirees, may help limit the country's substantial public
sector spending commitments over the long term.
Threats The country's major economic imbalances, namely too much con-
sumption and not enough production, are untenable in the long
term. Moreover, we believe that their unwinding poses major risks to
Brazil's growth story in the medium term, which are not adequately
appreciated by investors at present.
The inability of successive governments to implement successful
economic reforms, such as an overhaul of the tax system, which
places a heavy burden on business and industry, and reform of the
inflexible labour market are key threats to Brazil's economy. Should
President Dilma Rousseff's government fail to make progress on
these fronts over the coming years, it would impede long-term
competitiveness of the Brazilian economy and potentially cap foreign
direct investment.
BMI Economic Risk RatingsThough Brazil's extensive commodity wealth and a large consumer
base are likely to keep investor interest rooted in the country over the
coming years, there is a pressing need for the authorities to address
major structural imbalances in the economy. These stem in large part
from a very strong consumer and a weak manufacturing sector, which
have fostered an increased reliance on foreign capital in recent years.
While our core scenario calls for these imbalances to unwind through
a weakening of the currency over the coming years, we do not rule out
the possibility of a more rapid unwind or a delayed rebalancing followed
by a sharp adjustment thereafter.
Chapter 2: Economic Outlook
S-T Economy Rank TrendChile 79.2 1 +Mexico 76.2 2 =Peru 75.8 3 +Uruguay 73.1 4 =Brazil 68.1 5 -Panama 66.9 6 =Colombia 64.6 7 =Bolivia 63.5 8 -Ecuador 58.3 9 =Guatemala 58.1 10 =Costa Rica 55.4 11 =Paraguay 51.9 12 +El Salvador 51.7 13 – Honduras 50.0 14 =Argentina 47.5 15 -Nicaragua 44.0 16 -Venezuela 32.9 17 =Regional ave 58.1/Global ave 55.3/Emerging Markets ave 53.5
L-T Economy Rank TrendBrazil 73.6 1 -Chile 71.7 2 +Peru 71.0 3Uruguay 70.5 4 -Mexico 67.6 5 =Colombia 67.3 6 =Argentina 66.6 7 -Panama 65.5 8 =Costa Rica 61.6 9 =Bolivia 60.4 10 =Guatemala 55.6 11 =Ecuador 52.5 12 +Paraguay 50.2 13 -El Salvador 48.5 14 +Venezuela 44.0 15 =Honduras 41.9 16 =Nicaragua 38.6 17 =Regional ave 56.8/Global ave 53.8/Emerging Markets ave 51.3
14 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Economic Activity
Upswing In 2013, But No Return To Boom Years
BMI VIEWFollowing Brazil's unexpectedly-weak Q312 growth data, which
showed that both fixed investment and the banking sector continue to
drag down economic activity, we have revised down our average real
GDP growth forecast for 2012 to 1.0% (from 1.5% previously). That
said, we anticipate a significant pickup in economic activity in 2013, as
we expect a backlog of infrastructure projects and a modest uptick in
private consumption will boost growth to 3.5% in 2013.
Macro StrategyWe have downgraded our 2012 real GDP growth forecast for
Brazil to 1.0% (from 1.5% previously), as recently released
Q312 growth data indicates that the economic recovery is pro-
gressing more slowly than we expected. Both fixed investment
underperformance and slimmer profit margins for the banking
sector, due to government pressure on commercial banks to
reduce lending rates, have long been themes in our analysis,
though they weighed on economic activity more significantly
than we were expecting in Q312. While growth looks to come
in at the weakest level since the 2009 recession in 2012, we
continue to anticipate a significant pickup in economic activity
in 2013. Indeed, we forecast real GDP growth of 3.5%, a slight
downward revision from our previous 3.7% forecast, as we
expect a construction backlog to bolster growth, and continued
stimulus measures to modestly boost activity in the consumer
and manufacturing sectors.
Expenditure BreakdownPrivate Consumption – Weaker Consumer The New Nor-mal: Our core view for relatively weak private consumption
remains in play. Indeed, high household debt levels and weaker
purchasing power, on the back of the real's 10.9% depreciation
in the year to date is likely to constrain private consumption
growth considerably over the coming quarters. As such, we
forecast private consumption to contribute 0.8 percentage
points (pp) to headline real GDP growth in 2012, implying
real growth of 1.3%.
We expect private consumption to pick up modestly 2013,
Not Yet Moving In The Right DirectionBrazil – Interest Rates & Credit Growth
30
35
40
45
50
55
60
65
70
75
9
14
19
24
29
34
39
44
49
54
Jan-
05Ju
n-05
Nov
-05
Apr-
06Se
p-06
Feb-
07Ju
l-07
Dec
-07
May
-08
Oct
-08
Mar
-09
Aug-
09Ja
n-10
Jun-
10N
ov-1
0Ap
r-11
Sep-
11Fe
b-12
Jul-1
2
Individual Credit Growth (% chg y-o-y) LHS
Average Preset Consumer Interest Rates (%) RHS
Source: BMI, BCB
Starting To Turn The CornerBrazil – Real GDP Growth By Expenditure, % chg y-o-y
-4
-2
0
2
4
6
8
10
-20
-10
0
10
20
30
40
50
Q10
6Q
206
Q30
6Q
406
Q10
7Q
207
Q30
7Q
407
Q10
8Q
208
Q30
8Q
408
Q10
9Q
209
Q30
9Q
409
Q11
0Q
210
Q31
0Q
410
Q11
1Q
211
Q31
1Q
411
Q11
2Q
212
Q31
2
Private Consumption (LHS)Public Consumption (LHS)Gross Fixed Capital Formation (LHS)Real GDP Growth (RHS)
Source: BMI, IBGE
TABLE: ECONOMIC ACTIVITY2007 2008 2009 2010 2011 2012e 2013f 2014f 2015f 2016f
Nominal GDP, BRLbn [1] 2,661.3 3,032.2 3,239.4 3,770.1 4,143.0 4,344.7 4,741.3 5,140.2 5,607.8 6,106.5
Real GDP growth, % y-o-y [2] 6.1 5.2 -0.3 7.5 2.7 1.0 3.5 3.7 4.0 4.2
GDP per capita, US$ [2] 7,201 8,622 8,384 10,987 12,576 11,175 11,023 11,202 11,375 12,422
Population, mn [3] 189.8 191.5 193.2 194.9 196.7 198.4 200.1 201.7 203.3 204.8
Industrial production index, % y-o-y, ave [4] 5.9 3.0 -6.8 10.8 0.4 -2.7 2.5 5.1 4.6 4.1
Unemployment, % of labour force, eop [4] 7.4 6.8 6.8 5.3 4.7 5.5 5.4 5.5 5.5 5.6
Notes: e BMI estimates. f BMI forecasts. Sources: 1 IBGE, IMF; 2 IBGE/BMI calculation; 3 World Bank/UN/BMI; 4 IBGE.
15Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
growing by 3.2% in real terms, and contributing a more signifi-
cant 2.1pp to headline growth, as fiscal and monetary stimulus
increasingly feed through to the domestic market. However,
we highlight that weaker credit growth will help keep private
consumption growth off its recent highs. As we highlighted
above, a significant uptick in household debt levels has brought
the household debt servicing ratio (expected household debt
servicing payments/disposable income) to 22.0 in September,
marking several months near record high levels, and implying
that a period of deleveraging is necessary over the coming
quarters. We have seen consumer default rates rise in tandem in
recent months, remaining elevated at 7.9% of the total portfolio
in October, indicating that consumers remain stretched to make
loan payments despite a tight labour market. We expect both
of these factors, combined with private sector banks' continued
reticence to aggressively expand their loan portfolios, will limit
credit growth over the coming quarters, weighing on private
consumption.
Fixed Investment – Backlog To Drive Strong Growth: Follow-
ing a poor performance in Q312, we have significantly revised
down our 2012 fixed investment forecast. We now forecast
gross fixed capital formation to subtract 0.5pp from headline
growth in 2012, implying a 2.5% contraction in real terms, down
from 0.3% real growth previously. Our Infrastructure team has
long highlighted that Brazil is plagued by a number of issues,
which have put a ceiling on growth. Indeed, construction costs
remain substantial due to prohibitive local content requirements,
while high tariffs and complex tax, human resources, legal and
capital structures are weighing on profitability and access to
heavy industry. Moreover, a weak regulatory environment has
resulted in many projects being held up, or even re-tendered,
for reasons ranging from bidding irregularities to inadequate
environmental impact assessments. Ineffective institutions have
hindered government funding of infrastructure projects, which
comprises the majority of the government's growth accelera-
tion programme (PAC II), while a poor business environment
is deterring the private sector.
However, with the 2014 World Cup coinciding with a general
election and the final year of the PAC II, our Infrastructure
team expects a boost to construction industry growth in 2013
and 2014 similar to that seen in 2010 (without the base effects
from 2009's recession). Accelerating activity will be driven
by an expected improvement in funding disbursement and the
awarding of contracts, as a raft of new concession tenders and
projects has started to hit the market in H212. Moreover, with
infrastructure crucial to supporting the expansion of the oil &
gas, agribusiness and mining sectors, we believe the Brazilian
government will likely push through projects crucial to catalys-
ing this growth potential. Given these factors, we forecast gross
fixed capital formation to contribute a more significant 1.5pp
to real GDP growth in 2013, implying real growth of 7.7%.
Government Consumption – Heading Higher On Pre-Election Spending: We maintain our forecast for government
consumption to contribute a relatively moderate 0.2pp to headline
growth in 2012, implying real growth of 0.8%. Indeed, despite
numerous fiscal stimulus measures implemented in the year-
to-date, we have not seen a significant pickup in expenditure
growth. Rather, given that most of these measures have come in
the form of tax breaks, we have seen revenue growth fall instead,
a trend we expect to continue through year-end.
Pressure On Households Remains HighBrazil – Household Debt & Non-Performing Loans
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
15
16
17
18
19
20
21
22
23
Jan-
05Ju
n-05
Nov
-05
Apr-
06Se
p-06
Feb-
07Ju
l-07
Dec
-07
May
-08
Oct
-08
Mar
-09
Aug-
09Ja
n-10
Jun-
10N
ov-1
0Ap
r-11
Sep-
11Fe
b-12
Jul-1
2
Seasonally-Adjusted Household Debt Servicing Ratio LHSIndividual Non-Performing Loans (% total portfolio) RHS
Source: BMI, BCB
A Lot In The PipelineBrazil – PAC II (2011-2014) Investment Programme, BRLbn
Cidade Melhor
(Better City), 57.1
Comunidade Cidada (Citizen
Community), 23
Minha Casa, Minha Vida (My House,
My Life), 278.2
Agua e luz Para Todos (Water and Light for all),
30.6
Transport, 104.5
Energy, 461.6
Source: Brasil.gov
16 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
However, we maintain our view for a pickup in government con-
sumption in 2013, forecasting real growth of 2.1%, contributing
a more sizeable 0.4pp to real GDP growth. Indeed, with a general
election coming up in October 2014, and the PAC II programme
scheduled to expire that year as well, we believe public spending
will pick up significantly over the coming quarters.
Net Exports – External Account Weakness To Continue: Given significant continued weakness in trade data in recent
months, we have downgraded our exports and imports outlooks
for Brazil to reflect real growth of just 1.0% (from 4.0% previ-
ously) in 2012, and we forecast net exports to subtract 0.8pp
from headline real GDP growth.
Due to downgrades to our export and import data for 2013, in
line with our view that weaker Chinese demand for commodi-
ties will continue to impact Brazil's external accounts, we now
forecast net exports to subtract 0.5pp from headline growth,
slightly more than our previous forecast of -0.4pp.
Lower-Trend Growth To Continue Beyond 2013Over the medium term, we believe slowing private consumption
and the end of the China-led commodity boom will contribute to
average Brazilian real GDP growth of 3.5% between 2012 and
2017. Indeed, we believe that Brazil's consumer story is in for
a period of more moderate growth in the next few years due to
reduced consumer purchasing power, on the back of continued
currency weakness, and high household indebtedness.
In addition, we foresee a supportive, but bifurcated, investment
picture going forward (see our online service, October 11 2012,
'Lower-Trend Growth Ahead'). While a massive growth ac-
celeration programme and significant commodity wealth will
continue to support one of the region's largest infrastructure
project pipelines, our view for China's economy to rebalance
has important implications for Brazil. As Chinese investment
comes off the boil, we anticipate that the slowdown in economic
activity will feed through to lower average prices for base met-
als and iron ore, squeezing firms' margins and forcing them to
re-evaluate their capital expenditure programmes in major com-
modity producing countries. As such, we expect that investment
inflows related to the commodity sector are likely to moderate,
feeding through into slower headline growth in Brazil.
Risks To OutlookShould Brazil's construction backlog clear more slowly than
we currently expect, resulting in only a moderate improvement
in fixed investment growth over the coming quarters, growth
is likely to be relatively moderate in H113. Such a scenario,
combined with little pick up in private consumption due to
persistently high indebtedness and rising labour market uncer-
tainty, would pose major downside risks to our 2013 real GDP
growth forecast of 3.5%.
Monetary Policy
Economic Recovery And Price Pressures Underpin Modest Rate Hike
BMI VIEWWhile we believe that a slow economic recovery and significant pres-
sure on households is likely to keep Brazilian interest rates on hold for
the majority of 2013, we maintain our view for a 25-basis-points hike
by end-year, bringing the Selic rate to 7.50%. This comes as inflation
expectations have headed higher in recent months and we believe sig-
nificant currency depreciation and other supply-side price pressures
will keep headline inflation elevated as well.
We maintain our view that interest rates in Brazil will remain
near record lows in 2013, as the monetary authorities seek to
lessen the burden on a highly leveraged household sector, bolster
private consumption growth and economic activity. That said,
with inflation expectations edging higher and our forecast for
a significant uptick in real GDP growth to 3.5% in 2013, we
maintain our view that the Banco Central do Brasil (BCB) will
hike the benchmark Selic target rate by 25 basis points (bps)
to 7.50% by end-2013 (see our online service, July 20 2012,
A Massive SlowdownBrazil – Total Export And Import Growth, % chg y-o-y
-60
-40
-20
0
20
40
60
80
Jan-
07Ap
r-07
Jul-0
7O
ct-0
7Ja
n-08
Apr-
08Ju
l-08
Oct
-08
Jan-
09Ap
r-09
Jul-0
9O
ct-0
9Ja
n-10
Apr-
10Ju
l-10
Oct
-10
Jan-
11Ap
r-11
Jul-1
1O
ct-1
1Ja
n-12
Apr-
12Ju
l-12
Exports Imports
Source: BMI, BCB
17Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
'Interest Rates To Head Lower'). Nevertheless, given that the
Brazilian economy's recovery remains nascent and the country's
policymakers are likely to continue placing pressure on both
lending rates and the currency over the coming quarters, we
acknowledge that there are significant risks to this view.
Aggressive Rate Cuts Achieved Several GoalsWe have long argued that the BCB's 525 basis points (bps) of
cuts to the Selic rate between August 2011 and November 2012
sought to achieve several different goals, including stimulating
growth in the slowing economy, weakening the overvalued
real and bringing down the country's restrictively high interest
rates. At present, the monetary authorities look to have been
relatively successful, achieving at least two out of the three
objectives and fundamentally altering interest rate expectations
over the coming years.
Indeed, the real depreciated by 8.8% in 2012 on the back of
lower interest rates and government intervention, and continues
to trade below the BRL2.0000/US$ level despite rallying in
recent days. This has fed through to a slightly weaker real ef-
fective exchange rate as well, a long-held concern for the BCB
given the sharp slowdown in industrial production since 2011.
As such, while we believe the real will remain weak over the
next several years, averaging BRL2.1600/US$ between 2013
and 2015, we have recently tempered our forecasts for depre-
ciation to reflect what we see as important BCB concerns over
FX weakness. In addition to eroding consumer purchasing
power, continued real weakness, will also mean that imported
inflationary pressures will remain a salient concern over the
coming quarters, particularly given that Brazil's consumer price
basket is heavily weighted towards food and fuel (see 'Supply
Shocks And Stimulus Biggest Inflation Risks', August 24 2012).
In addition, interest rate expectations for a multi-year period have
changed dramatically in recent quarters, as the January 2014 DI
futures contract is currently trading at 7.2%, down from 10.4%
at the beginning of 2012. Moreover, the January 2021 contract
is trading at 9.3%, significantly lower than 11.0% at the start
of last year, implying a shift in rate expectations at the longer
end of the interest rate futures curve as well.
TABLE: MONETARY POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Consumer prices, % y-o-y, eop [2] 4.3 5.9 6.5 5.3 5.3 4.5 4.7 5.1 4.4
Consumer prices, % y-o-y, ave [3] 4.9 5.0 6.6 5.4 5.5 5.0 5.0 4.8 4.6
M1, BRLbn [4] 248.1 280.1 285.4 348.2 379.5 428.8 476.0 518.8 560.3
M1, % y-o-y [5] 10.5 12.9 1.9 22.0 9.0 13.0 11.0 9.0 8.0
M2, BRLbn [4] 1,169.3 1,360.7 1,617.5 1,876.3 2,176.5 2,394.1 2,585.7 2,792.5 3,015.9
M2, % chg y-o-y [5] 8.9 16.4 18.9 16.0 16.0 10.0 8.0 8.0 8.0
Central Bank policy rate, % eop [4] 8.75 10.75 11.00 7.25 7.50 8.00 7.50 6.50 5.50
Lending rate, %, eop [4] 34.3 35.0 37.0 30.0 32.5 34.5 35.0 33.0 30.0
Lending rate, %, ave [5] 37.3 34.9 38.9 33.5 31.2 36.3 34.8 34.0 31.5
Real lending rate, %, eop [1,5] 30.0 29.1 30.5 24.7 27.2 30.0 30.3 27.9 25.6
Real lending rate, %, ave [1,5] 32.4 29.8 32.4 28.2 25.8 31.3 29.8 29.2 26.9
3-month money market rate, % [5] 8.7 11.6 10.4 - - - - - -
Real 3-month money market rate, %, eop [1,5] 4.4 5.7 3.9 -5.3 -5.3 -4.5 -4.7 -5.1 -4.4
3-month money market rate, %, ave [5] 9.8 10.3 11.7 - - - - - -
Real 3-month money market rate, %, ave [1,5] 4.9 5.2 5.2 -5.4 -5.5 -5.0 -5.0 -4.8 -4.6
Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation. Sources: 2 IBGE; 3 IBGE/BMI calculation; 4 BCB; 5 BCB/BMI calcu-lation.
FX Provides Some ReliefBrazil – Real Effective Exchange Rate Index
40
50
60
70
80
90
100
110
120
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: BIoomberg, BIS
18 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Furthermore, given our view for private consumption growth to
remain relatively moderate in 2013, as neither household debt
levels nor non-performing loans have seen a major improve-
ment in recent months, we anticipate that rates will remain near
historical lows this year and do not rule out further government
pressure on commercial banks to reduce their lending rates.
Indeed, although average preset consumer lending rates have
fallen from 50.3% to 38.0% between January and November
2012, credit growth has remained relatively moderate, coming
in at 10.0% y-o-y in September. As such, we do not rule out
further cuts to commercial banks' reserve requirements either,
as was the case in September and December 2012, in order to
further stimulate loan growth and bolster private consumption.
While the BCB was likely able to avoid a more aggressive slow-
down in 2012 by slashing the benchmark interest rate, growth
has yet to rebound strongly. As Q312 data showed, this was
partly due to its own policies, as the service sector suffered on
the back of a poor performance from financial services (see 'Ser-
vices And Investment Disappoint Highlighting Downside Risks
To Growth', December 3 2012). Nevertheless, while we expect
private consumption growth to remain relatively moderate on
the back of the above factors, we anticipate a significant uptick
in fixed investment growth in 2013 as projects are increasingly
pushed through in advance of the expiration of the govern-
ment's PAC II growth acceleration programme and FIFA World
Cup in 2014 (see 'Upswing In 2013, But No Return To Boom
Years', December 18 2012). That said, we maintain our view
that real GDP growth will remain below pre-crisis levels over
the coming years, averaging 3.7% between 2013 and 2017, on
the back of a continued deleveraging process and a supportive,
but bifurcated investment picture (see 'Lower-Trend Growth
Ahead', October 11 2012).
A Delicate Balance Between Stimulating Growth And Stoking InflationWhile we believe that significant pressure on households, as well
as a still nascent economic recovery will keep rates on hold for
the majority of 2013, we maintain our view for a 25bps hike to
the Selic rate by year-end. This comes as we expect supply-side
price pressures to remain significant through H113, and continue
to anticipate a substantial boost in economic activity in 2013
largely on the back of stronger fixed investment.
Data Points To Stronger Growth And InflationBrazil – Economic Activity, Selic Rate and Consumer Price Inflation
-5
-3
-1
1
3
5
7
9
11
5
7
9
11
13
15
17
19
Jan-
04Ju
n-04
Nov
-04
Apr-
05Se
p-05
Feb-
06Ju
l-06
Dec
-06
May
-07
Oct
-07
Mar
-08
Aug-
08Ja
n-09
Jun-
09N
ov-0
9Ap
r-10
Sep-
10Fe
b-11
Jul-1
1D
ec-1
1M
ay-1
2O
ct-1
2
Selic Rate (%) LHSConsumer Price Inflation (% chg y-o-y) RHSEconomic Activity (% chg y-o-y) RHS
Source: BMI, BCB
Worst Is In The PastBrazil – Real GDP Growth, % chg y-o-y
-4
-2
0
2
4
6
8
10
-20
-10
0
10
20
30
40
50
Q10
6Q
206
Q30
6Q
406
Q10
7Q
207
Q30
7Q
407
Q10
8Q
208
Q30
8Q
408
Q10
9Q
209
Q30
9Q
409
Q11
0Q
210
Q31
0Q
410
Q11
1Q
211
Q31
1Q
411
Q11
2Q
212
Q31
2
Private Consumption (LHS)Public Consumption (LHS)Gross Fixed Capital Formation (LHS)Real GDP Growth (RHS)
Source: BMI, IBGE
Rates To Remain LowBrazil – January 2014 DI Futures Contract, %
6.6
6.8
7.0
7.2
7.4
7.6
7.8
8.0
8.2
Jun-
12
Jul-1
2
Aug-
12
Sep-
12
Oct
-12
Nov
-12
Dec
-12
Source: Bloomberg
19Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
Indeed, given the run-up in global grains prices in 2012, our
Commodities team believes that food price inflation is likely
to remain elevated through H113, keeping headline inflation
in Brazil on the rise. In addition, high likelihood of a domestic
fuel price hike this year means that supply-side pressures are
unlikely to ease substantially in the near future (see 'Moody's
Downgrades Petrobras, But Prospects For Fuel Price Changes
Provide Optimism', December 20 2012). These factors, combined
with our view for stronger economic activity and a pick-up in
government spending before the 2014 general election, underpins
our view for inflation to average 5.5% this year, slightly above
our estimated average of 5.4% for 2012. This view is broadly
in line with the weekly central bank economists' survey, which
has seen end-2013 inflation expectations increase from 5.4% on
November 30 to 5.5% on January 4. As such, we maintain our
view that the trend will be for higher rates over the coming years.
Risks To OutlookGiven that Brazil's economy remains in the early stages of a
recovery, we acknowledge that there are significant risks to
our view for a modest interest rate hike this year. Should fixed
investment remain a drag on growth in early 2013 on the back
of continued project delays and investor concerns over high
costs and red tape, we believe the BCB could cut rates in order
to bolster growth. That said, we do not rule out the possibility
of additional easing leading to a hiking cycle, should inflation
head back towards the upper limit of the central bank's target
band, potentially posing an upside risk to our end-2013 interest
rate outlook.
Exchange Rate Policy
BRL: Inflation Concerns To Limit Currency Weakness
BMI VIEWSince our last currency forecast update, the Brazilian real has con-
tinued to trade broadly sideways. While a sell -off in late 2012, which
brought the unit to a low of BRL2.1384/US$ in early December, initially
made us think that the Banco Central do Brasil (BCB) might allow a
weaker currency, the unit's subsequent rally confirmed that the real
is likely to range trade over the coming months. As such, we expect
the unit to continue trading within a tight band of BRL2.0000/US$ and
BRL2.1000/US$ over the coming months, forecasting an average ex-
change rate of BRL2.0700/US$ this year, slightly stronger than our pre-
vious forecast of BRL2.1300/US$.
Core ViewWe maintain our view for further currency weakness in Brazil
over the coming years on the back of a more moderate domestic
growth story, easing investment inflows due to slowing growth
in China and our expectation that the central bank will remain
supportive of a weak real. That said, we have revised our
multi-year exchange rate outlook to reflect a slightly stronger
currency, with the unit averaging BRL2.1567/US$ between
2013 and 2015, as compared to BRL2.2783/US$ previously.
This revision follows what we see as increasing concerns by
the central bank over the inflationary impact of significant FX
weakness, as well as potential for other supply-side pressures to
drive inflation higher in 2013 tempering the bank's growth bias.
While we are expecting a significant pickup in economic activ-
ity in Brazil in 2013, forecasting real GDP growth to accelerate
from an estimated 1.0% in 2012 to 3.5% in 2013, we maintain
our long-held view that a period of lower-trend growth is on the
cards over the coming years (see our online service, October 11
2012, 'Lower Trend Growth Ahead'). While we believe the 2013
growth spurt will be driven in large part by a pickup in fixed
investment related to the expiration of the government's PAC II
growth acceleration programme and FIFA World Cup in 2014,
we believe the investment picture will remain bifurcated. This
is underpinned by our view that some mining and infrastructure
investment will remain vulnerable to weaker external demand.
In addition, we expect Brazil's consumer story to experience a
period of more modest growth in the next few years due to a
period of consumer deleveraging following a run-up in house-
hold debt levels in 2011 and 2012 (see 'Upswing In 2013, But
BRL To Remain Range Bound For NowBrazil – Exchange Rate, BRL/US$ (Daily) & 200-Day Moving Average
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
Jun-
10
Aug-
10
Oct
-10
Dec
-10
Feb-
11
Apr-
11
Jun-
11
Aug-
11
Oct
-11
Dec
-11
Feb-
12
Apr-
12
Jun-
12
Aug-
12
Oct
-12
Dec
-12
Source: BMI, Bloomberg
20 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
No Return To Boom Years', December 18 2012). With Brazilian
growth unlikely to return to its recent highs for the foreseeable
future, interest rates to remain near record lows (we forecast
one 25 basis points hike by end-2013, bringing the benchmark
Selic interest rate to 7.50%), we see little upside for the real
over the coming quarters (see 'Economic Recovery And Price
Pressures Underpin Modest Rate Hike', January 9).
In addition, our view for China to undergo a period of domestic
rebalancing over the coming years – long a theme in our Asia
Country Risk analysis – has important implications for the Brazil-
ian real. Indeed, we expect the Chinese economy to increasingly
move away from a heavily investment-led growth model to one
in which private consumption plays a greater role, implying that
Chinese demand for commodities is likely to weaken over the
coming years (see 'Emerging Markets: Beyond China's Hard
Landing', September 27). As such, we believe that investment
inflows are likely to ease over the coming quarters, as firms
increasingly re-evaluate their capital expenditure plans on the
back of lower average metals prices.
Moreover, we continue to believe that the BCB will remain
supportive of a weaker real over the coming quarters in order to
continue aiding the ailing manufacturing industry, as industrial
production has not posted sustained gains since 2010. That said,
with the weekly central bank economists' survey showing end-
2013 inflation expectations increased from 5.4% on November
30 to 5.5% on January 4, and potential for a domestic fuel price
increase and food price inflation to keep headline inflation el-
evated in 2013, we believe the BCB is likely to limit significant
currency weakness over the coming quarters, underpinning our
view for only moderate depreciation.
Risks To OutlookWe maintain that the central bank's exchange rate policy will
be a major driver of the real over the coming quarters, mean-
ing that policy changes pose the largest risk to our multi-year
exchange rate outlook. Indeed, should inflation spike on the back
of higher food price pressures than we currently expect and a
significant domestic fuel price increase, we could see the BCB
allow the unit to appreciate to above the BRL2.0000/US$ level,
posing major risks to our average and end-2013 exchange rate
forecasts of BRL2.0700/US$ and BRL2.1500/US$ respectively.
Investors Continue To Price In DepreciationBrazil – BRL/US$ 1-Year Offshore Non-Deliverable Forward Contract
& 200-Day Moving Average
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
Sep-
10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep-
11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep-
12
Nov
-12
Jan-
13
Source: Bloomberg
Downtrend To Remain In PlaceBrazil – Exchange Rate, BRL/US$ (Monthly)
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: BMI, Bloomberg
TABLE: CURRENCY FORECASTSpot Short-Term 2013 2014
BRL/US$, ave 2.0391 2.0500 2.0700 2.1750
BRL/EUR, ave 2.6666 - 2.5254 2.6100
BCB Selic Rate, % eop 7.25 - 7.50 8.00
Source: BMI, January 9 2013
21Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
Balance of Payments
Stronger Trade Outlook Underpins Current Account Improvement
BMI VIEWFollowing a substantial trade slowdown in 2012, we expect a modest
recovery in exports, due to favourable base effects and a cyclical up-
swing in Chinese growth, will bolster the current account in 2013. Mean
while, although we expect the financial account surplus to remain off its
recent highs, we believe it will continue to comfortably offset the current
account deficit.
We maintain our long-held view that Brazil's external account
deficit will remain substantial in the next few years on the back
of more moderate export growth, due to still weak global growth
and a structural shift in China's economy. As such, we forecast
the current account deficit to come in at 2.2% of GDP in 2013,
a slight improvement from an estimated 2.3% of GDP in 2012
(see our online service, September 26 2012, 'Weakening Trade
Account Dampens Current Account Outlook'). While we expect
structurally weaker growth in China will temper investment
inflows into Brazil over the coming quarters, as cost constraints
impact firms' capital expenditure plans, we believe the financial
account surplus will continue to comfortably offset the current
account deficit.
Trade Balance To Head Higher As Exports RecoverBrazilian exports fell off sharply in 2012 as domestic growth
slowed and exports to China headed into negative territory,
and we expect only moderate upside in 2013. Indeed, we have
revised our 2012 estimate to reflect a 4.7% contraction in exports
last year (from a 2.0% contraction previously) and forecast a
relatively modest 4.5% expansion in 2013.
Brazilian exports are weighted heavily towards manufactured
goods and primary products (84.2% of exports during the first
11 months of 2012), and our view for the cyclical upswing in
Chinese economic activity to continue through H113 means that
rising demand for steel and iron ore will be supportive of export
growth (exports to China were 17.1% of total exports between
January and November 2012). Moreover, our Agribusiness team
is expecting strong sugar, coffee and soybean production to come
online over the coming months, bolstering exports as well. That
said, while exports to Argentina are a fairly small proportion of
total exports – 7.5% between January and November 2012 – we
believe they are unlikely to see a significant pickup, underpinned
TABLE: CURRENT ACCOUNT2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Goods imports, US$bn [2] 127.7 181.8 226.2 223.5 230.0 242.0 260.0 290.0 320.0
Goods imports, % of GDP [3] 7.9 8.5 9.1 10.0 10.0 10.2 10.3 10.5 10.4
Goods exports, US$bn [2] 153.0 201.9 256.0 244.0 255.0 270.0 300.0 335.0 375.0
Goods exports, % of GDP [3] 9.4 9.4 10.4 11.0 11.1 11.4 11.9 12.1 12.2
Goods exports, % of imports [3] 119.8 111.1 113.2 109.2 110.9 111.6 115.4 115.5 117.2
Balance of trade in goods, US$bn [2] 25.3 20.1 29.8 20.5 25.0 28.0 40.0 45.0 55.0
Balance of trade in goods, % of GDP [3] 1.6 0.9 1.2 0.9 1.1 1.2 1.6 1.6 1.8
Services imports, US$bn [2] 47.0 62.6 76.3 79.5 70.0 75.0 65.0 65.0 67.0
Services imports, % of GDP [3] 2.9 2.9 3.1 3.6 3.1 3.2 2.6 2.3 2.2
Services exports, US$bn [2] 27.7 31.8 38.4 40.3 29.0 29.3 29.1 29.0 29.0
Services exports, % of GDP [3] 1.7 1.5 1.6 1.8 1.3 1.2 1.2 1.0 0.9
Goods and services exports, US$bn [3] 180.7 233.7 294.5 284.3 284.0 299.3 329.1 364.0 404.0
Goods and services exports, % of GDP [3] 11.2 10.9 11.9 12.8 12.4 12.6 13.0 13.1 13.2
Balance of trade in goods and services, US$bn [3] 6.0 -10.6 -8.1 -18.7 -16.0 -17.7 4.1 9.0 17.0
Balance of trade in goods and services, % of GDP [3] 0.4 -0.5 -0.3 -0.8 -0.7 -0.7 0.2 0.3 0.6
Net income, US$bn [2] -33.7 -39.5 -47.3 -36.0 -37.0 -38.0 -38.0 -34.1 -33.9
Income account balance, % of GDP [3] -2.1 -1.8 -1.9 -1.6 -1.6 -1.6 -1.5 -1.2 -1.1
Net transfers, US$bn [2] 3.3 2.8 2.8 4.3 3.2 3.2 3.2 3.3 3.3
Net transfers, % of GDP [3] 0.2 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1
Current account, US$bn [2] -24.3 -47.5 -52.6 -50.4 -49.8 -52.5 -30.6 -21.8 -13.6
Current account, % of GDP [3] -1.5 -2.2 -2.1 -2.3 -2.2 -2.2 -1.2 -0.8 -0.4
Openness to international trade, % [1,3] 17.3 17.9 19.5 21.0 21.2 21.6 22.2 22.6 22.7
Notes: e BMI estimates. f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 BCB; 3 BCB/BMI calculation.
22 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
by our view for a devaluation of the Argentine peso in 2013, as
well as sharp deceleration in real GDP growth to 0.9% this year.
Following an estimated 1.2% contraction in 2012, we forecast
only a moderate recovery in import growth this year to 2.9%
(a slight downgrade from our previous forecast of 4.8%). In-
termediate goods and raw materials, as well as capital goods,
comprised 66.5% of total imports during the first 11 months of
2012, and import growth correlates closely with the industrial
production index.
While we expect industrial production to rebound in 2013,
aided by increased competitiveness on the back of continued
real weakness and the continuation of several stimulus pro-
grammes targeted at the manufacturing sector, we forecast an
average expansion of just 1.5%, following an estimated 2.7%
contraction in 2012. As such, while we believe favourable base
effects and a modest pickup in the manufacturing sector will
prompt imports to return to growth this year, we expect them
to remain off their recent highs.
In addition to a moderate improvement in the trade balance, our
expectation that the income account deficit will be constrained
by less significant profit repatriation by foreign firms, also un-
derpins our view for an improvement in the current account this
year. Indeed, we have seen the income account deficit moder-
ate in recent months and expect this trend to continue as firms'
profit margins remain under pressure due to weak domestic
and global growth.
Investment Inflows To EaseOn the investment side, we maintain our long-held view that
Brazil's financial account surplus will remain off its recent highs
in the next few years, although it will be more than sufficient to
fund the current account deficit. This view is underpinned by
our expectation that a structural shift in the Chinese economy
will precipitate more modest demand and prices for industrial
metals in particular, prompting major mining firms to re-evaluate
their capital expenditure plans in light of this new environment.
In addition, with Brazil's growth story having slowed substan-
tially over the last 12 months, and unlikely to return to pre-2011
growth rates in the near future, we expect portfolio investment
to remain more moderate as well, in line with the recent trend.
That said, given Brazil's substantial infrastructure project pipe-
line, as well as its massive commodity wealth, we believe the
country will remain one of the foremost investment destinations
in Latin America over the next five to 10 years.
Risks To OutlookWe recently explored the potential impacts of a more sustained
uptick in Chinese economic activity on Brazil and the region's
other major metals exporters through 2013 (see 'What If We're
Wrong On Chinese Growth? Assessing The Regional Impli-
cations', December 27 2012). Such a scenario would bolster
export growth on the back of a sustained pickup in demand
and prices for steel and iron ore, posing potential upside risks
to our 2013 and 2014 export and current account forecasts. In
addition, stronger economic activity in China would likely result
in stronger investment inflows than we currently expect as firms
are likely to continue boosting their capital expenditure plans.
Imports Linked To Industrial ProductionBrazil – Goods Imports & Industrial Production Index, % chg y-o-y
-20
-15
-10
-5
0
5
10
15
20
25
-60
-40
-20
0
20
40
60
80
100
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Intermediate Products And Raw Materials LHSCapital Goods LHSIndustrial Production RHS
Source: BMI, BCB
Heading Into Positive TerritoryBrazil – Goods Exports, % chg y-o-y
-60
-40
-20
0
20
40
60
80
100
120
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
Jan-
11
May
-11
Sep-
11
Jan-
12
May
-12
Sep-
12
Total Primary products Manufactured goods
Source: BMI, BCB
23Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
Fiscal Policy
Expenditures To Keep Fiscal Deficit Substantial In 2013
BMI VIEW While we see some upside for revenue growth in 2013 following a sig-
nificant slowdown in 2012, we believe expenditures will head higher as
well, meaning that we anticipate no improvement in Brazil's nominal
fiscal deficit this year. Moreover, with the government indicating that it
is looking to loosen Brazil's fiscal framework, we believe the adminis-
tration will miss its primary balance target in 2013.
We maintain our view that significant fiscal consolidation is off
the cards in Brazil until after the 2014 general election at the
earliest. While we expect a gradual winding down of the tax
cuts enacted in late 2011 and 2012 as economic activity picks
up, meaning some upside for revenue growth over the coming
quarters, we believe that spending related to the government's
PAC II growth acceleration programme and the 2014 general
election will see total expenditures head higher in 2013. As
such, we forecast the nominal fiscal deficit to come in at 2.6%
of GDP this year, marking no improvement from our 2012 es-
timate (see our online service, September 25 2012, 'Continued
Stimulus Means Fiscal Consolidation Will Remain Elusive').
Similarly, as the government continues to prioritise economic
growth over fiscal consolidation, we expect it to miss its primary
fiscal balance target of 3.1% of GDP in 2013, with the primary
balance coming in at 2.8% of GDP. Indeed, in line with recent
government statements, we believe it is highly likely that the
administration technically missed the target in 2012, and will
instead exclude certain investments and tap the country's sov-
ereign wealth fund to meet it.
Revenues To Head HigherWhile revenue growth remained weak for the majority of 2012,
due in part to a major slowdown in tax inflows, we expect some
upside in 2013 as economic activity recovers. Moreover, we
Financial Account Surplus To Remain Off Its Recent Highs
Brazil – FDI & Portfolio Investment, US$mn
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0O
ct-1
0Ja
n-11
Apr-
11Ju
l-11
Oct
-11
Jan-
12Ap
r-12
Jul-1
2O
ct-1
2
FDIPortfolio Investment
Source: BMI, BCB
More Upside AheadBrazil – Tax Revenue & Economic Activity, % chg y-o-y
-6
-4
-2
0
2
4
6
8
10
12
-20
-10
0
10
20
30
40
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Tax Revenue (LHS)Seasonally-Adjusted Economic Activity Index (RHS)
Source: BMI, BCB
TABLE: FISCAL POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Fiscal revenue, BRLbn [1,5] 737.1 917.3 987.2 1,056.3 1,151.4 1,278.0 1,431.4 1,603.1 1,795.5
Revenue, % of GDP [1,6] 22.8 24.3 23.8 24.3 24.3 24.8 25.5 26.2 26.9
Fiscal expenditure, BRLbn [2,5] 699.9 840.8 897.2 995.9 1,130.3 1,288.6 1,430.3 1,580.5 1,722.7
Expenditure, % of GDP [2,6] 21.6 22.3 21.7 22.9 23.8 25.0 25.4 25.8 25.9
Budget balance, BRLbn [3,5] -106.2 -93.7 -108.0 -113.0 -124.2 -128.9 -112.5 -110.2 -86.6
Budget balance, % of GDP [3,6] -3.3 -2.5 -2.6 -2.6 -2.6 -2.5 -2.0 -1.8 -1.3
Primary balance BRLbn [3,5] 64.8 101.7 128.7 99.9 132.8 154.6 174.3 202.1 233.2
Primary balance % of GDP [4,6] 2.0 2.7 3.1 2.3 2.8 3.0 3.1 3.3 3.5
Notes: e BMI estimates. f BMI forecasts. 1 Central Government Revenues; 2 Central Government Expenditure; 3 General Government Budget (Accumu-lated Current Prices); 4 Fiscal balance stripping out interest payments on government debt. Sources: 5 BCB; 6 BCB/BMI calculation.
24 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
forecast total central government revenue to expand by 9.0%
in 2013, after estimated growth of 7.0% in 2012. This comes as
we have already begun to see a modest recovery in tax revenue
in recent months, posting 4.7% y-o-y growth in November, well
above its 2012 low of -6.9% y-o-y.
Our view for revenues to expand at a modestly stronger pace in
2013 is underpinned by our expectation of a gradual winding
down of the tax cuts implemented in recent quarters, as well as
a pickup in economic activity. Indeed, the former is exemplified
by the government's recent announcement that it will gradually
increase the industrial products tax (IPI) over the coming months,
phasing out a tax cut targeted at the Autos sector (see ' Gov-
ernment To Stagger Tax Cut Reduction ', December 20 2012).
While we believe the elimination of tax breaks will be gradual,
given the government's growth bias, we believe slightly higher
tax rates are likely to bolster revenues this year. Moreover, we
expect revenue growth to get a boost from stronger economic
activity as well, in line with our forecast for real GDP growth to
accelerate to 3.5% in 2013, a significant increase from estimated
1.0% growth in 2012 (see 'Upswing In 2013, But No Return To
Boom Years', December 27 2012).
PAC II And Election To Boost ExpendituresOn the expenditures side, we continue to see scope for government
spending to head higher over the coming quarters, forecasting
total central government expenditures to expand by 13.5% in
2013, up from an estimated 11.0% in 2012.
This view is supported by our expectation that both the expira-
tion of the government's PAC II growth acceleration programme
in 2014, as well as the general election that year will see both
current and capital expenditures tick up. Indeed, our Infra-
structure team anticipates that after significant project delays
in 2012, the government will increasingly push through public
investment projects over the coming quarters. In addition to the
programme's expiration in 2014, the general election provides a
further impetus for President Dilma Rousseff's government to
ramp up promised spending on infrastructure and social housing,
underpinning our view for higher expenditure growth.
Changing The Fiscal Paradigm ?The Brazilian government's decision to forgo its primary fiscal
balance target of 3.1% of GDP in 2012, indications that the
government may miss it again in 2013 (our core view), as well
as proposed changes to the country's fiscal responsibility law
underscore our view that the current administration is moving
towards a looser fiscal framework. Indeed, given the economy's
success in managing its public finances in recent years, we
believe that an increasing focus on the nominal fiscal deficit,
rather than the primary surplus, is apt. While we acknowledge
that relaxing the country's hallmark fiscal responsibility law
could be a slippery slope, the ability to reduce Brazil's substantial
tax burden – one of the proposed changes – will be essential
to increasing investment and improving the country's business
environment over the medium to long term. Indeed, Brazil
scores 154 out of 185 economies in the 'paying taxes' portion
of the World Bank's Doing Business 2013 report, due to both a
69.3% total tax rate and a burdensome 2,600 hours to file taxes.
Given that we expect both more moderate real GDP growth over
the coming years, as well as an increasingly important role for
fixed investment in Brazil's economy, a more investor-friendly
tax regime is essential in the next few years.
Risks To OutlookThe risks to our 2013 fiscal outlook lie to the downside. Should
real GDP growth disappoint over the coming quarters on the
back of a more moderate expansion in fixed investment that we
currently anticipate, we could see both more moderate revenues
and higher expenditures. Weaker than expected economic activity
could see the government fail to phase out certain tax breaks,
seeing what modest additional revenue growth we foresee this
year disappear. Moreover, we expect that expenditures are likely
to pick up even if economic activity does not as the government
attempts to stimulate growth and moves forward with some public
investment projects ahead of the PAC II deadline and general
election in 2014. Such a scenario would pose major downside
risks to our primary and nominal fiscal forecasts this year.
Uptrend To ContinueSelected Components Of Central Government Expenditures, BRLbn
0
20
40
60
80
100
120
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0O
ct-1
0Ja
n-11
Apr-
11Ju
l-11
Oct
-11
Jan-
12Ap
r-12
Jul-1
2O
ct-1
2
Capital and Current ExpendituresSocial securities benefitsPayroll and Social Charges
Source: BMI, BCB
25Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
Regional Economic Activity
What If We Are Wrong On Chinese Growth? Assessing The Regional Implications
BMI VIEWSigns of a recovery in China's economy present substantial upside
risks to our current 'hard landing' scenario. Higher-than-anticipated
economic growth in China over the coming years would have profound
implications for Latin America's economic trajectory, and we highlight
Chile and Peru, and Brazil to a lesser extent, as most affected in the
event of stronger growth in Asia's biggest economy.
Regular readers of BMI's Latin America Country Risk ser-
vice will be acutely aware of our below-consensus economic
growth outlook for much of the region, despite forecasting
stronger average real GDP growth in 2013. In particular, we
have maintained a subdued growth outlook for countries with a
high dependence on commodity exports, as they are particularly
exposed to declining external demand. As part of our key mac-
roeconomic themes for 2013 for Latin America, we have singled
out industrial metals exporters, such as Chile and Peru, as most
vulnerable to a deceleration in economic growth in China (see
our online service, 'Our Key Themes For 2013', December 12
2012), which has become a dominant consumer of global base
metal production in recent years.
With BMI remaining substantially below consensus expectations
on Chinese growth, in light of an ongoing structural rebalancing
process in the coming years, metals exporters in Latin America
will be directly affected by the drop in housing activity and fixed
investment in China. Having said that, we highlight growing
upside risks to this view, with recent economic data showing
signs of 'green shoots' in the Chinese economy.
Back in October, our Asia team identified the possibility of
a cyclical upturn in Chinese economic growth, as part of a
drawdown in inventory levels (see 'Growth: Upside Risks
Amid Structural Downturn', November 12 2012). This view has
since materialised, presenting noteworthy upside risks to our
China growth forecast, which we recently revised up to 7.5%
from 7.1% for 2013. While we currently maintain that the lat-
est batch of positive data is temporary and cyclical within in
a structural downtrend, we explore the possibility of China's
economy performing closer to current consensus expectations
over the next two years, and how this will affect our outlook
for Latin America.
In our baseline scenario, we see Latin America's weighted aver-
age real GDP growing by 3.4% in 2013, up from 3.0%, which
we expect for 2012. Based on the existing weightings used in
our calculations for regional GDP, a stronger growth scenario
in China, which aligns more closely with consensus expecta-
'Hard Landing' Scenario Is Still Out Of ConsensusChina – Real GDP Growth Forecasts, %
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
2010 2011 2012f 2013f 2014f
Bloomberg Consensus BMI
Source: BMI, Bloomberg
TABLE: CHINA'S CONSUMPTION OF SELECTED COMMODITIES, % OF GLOBAL CONSUMPTION Aluminium Copper Lead Nickel Tin Zinc Corn Rice Wheat Oil Coal
2002 16.1 18.2 14.3 7.1 19.4 17.9 20.1 33.4 17.5 6.7 27.4
2003 18.6 20.1 17.1 10.6 23.9 21.2 19.8 32.1 18 7.2 30.6
2004 19.9 20.2 19.7 11.5 27.9 26.2 19 32.1 16.8 8.1 35.2
2005 22.2 21.9 25.5 15 33.5 28.6 19.4 31.1 16.5 8.3 37
2006 25.2 21.2 27.7 17.1 31.6 29 20 30.4 16.5 8.8 37.8
2007 32.7 26.8 30.7 24.2 37.5 31.8 19.4 29.9 17.3 9.1 38.6
2008 33.3 28.4 38.6 25.5 41 36 19.5 30.5 16.6 9.3 40.5
2009 40.7 39 44.5 43.1 45.7 43.5 20.2 30.8 16.5 9.7 43.6
2010 39.1 38.2 43.7 34.4 41.6 42.9 21.2 30.4 16.9 10.6 46.2
2011e 41.2 40.6 46.5 43.1 47.2 43.5 21.9 30.6 17.5 11.1 50
Source: BMI, USDA, WBMS
26 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
tions of 8.1% real GDP growth versus our forecast of 7.5% in
2013, we estimate that Latin America's GDP would expand by
3.7% in real terms, 0.3 percentage points (pp) above our current
estimates for the region. Moreover, i n 2014, we would see scope
for Latin America's economy to expand by 4.1% in real terms, as
opposed to our current baseline expectation for 3.7% real GDP
growth, in the event that a hard landing is avoided and China's
economy grows more in line with consensus expectations of
8.0% against our current projection for 6.7% real GDP growth.
In the event that we turn out to be overly pessimistic on China's
economic outlook (ie, no immediate rebalancing of the economy),
the stronger growth outlook for the region is primarily based
on the impact this would have on growth in Brazil, Chile and
Peru, which we believe to be most directly affected by China's
economic performance over the coming two years. However,
we also include indirect factors on regional growth, such as
stronger investor confidence, improved liquidity conditions and
an increase in private sector investment in the region, which
would help to push Latin America's real GDP growth higher.
Brazil : A More Supportive External Environment Would Delay Domestic Rebalancing While Brazil is less heavily exposed to China's growth story than
the region's major metals exporters, due to a lesser reliance on
exports (exports were 11.9% of GDP in 2011, compared with
18.0% in Peru) and a more diverse commodity mix, we believe
China's economic rebalancing will have important implications
for the Brazilian economy, including more moderate investment
inflows and a weakening currency (see ' Lower-Trend Growth
Ahead ', October 11 2012). Although we are forecasting a
significant uptick in economic activity in 2013, with real GDP
growth accelerating from 1.0% in 2012 to 3.5% in 2013, on the
back of continued stimulus measures and a significant construc-
tion backlog, we believe that Brazil is in for a period of more
moderate growth over the coming years (see 'Upswing In 2013,
But No Return To Boom Years', December 18 2012). This is
underpinned by our view that a period of consumer deleveraging
is on the cards, and while investment will be broadly support-
ive, it will be bifurcated, as some mining investment remains
vulnerable to weaker Chinese metals demand.
Conversely, we believe that a sustained bounce in Chinese
economic activity in 2013 and 2014 would feed through to a
pickup in export growth – exports to China averaged 17.8% of
total exports between January and July 2012 – on the back of
rising demand and more favourable prices for steel and iron
ore. As such, we believe net exports would be a more positive
contributor to growth over the coming years. However, the
impact would be less notable, given that Brazil's growth outlook
for the next two years is in large part based on fixed investment
and existing stimulus efforts. This is reflected in the smaller
divergence between BMI's and Bloomberg consensus forecasts
for real GDP growth in Brazil – despite our substantially lower
growth outlook on China, our Brazil growth forecast is only
slightly below consensus.
Having said that, we would expect investment inflows to pick
up in the event of stronger Chinese economic growth, which
would likely stave off further monetary easing measures by the
central bank. The central bank has recently grown more con-
Export Sector Still Looking To ChinaBrazil – Exports To China
-100
-50
0
50
100
150
200
250
300
-10
-5
0
5
10
15
20
25
30
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
Jan-
11
May
-11
Sep-
11
Jan-
12
May
-12
Brazilian Exports To China (% total) LHSBrazilian Exports To China (% chg y-o-y) RHS
Source: IMF, Bloomberg, BMI
Scope For A V-Shaped Recovery?Latin America – Real GDP Growth Forecast, % y-o-y
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
2010
2011
2012
f
2013
f
2014
f
BMI baseline scenarioStronger Chinese growth scenario
Source: BMI
27Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
cerned about the impact of a weaker real on the economy and
its inflation fighting credentials. With the prospect of stronger
global commodity prices in the event of a stronger Chinese
growth scenario, a normalization of monetary policy could oc-
cur sooner than under our current core view. Although we see
the central bank raising the Selic target rate to 7.50% from the
record-low of 7.25% by end-2013, the central bank may seek to
bolster the real's carry appeal and stave off capital outflows which
have seen the currency become one of the worst-performing FX
majors in the region in 2012.
Nevertheless, while an upturn in China would provide a more
supportive external environment for Brazil to recover from
the sharp slowdown seen in 2011 and 2012, boosting headline
growth, we do not believe that more robust Chinese growth
would fundamentally alter Brazil's economic rebalancing, but
would simply delay it.
Chile: Potentially A Very Different Economic TrajectoryWe expect that a sustained recovery in Chinese economic
activity would bolster the Chilean economy significantly.
Stronger Chinese demand, we believe, would have both first-
and second-order effects on the economy, which would likely
include stronger real GDP growth, a smaller current account
deficit, and a stronger peso.
The primary effect of a stronger-than-expected Chinese economy
in 2013 would be a return to relatively strong growth in Chilean
exports, which have contracted by 4.2% y-o-y in the year-to-
date in November. Indeed, Chilean exports to China constitute
roughly 25% of all Chilean exports, so we believe that an uptick
would likely boost export volumes, supporting net exports and
pushing real GDP higher.
While 25% is a significant portion of exports to send to one
country, the year-to-date contraction is not attributable solely
to China. Indeed, for much of 2012 Europe was a greater drag
on year-on-year export growth than China. As such, we believe
that, as long as Europe remains weak, a moderate strengthen-
ing in China would not be sufficient to bring Chile back to the
strong commodity growth of recent years.
The composition of Chile's exports leads us to believe that the
gains of a stronger Chinese economy would be fairly concentrated
among the country's sizeable mining industry. Chilean exports
to China are roughly 80% copper, and we would expect higher
profits in the mining industry. Higher profits could lead to higher
capital expenditure via reinvestment or encourage long-overdue
investment in the country's supporting industries, such as power
generation and transmission, investments that would likely have
positive spill-over effects for the rest of the economy.
In addition to the real economic benefit of a stronger net export
picture, we see other areas that would be affected by a surge in
Chinese economic activity leading to a rise in Chilean goods
exports. Chief among these is the current account, where we
believe greater export volumes would narrow our forecast for
a 2.2% of GDP current account deficit in 2013.
That said, we have long maintained that Chile is in a funda-
Feeding The DragonChile – Goods Exports By Destination, US$mn
0
5
10
15
20
25
30
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Jan-
03Ju
l-03
Jan-
04Ju
l-04
Jan-
05Ju
l-05
Jan-
06Ju
l-06
Jan-
07Ju
l-07
Jan-
08Ju
l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ju
l-11
Jan-
12Ju
l-12
Exports To China (FOB), US$mnExports ex China (FOB), US$mnExports To China As Percent Of Total (RHS), 3mma %
Source: BCC, BMI
China Hard Landing Has Minor Impact On Forecast Outlook
Brazil – Real GDP Growth Forecasts, %
0
1
2
3
4
5
6
7
8
2010 2011 2012f 2013f 2014f
Bloomberg Consensus BMI
Source: BMI, Bloomberg
28 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
mentally stable position with regard to its current account, so
while noteworthy, a slightly smaller current account deficit for
a year is unlikely to have a substantial real economic impact.
Another area of likely impact is the exchange rate, which in our
core view will depreciate slightly in 2013 on the back of weaker
global copper prices. We believe a likely result of an upsurge
in Chinese growth would be higher metals prices in general,
such that Chile's terms of trade would improve substantially.
Higher average prices for copper, which constitutes over half of
all Chilean exports, would likely see a period of peso strength,
particularly if high prices lead to an increase of FDI in the sector.
While we believe such a development would raise the politi-
cal opposition of manufacturing and agricultural exporters –
something we saw during the summer of 2012 – a stronger
peso would facilitate greater private consumption growth and
stronger purchasing power, enabling a rebalancing away from
reliance on export-driven growth over the long term.
Higher commodity prices on the back of stronger-than-expected
Chinese growth would likely increase inflationary pressures in the
Chilean economy. As such, and in light of our expectation that
such a scenario would see stronger real GDP growth, we believe
the Banco Central de Chile (BCC) would not cut its monetary
policy rate from 5.00% to 4.50% in 2013, as is our core view, but
would likely hold or even hike rates. Higher interest rates would
reinforce the peso appreciation we describe above, as an attractive
carry trade would bring more speculative dollars into the country.
Highly Exposed To A Hard LandingPeru – Exports To China
-50
-30
-10
10
30
50
70
90
110
130
150
-10
-5
0
5
10
15
20
25
30
Q10
6Q
206
Q30
6Q
406
Q10
7Q
207
Q30
7Q
407
Q10
8Q
208
Q30
8Q
408
Q10
9Q
209
Q30
9Q
409
Q11
0Q
210
Q31
0Q
410
Q11
1Q
211
Q31
1Q
411
Q11
2Q
212
Exports To China (% total) LHSExports To China (% chg y-o-y) RHS
Source: IMF, Bloomberg, BMI
China Is A Major Factor In Chile's Growth OutlookChile – Real GDP Growth Forecasts, %
3.5
4.0
4.5
5.0
5.5
6.0
6.5
2010 2011 2012f 2013f 2014f
Bloomberg Consensus BMI
Source: BMI, Bloomberg
Copper Demand Key To External SectorChile – Exports To China, US$mn
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
Jan-
03Ju
l-03
Jan-
04Ju
l-04
Jan-
05Ju
l-05
Jan-
06Ju
l-06
Jan-
07Ju
l-07
Jan-
08Ju
l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ju
l-11
Jan-
12Ju
l-12
Copper Exports To China (FOB), US$mnNon-copper Exports To China (FOB), US$mn
Source: BCC, BMI
Not All About ChinaChile – Contribution To Goods Export Growth By Destination, pp
-60
-40
-20
0
20
40
60
80
Jan-
04Ju
n-04
Nov
-04
Apr-
05Se
p-05
Feb-
06Ju
l-06
Dec
-06
May
-07
Oct
-07
Mar
-08
Aug-
08Ja
n-09
Jun-
09N
ov-0
9Ap
r-10
Sep-
10Fe
b-11
Jul-1
1D
ec-1
1M
ay-1
2O
ct-1
2
Europe China All Other Asia ex China Americas
Source: BCC, BMI
29Business Monitor International Ltd www.businessmonitor.com
ECONOMIC OUTLOOK
Peru: Far-Reaching Implications Of Rising ExportsSimilar to Chile, we believe that stronger Chinese growth is
most likely to feed through to the Peruvian economy by way
of a strong uptick in exports, due to rising Chinese demand
for Peru's mining exports, higher base metals prices, and more
robust investment inflows than we currently expect. Indeed,
Peruvian exports to China averaged 19.7% of total exports in
H112, and growth in exports has trended downward in recent
quarters. Moreover, mining exports comprised more than half of
total exports during the first three quarters of 2012, with copper
alone making up 22.6%.
As such, a sustained, multi-quarter bounce in the Chinese
economy, briefly staving off economic rebalancing pressures
would likely translate into a significant uptick in Peru's exter-
nal accounts. We would therefore expect net exports to be a
less substantial drag on real GDP growth in 2013 and 2014,
likely bringing headline growth closer to 2012 levels, which
we forecast to come in at 6.1%, rather than our current forecast
of 5.2% growth in 2013.
Stronger economic activity in China, and higher base metals
prices would also impact Peru through the investment channel.
Indeed, our Mining team has long highlighted that weaker prices
for copper, as well as other base metals, are likely to result in
major mining firms cutting back on their capital expenditure
plans (see 'Capital Expenditure To Slow', October 29 2012). This
is a particular threat in Peru, given rising costs and significant
business environment risks stemming from continued protests.
A sustained uptick in Chinese growth could see investment
inflows into Peru remain stronger than we currently expect over
the coming quarters, bolstering the financial account surplus
and placing continued appreciatory pressures on the currency.
A stronger external account picture, a more significant rise
in investment inflows in 2013 and 2014 and more robust real
GDP growth in Peru would have important implications for our
monetary policy and exchange rate outlooks as well.
Indeed, given our view for growth to moderate in 2013, as well as
declining inflation and a significant appreciation of the Peruvian
nuevo sol in recent quarters, we forecast the Banco Central de
la Republica del Peru (BCRP) to cut the policy rate by 25bps
Major Implications From Upside China Growth Risks
Peru – Real GDP Growth Forecasts, %
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
2010 2011 2012f 2013f 2014f
Bloomberg Consensus BMI
Source: BMI, Bloomberg
China The Largest ConsumerPeru – Lead Exports By Destination, %
China45%
South Korea24%
Canada18%
Belgium7%
Germany2%
Japan2%
Morrocco2% Others
1%
Source: Ministry of Mines, BMI
High Trade ConcentrationPeru – Cooper Exports By Destination, %
China37%
Japan14%Germany
8%
South Korea6%
Italy6%
Brazil5%
Spain5%
Others19%
Source: Ministry of Mines, BMI
30 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
to 4.00% by end-2013. However, we have long highlighted
that a stronger domestic growth outlook, and a more favourable
external environment, could lead the government to keep rates
on hold over the coming quarters, choosing to utilise banks'
reserve requirements to adjust credit conditions, rather than the
policy rate, as has been the case in recent months.
Moreover, we anticipate modest sol weakness over the coming
quarters, and forecast the unit will fall to PEN2.6600/US$ in
2013, down from PEN2.6360/US$ in 2012, due to monetary
easing and continued central bank intervention to weaken the
currency (see 'PEN: Weakness In 2013, But Appreciation Over
The Medium Term', December 5 2012). However, more robust
investment inflows than we currently expect could place sizeable
appreciatory pressures on the unit, posing major upside risks to
our multi-year exchange rate outlook.
31Business Monitor International Ltd www.businessmonitor.com
Chapter 3: 10-Year Forecast
The Brazilian Economy To 2022
Imbalances To Unwind, Three Potential Scenarios
BMI VIEW Vast natural resources and strong domestic demand will keep investor
interest rooted in Brazil over the coming decade. However, there is
a pressing need for the authorities to address some of the country's
deeply- rooted structural issues, stemming from too much consumption
and not enough production, which is likely to lead to slower growth and
a weaker currency at some point over the next 10 years.
Over the coming decade, a lot of attention will be focused on
Brazil as an engine of regional economic growth, and increas-
ingly as a key political actor on the international stage. Economic
policy credibility, solid institutions, rising incomes and a vast
array of commodities will underpin the country's growing im-
portance as a destination for global investors. However, several
of the economic imbalances that we have long been highlighting
– a very strong consumer and an ailing manufacturing sector
– need to be addressed. The longer these imbalances remain
unaddressed, the more painful the adjustment will be when it
comes. We therefore outline three potential scenarios for these
imbalances to play out over the next decade:
• Currency depreciation through 2015 helps unwind the
imbalances.
• The authorities utilize their massive toolkit to stave off any
substantial changes until after the 2014 presidential election.
• A substantial and sustained currency sell-off hits the con-
sumer and the banking sector hard.
Unwinding Imbalances Change The Shape Of Growth – 50% ProbabilityWe have long highlighted that Brazil's economic imbalances
are largely the cause of cheap, free-flowing credit and rampant
currency strength driven by robust capital inflows. Strong pur-
chasing power and increasing access to financing have bolstered
the Brazilian consumer and driven demand for relatively inex-
pensive imports in recent years. On the other hand, the country's
manufacturing sector has been weakened by rising labour costs,
import substitution policies and a lack of export competitiveness.
These dynamics have seen the current account flip into deficit in
recent years, fostering a reliance on foreign investment in order
to cover the external account shortfall. Given the diminishing
returns of continued fiscal and monetary stimulus, as well as
the still rising cost of domestic production, we believe these
imbalances are untenable in the long term.
Our core scenario calls for these imbalances to unwind over the
coming years through a weakening of the currency. The real's
break through long-term trendline support in May caused us to
call for more substantial depreciation in coming years, with the
unit reaching BRL2.2500/US$ by end-2015 from BRL2.0500/
US$ in end-2012. The slowdown in private consumption will
also be painful, impacted by both a reduction in purchasing
power as the currency weakens, as well as households' delev-
eraging as credit growth slows. Moreover, the improvement
on the manufacturing side is likely to be more drawn out, as
substantial private investment and a reduction in the govern-
TABLE: LONG-TERM MACROECONOMIC FORECASTS2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f
Nominal GDP, US$bn [1] 2,527.41 2,770.80 3,063.63 3,412.21 3,851.24 4,408.95 5,065.92 5,675.23
Real GDP growth, % y-o-y [2] 4.0 4.2 4.3 4.3 4.2 4.4 4.5 4.5
Population, mn [3] 203.3 204.8 206.3 207.7 209.1 210.4 211.7 212.9
GDP per capita, US$ [2] 12,432 13,527 14,850 16,426 18,417 20,952 23,929 26,653
Consumer prices, % y-o-y, ave [2] 5.0 4.8 4.6 4.5 4.6 4.5 4.5 4.4
Current account, % of GDP [4] -1.2 -0.8 -0.4 -0.2 -0.1 0.2 0.4 0.5
Exchange rate BRL/US$, ave [5] 2.22 2.21 2.17 2.12 2.05 1.95 1.85 1.80
Notes: f BMI forecasts. Sources: 1 IBGE, IMF; 2 IBGE/BMI calculation; 3 World Bank/UN/BMI; 4 BCB/BMI calculation; 5 BMI calculation.
32 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
ment's import substitution policies are also necessary to make
the industry more dynamic.
This shift away from a consumption-based growth model towards
greater fixed investment is what Brazil needs to put the economy
on a more sustainable long-term trajectory. Investment will be
driven by the 2014 FIFA World Cup, the Olympic Games in Rio
de Janeiro in 2016, the PAC II growth acceleration programme,
as well as the country's substantial infrastructure deficit. These
will provide enormous incentives for widespread infrastructure
upgrades across the country in which private firms (Brazilian
and foreign) will be keen to participate. Furthermore, the ex-
ploration and development of the country's massive offshore oil
reserves will remain a major driver of investment, in line with
our Oil & Gas team's forecast for net oil exports to increase to
1,086.7100b/d in 2022, from a deficit of 55.9100b/d in 2012.
However, for private companies to invest we need to see a
significant reduction in the cost of doing business, otherwise
the government will be left holding the bill.
While this will mark a major change to Brazil's growth story,
we do not foresee a significant drop in headline growth, in line
with our average real GDP growth forecast of 3.9% between
2012 and 2022. While this forecast encompasses a moderate
slowdown over the next few years, as the weaker currency and
slower credit growth impact the economy, we anticipate a pick
up between 2017 and 2022, when we expect growth to average
4.4%. Meanwhile rising capital inflows and a more competitive
Brazilian economy will help return the real to its appreciatory
trend, ending 2021 at BRL1.7500/US$.
Quick Fixes Prolong Imbalances, Sharp Adjustment After 2014 – 35% ProbabilityGiven the Brazilian authorities' massive toolkit and demonstrated
willingness to use it, we do not rule out the current economic
imbalances to continue over the coming years. This risk to
our core scenario is particularly acute given the 2014 general
election, implying that the appeal of using massive fiscal and
monetary stimulus to support growth remains high.
Should the government choose to continue substantial tax cuts for
industry and the consumer implemented in 2011, while walking
a fine line between aggressive monetary stimulus and eroding
the central bank's inflation fighting credentials, we believe the
authorities would be successful in boosting growth over the com-
ing years. However, this would result in a sharp adjustment after
2014. The removal of massive government stimulus would see
private consumption fall substantially, bringing down headline
growth as well. Furthermore, several additional years of strong
credit and money supply growth would make the consumer
deleveraging process even more painful. In addition, given the
unchecked rise of these imbalances, the potential for a sharp
currency sell-off on the back of investors' re-evaluation of their
attitudes towards the economy remains high.
Substantial Sell-off Batters Consumer and Banking Sector – 15% ProbabilityIn our opinion, the worst case scenario, and no doubt the most
painful for Brazil over the short term would entail a substantial and
sustained sell-off in the real, likely sending it to the BRL2.5000/
US$ level, on the back of a major change in investor sentiment
towards the economy. This would represent a significant break
out of the unit's long-term appreciatory trend, with massive
implications for the country's growth story.
Such a significant reduction of Brazilians' purchasing power
would translate into a slump for private consumption, dragging
down headline growth with it. In addition, tepid consumption
would hit the service sector hard, translating into rising unemploy-
ment, a major drag on growth as it currently employs the more
than twice the number of workers than the manufacturing sector.
A significant currency sell-off would also increase the likelihood
of a banking sector crisis and a supply side liquidity crunch. We
have long expressed concern about the sector's risky financing
practices, including small banks selling their loan books to
larger firms, and a growing reliance on external debt issuance
due to a favourable exchange rate. A sustained sell-off in the
real would create potential for a currency mismatch on banks'
balance sheets, while their debt servicing costs would increase
substantially. However, they would also be hit on the assets side,
as rising unemployment would precipitate a sharp deterioration
in credit quality, meaning that some lenders would be unable
to cover these rising costs. While we believe the government
would be able to cover the cost of a bank bailout, it would pull
the nominal fiscal deficit further into the red, leaving the gov-
ernment with an even larger debt overhang.
Such a scenario would clearly precipitate a rapid change in
investors' perceptions of the economy, implying that the coun-
try's substantial net international investment liabilities position
could become a major risk to external account stability. Though
foreign direct investment has ticked up in recent months, a large
proportion of these liabilities are still in the form of shorter-term
investments, which could head rapidly for the exit in the event
33Business Monitor International Ltd www.businessmonitor.com
10-YEAR FORECAST
of a substantial re-evaluation of Brazil's growth prospects. The
subsequent dearth of capital would not only exacerbate the
downturn, but could cap growth for many years to come.
BMI's long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most
cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,
demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,
our forecasts also reflect analysts' in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in
the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,
fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,
external account balances and interest rates.
35Business Monitor International Ltd www.businessmonitor.com
SWOT Analysis
Strengths A stable political regime has anchored investor interest in Brazil in the
last decade, and we expect this trend to remain in place throughout
the forecast period.
A large population and a growing middle class present mean that
Brazil's consumer sector provides significant long-term opportunities
for firms.
The Brazilian economy is one of the largest in the world and benefits
from a rich abundance of agricultural and mineral resources.
Weaknesses Despite economic liberalisation, significant trade barriers, labour
market rigidity and a complex customs system increase business
risk
Opportunities Commitments to upgrade physical infrastructure should continue to
be boosted by the successful bid to host the 2016 Olympic Games
in Rio de Janeiro and the 2014 FIFA World Cup, as well as the PAC
II growth acceleration programme.
Recent onshore and offshore oil discoveries could help Brazil become
a global oil giant. This will help the country attract a wide range of
investors and businesses over the long term.
Threats Tax reform and new labour legislation are needed to simplify the very
complex, onerous tax system and highly inflexible labour market.
Government intervention in the domestic banking sector and lax
regulation distort Brazil's financial system. Combined with massive
fiscally fuelled credit, there is potential for significant misallocation of
resources. This could undermine the overall business environment
and lead to a more prolonged economic slump.
BMI Business Environment Risk RatingsSeveral physical, institutional and regulatory challenges continue to
weigh on Brazil's business environment profile. At the same time,
however, long-term opportunities will likely continue to keep foreign
investment anchored, particularly in light of a series of sovereign credit
ratings upgrades, the awarding of the 2014 FIFA World Cup and 2016
Olympic Games to Rio de Janeiro, and the country's massive commodity
wealth. For the time being, however, a rigid labour market, high barriers
to entry and endemic corruption threaten to stall robust progress for the
country's investment profile.
Chapter 4: Business Environment
Business Environment Rank TrendChile 64.0 1 +Uruguay 59.8 2 +Mexico 53.8 3 +Brazil 53.7 4 +Peru 53.5 5 +Colombia 52.6 6 +Costa Rica 52.1 7 +Panama 51.6 8 =Argentina 48.3 9 -Paraguay 43.2 10 +El Salvador 42.0 11 -Guatemala 40.9 12 +Nicaragua 40.3 13 +Ecuador 38.4 14 +Bolivia 37.5 15 +Honduras 36.3 16 -Venezuela 32.6 17 +Regional ave 45.7/Global ave 48.6/Emerging Markets ave 45.2
36 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Business Environment Outlook
IntroductionWith an abundance of agricultural and mineral resources and a
government that is actively courting foreign investment, Brazil
poses an attractive investment environment. Furthermore, Presi-
dent Dilma Rousseff's ambitious infrastructure investment plans
should unlock opportunities across all major sectors, not least
with the successful bid to host the 2016 Olympic Games in Rio
de Janeiro – two years after the FIFA World Cup will take place
in Brazil. Over-regulation, corruption and gang crime, however,
represent the key threats to the business environment, in our view.
Institutions
Legal Framework The Brazilian legal system is becoming increasingly sophisticated
in order to complement an expanding and diverse economy. The
upshot of this has been a more dynamic and more competitive
legal market. While the system is now well structured by Latin
American standards, inefficiencies still slow the judicial process,
and this has contributed to a major backlog in cases.
The legal system is mainly based on Portuguese law and is
underpinned by the terms of the Federal Constitution, effective
since 1988. Judicial power is divided between the state and
federal branches. Each state is divided into judicial districts
(comarcas). These comarcas have trial courts acting as the court
of first instance. Some districts also have extra courts to rule
on family and bankruptcy issues. Crimes against the person
are heard by a jury; otherwise, most cases are heard by a judge
only. Judgments from these courts can be appealed against in
the courts of second instance.
Property Rights Property rights protection is reasonably sound. In the 2012 In-
ternational Property Rights Index report, Brazil is placed 62nd
out of 130 countries surveyed, rising from 81st in 2009. It ranks
18th out of 22 countries in the region. That said, property rights
are still a relatively abstract concept in the slums (favelas) of
major cities and rural areas at the periphery.
Intellectual Property Rights Brazil is a member of the World Intellectual Property Organi-
sation (WIPO) and has signed several relevant WTO accords.
Enforcement remains patchy, a state of affairs that has drawn
criticism from the country's main trading partners. However, the
overall intellectual property rights situation has improved consid-
erably. Several court cases concerning trademark infringements
have been successfully brought by international companies.
A 1996 industrial property law generally brought patent and
trademark legislation up to international standards. In addition, a
TABLE: BMI BUSINESS AND OPERATION RISK RATINGSInfrastructure Rating Institutions Rating Market Orientation Rating Business Environment
Argentina 55.8 44.8 44.4 48.3
Brazil 60.9 53.3 47.0 53.7
Chile 53.4 68.1 70.4 64.0
Colombia 51.6 56.4 49.8 52.6
Costa Rica 55.1 51.1 50.0 52.1
Dominican Republic 38.6 45.8 49.6 44.6
El Salvador 42.4 43.1 40.5 42.0
Guatemala 39.2 37.2 46.4 40.9
Guyana 36.9 46.8 46.7 43.5
Honduras 32.0 32.6 44.5 36.3
Jamaica 42.1 49.7 37.5 43.1
Mexico 52.1 51.9 50.1 51.4
Nicaragua 34.6 38.0 48.5 40.3
Panama 48.6 54.2 51.9 51.6
Peru 49.4 50.2 60.8 53.5
Trinidad & Tobago 44.9 47.3 61.0 51.0
Uruguay 63.5 66.2 49.7 59.8
Venezuela 40.9 24.6 32.5 32.6
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
37Business Monitor International Ltd www.businessmonitor.com
BUSINESS ENVIRONMENT
1998 law brought copyright protection legislation up to interna-
tional standards, although piracy of copyrighted materials (such
as music and videos) and trademarks remains a problem. Brazil
has ratified the WIPO Treaties on Copyright and Performances
and Phonograms. Brazilian patents, copyrights and trademark
laws are generally considered to meet international standards.
Corruption With a score of 43 (and a ranking of 69th out of 174 countries),
Brazil's 2012 performance in Transparency International's Cor-
ruption Perceptions Index saw the country's rank decline slightly
from the previous year. We believe this highlights deterioration
in corruption perceptions since the start of the decade, at which
point the country fared markedly better. The authorities are,
at least, ostensibly trying to eradicate endemic corruption: the
country has signed the OECD Anti-Bribery Convention. While
federal government authorities generally investigate allegations
of corruption, there are inconsistencies in the level of enforce-
ment among individual states.
Infrastructure
Physical Infrastructure Brazil possesses well-developed agricultural, mining, manu-
facturing and service sectors. Development in infrastructure is
being driven by public-private partnerships (PPP), whereas the
Brazilian construction industry is being spurred by strong gov-
ernment investment. Private-sector interest in the construction
segment has been increasing, which is evident in the growing
number of public offerings on the stock exchange. Indeed, we
expect this trend to gain new momentum as economic activity
remains strong and the country gears up for the 2014 FIFA
World Cup and the 2016 Olympic Games in Rio de Janeiro.
The leading construction companies are well entrenched in the
country and are significant players outside Brazil. The federal
government's Growth Acceleration Programme (Programa de
Aceleração do Crescimento, PAC) was unveiled in January 2007,
with the aim to facilitate faster turnaround of construction projects
in the pipeline. The programme has already funded projects in the
oil and gas, transportation and sanitation sectors, and aimed to
spur BRL500bn (US$235bn) of infrastructure development during
2007-2010. Infrastructure upgrades included the expansion and
modernisation of the country's main international airport, Guarul-
hos, at a cost of US$832mn. The government has also announced
the allocation of funds for various states for urbanisation, slum
rehabilitation and sanitation, among other developments. The
second PAC programme, estimated at BRL1tn (US$544.5bn),
is aimed at continuing social programmes and increasing public
sector investment in infrastructure between 2010 and 2014.
TABLE: BMI LEGAL FRAMEWORK RATINGInvestor Protection Score Rule of Law Score Contract Enforceability
ScoreCorruption Score
Argentina 26.0 46.3 64.0 56.8
Brazil 42.5 69.8 55.4 52.4
Chile 61.9 90.2 53.7 72.2
Colombia 67.1 64.3 8.7 36.9
Costa Rica 31.5 79.4 38.7 89.5
Dominican Republic 42.4 37.2 42.8 44.7
El Salvador 28.0 24.7 49.2 68.6
Guatemala 24.1 42.0 27.6 46.1
Guyana 41.2 48.5 50.9 50.5
Haiti 5.8 9.6 35.9 42.7
Honduras 26.4 41.3 20.4 22.9
Jamaica 38.9 53.6 23.1 70.5
Mexico 51.9 55.5 54.8 30.8
Nicaragua 23.1 33.8 64.0 43.2
Panama 61.1 60.9 20.1 47.4
Peru 53.6 41.1 49.2 44.8
Trinidad & Tobago 48.1 63.1 17.8 64.8
Uruguay 60.6 85.0 52.3 84.9
Venezuela 4.2 17.1 38.1 20.8
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
38 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Nevertheless, the nation's transport infrastructure suffers from
inadequate funding and lack of focus, leading to slow progress
in the development of roadways and port terminals. Private
investment generated through PPPs has been beneficial only
at the regional level. The laws regarding foreign companies
are not liberal, and stipulate that they either have a Brazilian
partner or be established in Brazil in order to provide construc-
tion services. The government is also considering revising its
existing toll tariffs system, but we expect protracted negotiations
on this front. The current set of concessions has been in place
since 1996, when the country's macroeconomic fundamentals
were riskier and high tariffs were required to recover roads in
a deplorable condition.
Labour Force Brazil has a labour force of approximately 90mn people out of
a total population of some 198mn, although inaccurate census
information makes these figures extremely approximate. Around
65% work in the service sector, 20% in agriculture and 15% in
industry. Unemployment averaged 6.0% in 2011, with this figure
falling to a recent low of 4.7% in December 2011. Wages are
generally relatively low, though a 14% increase to the minimum
wage in January 2012 has brought it to BRL622.0, implying a
substantial increase in wage-related benefits as well. Furthermore,
up to a third of employers' labour costs can be accounted for by
various taxes and other charges.
The high numbers employed in the services and industrial sectors
reflect the changing shape of Brazilian society, as the country's
urbanisation continues apace. The proportion of working women
is also growing, approaching half of the labour force. According
to some estimates, more than a third of all workers still operate
in the informal market and so do not pay taxes or receive em-
ployment benefits. Average real wages, which had been falling
over a number of years, started to nudge upwards again from
2005. However, huge disparities exist between the amount of
earnings and types of employment, as well as regional variations.
Brazil's labour code, based on the Consolidated Labour Laws, is
comprehensive, with fairly extensive labour benefits. Workers
receive an annual bonus, based on overall earnings, at least 30
days of vacation annually and are entitled to recompense when
dismissed without cause. The 1988 constitution establishes a
44-hour working week and overtime pay of 50% of base pay.
Labour courts exist to hear routine employment cases, involving
wage disputes, unfair dismissal, and working conditions, etc.
Despite federal efforts to speed up the system, the backlog of
such cases stretches back several years in some instances. These
courts are effectively empowered to arbitrate on employer-union
negotiations by imposing an agreement if talks break down and
one side seeks a legal resolution. Greater flexibility in labour
relations recently has resulted in less recourse to the courts
for dispute resolution in this manner. Unions are often strong,
with membership running at more than 10% of the workforce
TABLE: LABOUR FORCE QUALITYLiteracy Rate,% Labour Market Rigidity Score Female Labour Participation, %
Argentina 97.6 21.0 52.4
Brazil 89.6 46.0 60.1
Chile 96.4 18.0 41.8
Colombia 92.3 10.0 40.7
Costa Rica 95.8 39.0 45.1
Dominican Republic 88.8 21.0 50.5
El Salvador 83.6 24.0 45.9
Guatemala 72.5 28.0 48.1
Guyana 91.8 19.0 44.7
Haiti 61.0 10.0 57.5
Honduras 82.6 57.0 40.1
Jamaica 85.5 4.0 56.1
Mexico 91.7 41.0 43.2
Nicaragua 80.1 27.0 47.1
Panama 93.2 66.0 48.4
Peru 88.7 39.0 58.2
Trinidad & Tobago 98.6 7.0 55.1
Uruguay 97.8 18.0 53.8
Venezuela 93.0 69.0 51.7
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score
39Business Monitor International Ltd www.businessmonitor.com
BUSINESS ENVIRONMENT
directly and representing many more through their role in col-
lective bargaining. Unions are obliged to represent all workers
in their sector or region, whether they are members or not. There
are estimated to be more than 15,000 unions operating across
Brazil. Employers' federations are also powerful players in
workplace negotiations. More sophisticated labour-management
negotiations have led many firms to overhaul their practices
and hire more skilled negotiators, in many cases resulting in
improved relations.
Market Orientation
Foreign Investment Policy In terms of market openness, Brazil is a front runner in Latin
America and a major recipient of foreign capital. Total FDI
inflows of US$66.6bn in 2011 were almost double the amount
Brazil attracted in 2007 and, in nominal terms at least, higher
than flows attracted at the beginning of this decade when the
government's privatisation campaign was in full swing.
The foreign investment framework has been an evolving process
over the past few decades. For instance, foreigners have been
able to invest in the stock market since 1991. A series of rules
and constitutional amendments introduced in 1995-2000 gave
foreign investors the same opportunities as domestic investors
in most sectors. That said, the catalyst for recent FDI activity
has undoubtedly been a loosening of regulation under the Lula
administration. Foreign suitors, satisfied with the improved level
of economic and political stability, have been taking advantage
of the country's extensive privatisation programme. A landmark
reform took place in December 2004 when Brazil's senate ap-
proved the Public-Private Investment Bill, allowing private firms
to invest jointly with the government in projects backed by a
state guarantee. Companies taking up the contracts must invest
at least BRL20mn for five to 35 years. One aim is to speed up
infrastructure development, including roads, railways and water
systems. The bill also introduces improved levels of transpar-
ency. Foreign water companies have expressed concerns that
their sector still needs stronger regulation and a more developed
institutional framework before it becomes sufficiently attractive
to bring in large FDI flows.
Brazil has eight free trade zones (FTZs) in total, of which the
most important for foreign investors is the Manaus FTZ, which
covers nearly 4,000 square miles in the middle of the Amazon
basin. Here, goods originating outside the country enter without
attracting customs levies or any import taxes. Goods may also
be exempt from certain other taxes.
Foreign Trade Regime Brazil joined the WTO in 1995. It was a founding member of
the Mercosur free trade area in 1991 with Argentina, Paraguay
and Uruguay (Bolivia and Chile have observer status). Merco-
sur and the neighbouring Andean Community (Peru, Bolivia,
Ecuador and Colombia) signed a pact in October 2004 under
which the two trading blocs agreed to phase out import tariffs
over 15 years.
Mercosur is in the process of negotiating a trade agreement with
the EU and also with the US and others through the proposed Free
Trade Area of the Americas. Separately and through Mercosur,
Brazil has been strengthening bilateral ties with other countries,
notably India, for which Brazil is its biggest Latin American
trading partner. Brazil and India have set a target of bilateral
trade of US$10bn in the short term.
TABLE: LATIN AMERICA – ANNUAL FDI INFLOWS2009 2010 2011
US$bn Per Capita US$bn Per Capita US$bn Per Capita
Argentina 4.0 100.3 7.1 174.6 7.2 177.7
Brazil 25.9 134.3 48.5 248.8 66.7 339.0
Chile 12.9 760.1 15.4 898.3 17.3 1001.7
Colombia 7.1 156.3 6.9 149.0 13.2 282.0
Mexico 16.1 143.9 20.7 182.6 19.6 170.3
Peru 6.4 223.6 8.5 290.8 8.2 280.0
Trinidad & Tobago 0.7 530.6 0.5 409.6 0.6 426.3
Venezuela -2.5 -88.9 1.2 41.7 5.3 180.1
Source: UNCTAD, BMI
40 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Tax Regime The tax regime is highly complex, making the overall burden
difficult to predict. Rates are among the highest in Latin America.
Reform of the regime has been high on the government's agenda,
though substantial progress has yet to be made.
Corporate Tax: Effectively 34%. Companies pay corporate
income tax, income surtax and a social contribution. Corporate
income tax is 15%. The income surtax is 10% on profits above
BRL240,000 per year. The social contribution is charged at 9%.
Resident companies pay tax on global income. Non-resident
firms pay tax on Brazilian-sourced income only. In August 2007,
legislation (Complementary Law 127/2007) was introduced
aimed at simplifying the tax regime for small businesses.
Individual Tax: Rises progressively to 27.5%. Residents are
taxed on global income. Non-residents are taxed on Brazilian-
sourced income only.
Indirect Tax: Brazil has separate VAT regimes run by the
federal and state governments, which are not harmonised;
however, an 18% rate is used in some of the most developed
states. Recent reforms have included invoice taxes to VAT. An
attempt to harmonise VAT failed in 2003. Further efforts are
now being made to do so.
Capital Gains: gains of companies are taxed as income in most
cases. Individuals are taxed on gains at 15%. Capital gains made
by non-residents on investments registered with the central bank
are generally subject to a 15% withholding tax.
Operational Risk
Security Risk The most serious threat to domestic security in Brazil comes from
organised crime, in our view. This risk is particularly widespread
in drug trafficking, which is largely controlled internally by the
criminal gangs of Rio de Janeiro and São Paulo. The strongest
of these groups are the Primeiro Comando da Capital (PCC) in
São Paulo and the Comando Vermelho (CV) in Rio de Janeiro,
which have started to explore joining forces in order to expand
their regional power at a national level. Their influence has
grown to such an extent that in many parts of Rio de Janeiro
they are seen as a parallel power to the state.
Although the Colombian border attracts the most attention, drug
trafficking is a problem along all sections of Brazil's frontier,
especially given increasing production in Peru and Bolivia. New
drug-smuggling routes are opening up across the Peruvian and
Bolivian borders into the states of Acre, Rondônia and Mato
Grosso. These borders are heavily forested, difficult to patrol and
TABLE: TRADE AND INVESTMENT RATINGSOpenness To Investment Score Openness To Trade Score
Argentina 58.5 20.2
Brazil 64.7 9.4
Chile 44.0 68.5
Colombia 53.9 9.3
Costa Rica 66.0 63.6
Dominican Republic 62.8 44.4
El Salvador 19.3 66.0
Guatemala 42.2 45.3
Guyana 60.5 87.8
Haiti 47.5 44.6
Honduras 54.9 61.8
Jamaica 21.4 32.9
Mexico 63.4 38.7
Nicaragua 56.9 73.4
Panama 46.4 81.4
Peru 76.8 49.1
Trinidad & Tobago 37.4 70.5
Uruguay 45.7 38.0
Venezuela 36.8 20.0
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
41Business Monitor International Ltd www.businessmonitor.com
BUSINESS ENVIRONMENT
have yet to gain increased attention from the Brazilian armed
forces and federal police. Indeed, local news sources report
than an unprecedented 24 tonnes of cocaine were confiscated
in 2009, compared with 15 tonnes in 2005. Moreover, recent
media reports have suggested that between 60% and 80% of
Bolivian cocaine is destined for Brazil, underscoring the coun-
try's growing consumer base.
Brazil is the second-largest producer and exporter of small arms
and ammunition in the Americas after the US, with both civilian
and military production. Brazil also has one of the highest rates
of death by firearms in the world, with around 90% of these be-
ing murders. The main increases in murders have occurred in
the urban capitals, such as Rio de Janeiro and São Paulo. The
majority of illegal weapons seized by the security forces are
locally manufactured handguns and ammunition.
Although Brazil has no active domestic insurgent groups, there
are growing concerns about the presence of illegal armed and
organised crime groups in the Tri-Border Area on the border
with Argentina and Paraguay. In particular, there are anxieties
that Islamist terrorists are using organised crime to fund activi-
ties in South America and abroad.
43Business Monitor International Ltd www.businessmonitor.com
Chapter 5: Key Sectors
Autos
Executive SummaryPassenger car sales in Brazil decreased 5.2% y-o-y in Septem-
ber, to 214,351 units. Over the first nine months of 2012, sales
in this segment have increased 7.2% y-o-y, to 2,100,365 units.
BMI has long maintained that passenger car sales in Brazil will
increase 3.9% over the course of the year. We maintain this
view for now, as we believe sales in this segment will moder-
ate over the remainder of the year, and drop in line with our
forecast. Earlier in 2012, car sales were boosted significantly
through stimulus measures aimed at boosting investment and
consumption, including cheaper credit for vehicle loans and
tax breaks for domestically produced vehicles. Although the
stimulus measures are in place until the end of October, we be-
lieve their effects were felt the most in the June-August period,
and that their impact will be more subdued in the latter stages.
We believe that greater access to credit for vehicle loans will
provide some modest increase in sales over the remainder of
the year, but not substantially so.
Over the long term, we maintain a bullish outlook for the
passenger car segment in Brazil, and expect to see strong and
sustained growth over the remainder of our 2017 forecast period.
Vehicle production in Brazil increased 8.2% y-o-y in Sep-
tember, 282,540 units. Over the first nine months of the year,
production declined 5.7% y-o-y, to 2,462,873 units. In July, we
revised down our vehicle production forecast, to a 5% decrease
in 2012, predicated on our belief that the Brazilian economy,
with its industrial and vehicle production, will pick up in the
second half of the year. This view is continuing to play out, and
we maintain our forecast for now.
BMI believes that despite weak Q212 growth, we will see a
modest pick-up in economic growth in coming quarters, in
line with our 2012 real GDP growth forecast of 1.0%. The
July industrial production reading recorded the most moderate
contraction since March, at 2.9% y-o-y. We believe, however,
this will resurge somewhat in H212. This has informed our
belief that vehicle production will have picked up in this time.
BMI also sees little to suggest substantial further appreciation
for the Brazilian real in the short term. Rather, we believe cen-
tral bank intervention, both through monetary easing, as well as
directly purchasing US dollars, will mute any upside potential
for the currency. An appreciation of the currency would pro-
vide further downside risk to our forecast, as this would make
exports less competitive.
Over the longer term, we maintain our bullish outlook for the
autos production sector, predicated on government policy bearing
fruits, our view of resurging domestic sales, and the potential
for Brazil to become a regional production hub. On the back
of this bullish outlook, over the short and long term, we expect
to see significant investment from international automotive
manufacturers in the Brazil autos sector.
Market OverviewSuppliers: It is BMI's long held view that government policy in
Brazil to boost domestic automotive production would bear fruits,
and that the segment will see considerable ongoing investment over
the medium term. Indeed, automotive manufacturers continue to
invest in production facilities in the country, and this is begetting
growth across the supply chain. Indeed, on the back of govern-
ment policy mandating local content requirements for autos parts,
domestic suppliers are benefiting massively from these increases
in investment. We expect this trend to continue as the production
market, and the domestic supply chain, continues to develop.
According to 2008 estimates, the industry boasts of a strong
network of 470 automotive companies, which together operate
some 650 plants across the country. Details of some of the leading
international names are listed below. The list is not exhaustive.
Segment Developments: In October, South Korean automaker
Hyundai Motor's components subsidiary Hyundai Mobis
plans to establish large-scale distribution centres in the Brazil
in 2013, amongst other emerging market economies. The move
is in line with the carmaker's global expansion of vehicle pro-
duction facilities and the development of its aftermarket parts
business. The carmaker is set to increase its global distribution
bases to 35 by end 2012.
44 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
In September, Automotive technology and systems manufacturer
Denso announced that it will begin production of engine con-
trol units (ECUs) in Brazil. The company will initially supply
Toyotaplants in Brazil. Toyota recently opened its third auto
production plant in Brazil, currently employing some 4,000
workers, and recently announced plans to build an engine pro-
duction plant in the country.In addition to Toyota, Denso aims
to supply ECUs made in Brazil to other Japanese automakers,
including Nissan which plans to bring a new plant online in
2014. In the first quarter of FY2012, Denso's sales in the Latin
American region reached JPY14bn (US$176.3mn), an 11.4%
y-o-y decrease. In the Q112 period, vehicle sales in both Brazil
and Argentina – key regional markets for the company – de-
creased, but picked up over the Q212 period in Brazil, and BMI
expects this growth to continue for the remainder of the year.
We remain somewhat more bearish about vehicle production
and sales in Argentina, however, forecasting an 18% drop in this
segment in 2012. Denso hopes to nearly double its sales in the
Latin America region to US$1.4bn by 2015, taking advantage of
automakers' plans to increase their parts procurement in Brazil.
In August, German auto parts manufacturer Continental launched a new technical centre in Brazil. The move is line
with the company's strategy to focus on powertrain testing
and cater to the growing demand for development capacities,
owing to stricter global standards for fuel consumption and
emissions. The new centre has been built with an investment
of about BRL28mn (US$13.8mn) and has 50 staff members
mainly from the local area.
In August, Denso Do Brasil (DNBR), a subsidiary of global
automotive firm Denso Corp., opened a new plant and technical
development centre in Santa Barbara, Sao Paulo, Brazil. The
company has invested US$101.4mn in the plant, employing 800
employees. The technical centre will develop motor parts for the
South American market. DNBR's president, Hiroshige Shinbo,
says the technical centre will increase production capacity and
reduce development time for new technology.
In August, US component manufacturer Wabtec Corporation
acquired a 100% stake in Brazilian subsidiary Winco Equipa-mentos Ferroviarios. The move is in line with Wabtec's strategy
to expand its business footprint in Brazil. Wabtec's sales outside
the US grew from US$370mn in 2006 to US$916mn in 2011,
with a compounded annual growth rate of 20%. The company
expects double-digit growth in 2012.
In August, Air and ocean freight specialist DHL Global Forward-
ing opened a new Automotive Competence Centre in SãoPaulo,
Brazil. The company expects the Centre to handle some 2,000
shipments per month from original equipment manufacturers
(OEMs) and first-tier suppliers importing auto components into
the country.
In July, US-based Yaskawa America Inc's (YAI) divisions,
Motoman Robótica do Brasil and Yaskawa Eléctrico do Brasil, jointly stated their plans to expand in Brazil. Both
divisions will move together to a larger manufacturing area in
Diadema, but will stay as separate divisions. Both divisions
are scheduled to be fully functional by mid-July 2012 and will
relocate around 150 employees. The new location will enable
the divisions to bolster efficiencies and production capacity as
well as offer efficient customer service.
Industry ForecastSales: Passenger car sales in Brazil decreased 5.2% y-o-y in
September, to 214,351 units. Over the first nine months of 2012,
sales in this segment have increased 7.2% y-o-y, to 2,100,365
units. BMI has long maintained that passenger car sales in Brazil
will increase 3.8% over the course of the year. We maintain this
view for now, as we believe sales in this segment will moderate
over the remainder of the year, and drop in line with our forecast.
We believe that greater access to credit for vehicle loans will
provide some modest increase in sales over the remainder of
the year, but not a substantial increase.
Earlier in 2012, the Brazilian government implemented stimu-
lus measures aimed at boosting investment and consumption,
including cheaper credit for vehicle loans and tax breaks for
domestically produced vehicles. These were extended for two
month sin late August, along with other measures to stoke the
economy. Car sales increased massively on the back of these
moves. At the time, we maintained that car sales would dip
once these incentives finished, and our fears were borne out
when passenger car sales declined in September. Although
the measures are in place until the end of October we believe
their effects were felt the most in the June-August period, and
that their impact will be more subdued in the latter stages. As a
result, we maintain our 2012 sales forecast, with sales abating
somewhat over the remainder of the year.
BMI maintains its view that significant fiscal and monetary
stimulus will precipitate a pick-up in private consumption over
the coming quarters, although we believe that private banks'
concerns over elevated non-performing loans, high household
debt levels, reduced purchasing power, and weak consumer
45Business Monitor International Ltd www.businessmonitor.com
KEY SECTORS
confidence mean that such a development will be more modest
than we previously expected. BMI believes that this modest
increase in private consumption in the second half of the year
will boost passenger car sales. This has partly informed our
bullish forecast throughout the year.
The rate of delinquent car loans in Brazil dropped to 6.0% in
June, from 6.1% in May – the first decline since December
2010. The rate of total loan delinquency is slightly lower, com-
ing in at 5.8% in June. BMI believes that lower interest rates
in the second half of the year will lower this rate further; this
may facilitate a boost in vehicle loans as banks becomes more
willing to issue credit.
Vehicle loans to customers in the non-prime, sub-prime, and deep-
sub-prime risk tiers accounted for 25.4% of all vehicle loans in
Brazil in Q212, a 14% increase on Q211. As banks increased loan
access to a wider section of the population, the average customer
credit scores for both new and used vehicle loans decreased in
the period. BMI believes that this widening of access to credit
has helped, in part at least, to boost passenger car sales in Q212.
Despite the increase in loan volumes to riskier consumers, how-
ever, the loan-to-value (LTV) ratios (the amount of money paid
over the life of a loan versus the purchase price of the vehicle)
were lower than they were a year ago. For new vehicles, the aver-
age LTV ratio was 109.55% in Q212, compared with 115.65%
in Q211. BMI believes that, although banks have widened their
access to credit to sections of the population that were hitherto
unable to access official credit for vehicle purchases, the lower
LTV ratio suggests that this is not a considerable increase in the
riskiness of their portfolios, and therefore remains a sustainable
increase in operations.
Over the first nine months of 2012, Fiat's sales increased 11.6%
y-o-y, to 493,976 units. The company is the largest auto company
in the country by sales volume, with a market share of 23.5%.
In this period, Volkswagen's (VW) sales increased 9.6% y-o-y,
to 482,085 units. The German marque has a market share of
22.9%. General Motor Company's (GM) sales increased 1.9%
y-o-y in this period, to 396,543 units, giving the company a
market share of 18.8%. Ford's sales over this period increased
8% y-o-y, to 197,342 units, resulting in a market share of 9.4%.
Despite weak Q212 growth, BMI believes there will be a mod-
est pick-up in economic growth over the coming quarters, in
line with our 2012 real GDP growth forecast of 1.8%. Indeed,
the July industrial production reading recorded the smallest
contraction since March, at 2.9% y-o-y. We believe this will
resurge somewhat in H212.
Light commercial vehicle sales declined 0.5% y-o-y in 9M12, to
565,786 units. We have become increasingly bearish on sales in
this segment, forecasting a 2% increase in 2012, down from 4.2%
previously. We maintain this forecast for now, as we believe the
year-to-date reduction will be moderated by an upswing in the
economy and rise in industrial production in H212.
Heavy truck sales fell 22% y-o-y in 9M12, to 101,318 units. We
recently revised down our 2012 sales forecast for this segment
to a more bearish 18% decline over the year, from an 8.7% de-
crease previously. However, we also believe that falling truck
sales will be moderated by the upswing in the economy and rise
in industrial production in H212.
Production: Vehicle production in Brazil increased 8.2% y-
o-y in September, 282,540 units. Over the first nine months of
the year, production declined 5.7% y-o-y, to 2,462,873 units.
In July, we revised down our vehicle production forecast, to a
5% decrease in 2012, predicated on our belief that the Brazilian
economy, and with it industrial and vehicle production, will
pick up in the second half of the year. This view is continuing
TABLE: BRAZIL AUTOS SALES BY SEGMENT – HISTORICAL DATA AND FORECASTS, 2010 – 20172010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Vehicles, units 3,524,970 3,644,151 3,764,256 3,892,227 4,131,583 4,394,399 4,686,898 5,167,621
– % chg y-o-y 12.21 3.38 3.3 3.4 6.15 6.36 6.66 10.26
Passenger cars, units 2.644.704 2,647,032 2,748,943 2,827,917 2,981,594 3,150,841 3,351,999 3,647,106
– % chg y-o-y 6.87 0.09 3.85 2.87 5.43 5.68 6.38 8.8
Commercial vehicles, units 880,266 997,119 1,015,313 1,064,310 1,149,988 1,243,558 1,334,899 1,520,516
– % chg y-o-y 32.05 13.27 1.82 4.83 8.05 8.14 7.35 13.9
Motorbikes, units 1,818,181 2,044,422 2,233,693 2,393,004 2,588,072 2,789,282 3,031,056 2,728,936
% chg y-o-y 15.13 12.44 9.26 7.13 8.15 7.77 8.67 8.1
e/f = estimate/forecast. Source: National Association of Motor Vehicle Manufacturers, Registro Nacional de Veículos Automotores, Federação Nacional da Distribuição de Veículos Automotores, BMI
46 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
to play out, and we maintain our forecast for now.
BMI believes that despite weak Q212 growth, we will see a mod-
est pick-up in economic growth in coming quarters, in line with
our 2012 real GDP growth forecast of 1.8%. The July industrial
production reading recorded the most moderate contraction since
March, at 2.9% y-o-y. We believe, however, this will resurge
somewhat in H212. This has informed our belief that vehicle
production will pick up in the remainder of the year.
Further, BMI sees little to suggest substantial further apprecia-
tion for the Brazilian real in the short term. Rather, we believe
central bank intervention, both through monetary easing, as well
as directly purchasing US dollars, will mute any upside potential
for the currency. An appreciation of the currency would provide
further downside risk to our forecast, as this would make exports
less competitive.
Over the longer term, we maintain our bullish outlook for the
autos production sector, predicated on government policy bearing
fruits, our view of resurging domestic sales, and the potential
for Brazil to become a regional production hub.
In May 2012, as part of a BRL60.4bn (US$31.6bn) stimulus
package designed to boost foreign and domestic investment, in-
novation, and GDP growth, the Brazilian government announced
a number of tax incentives and other perks for the autos industry.
BMI has long maintained that, although investments are neces-
sary to boost Brazil's productive capacity, such changes will not
happen immediately, and the domestic production sector will
take time to mature. Imposing tight restrictions on importers will
cutoff supply in the short to medium term, before the domestic
manufacturing sector is ready. The current downward trend in
vehicle production is commensurate with this view.
BMI believes that once the sector does begin to develop we
will see strong growth in domestic manufacturing. Indeed, a
number of auto manufacturers continue to invest in the country,
predicated on their longer-term faith in the sector.
Food & Drink
Executive SummaryA number of pressing challenges are facing Brazil's economy
over the next few years, informing our view that the country
is in for a period of lower-trend growth. We highlight slowing
private consumption and the end of China's investment boom as
major contributors to Brazil's medium-term growth trajectory.
Following substantial growth in the last decade, we believe
Brazil's consumer story is in for a period of more moderate
expansion over the medium term due to re duced consumer
purchasing power o n the back of currency weakness and high
household indebtedness following significant credit growth in
recent years.
Household debt levels have ballooned in recent years, a factor
we expect to co nstrain consumer borrowing despite government
pressure on commercial banks to bring down their lending rates.
As such, we have revised our medium-term growth forecasts
to reflect a more moderate consumer story in coming years. W
e forecast private consumption to contribute an aver age of 2.0
percentage points to real GDP growth between 2012 and 2017,
implying average real private consumption growth of 3.1%
between 2012 and 2017.
Headline Industry Data (local currency)
• 2013 per capita food consumption = +9.8% year-on-year
(y-o-y); forecast compound annual growth rate (CAGR)
to 2017 = +9.3%.
• 2013 alcoholic drink sales = +10.8% y-o-y; forecast CAGR
to 2017 = +10.7%.
• 2013 soft drink sales = +9.0% y-o-y; forecast CAGR to
2017= +9.3%.
• 2013 mass grocery retail sales = +8.0% y-o-y; forecast
CAGR to 2017 = +8.7%.
Key Company Trends AmBev Volume Growth Muted : In
August 2012, AmBev, the Brazilian subsidiary of beer giant
Anheuser-Busch InBev, posted muted growth for its fiscal
first half. For the six months to the end of June, total volumes
were up by 3.4%, with beer volumes up by 2.7% and soft drink
sales up by 4.9% (on an organic basis). Net sales advanced by
10.1% on an organic basis. However, growth of just 2.7% for
beer sales points to the firm's recent push for revenues over
volumes as well as the ongoing challenges within the Brazilian
beer market due to slowing economic growth – a situation set
to be compounded by upcoming duty hikes.
Brasil Foods Facing Cost Challenges :Body 1In August 2012,
47Business Monitor International Ltd www.businessmonitor.com
KEY SECTORS
Brasil Foods, Brazil's largest food producer, registered a mas-
sive drop in profitability after seeing commodity and financial
costs eat into its earnings. For the six months to the end of June,
the firm reported a 7% increase in net sales, which reached
BRL13.2bn. However, earnings before interest, taxes, deprecia-
tion and amortisation fell by 32% to BRL1,097mn, while net
profits slumped by 82% to BRL160mn.
Key Risks To Outlook: The risks to our growth forecasts for
Brazil remain substantial. We previously outlined two potential
scenarios for the country's economic imbalances to unwind over
the coming years, both of which remain on the table. First, given
policymakers' massive toolkit and demonstrated willingness to
use it, we do not rule out that the current policy mix could achieve
higher returns to growth through the 2014 general election than
we currently forecast, particularly if the authorities change their
view on a weak real. However, this would result in a sharper
adjustment thereafter, as the reduction of massive fiscal stimulus
would likely prompt a substantial drop in private consumption,
and two more years of strong credit and money supply growth
would make the ensuing deleveraging period even more painful.
Meanwhile, given the real's break through long-term trend-line
support, and analysts' and investors' increasingly bearish views
on the economy, we believe our worst-case scenario has become
increasingly likely in recent months. A significant and sustained
change in investor sentiment could precipitate an aggressive
currency sell-off, sending the unit towards BRL2.5000/US$
much faster than we currently anticipate. This would severely
dampen private consumption and likely drag headline growth
down as well. Such a scenario also implies greater potential
for a full-fledged banking sector crisis given the currency mis-
match on banks' balance sheets and potential for loan quality
to deteriorate substantially.
Industry ForecastFood Consumption:
• Headline food consumption compound annual growth, local
currency, to 2017: +10.1%
• Per capita forecast food consumption compound annual
growth, local currency, to 2017: +9.3%
Due to rapid income growth and a steady increase in the value
of the Brazilian real against the dollar, per capita food consump-
tion (food and drink, excluding alcoholic drinks) in Brazil is
now above average for the Latin America region in US dollar
terms. Despite this, food consumption is still growing at a
tremendous rate.
In the next five years, food consumption is expected to continue
growing rapidly, despite the current economic slowdown.
Between 2012 and 2017, per capita consumption is forecast to
grow by 55.7% (nominal growth rate in local currency terms),
which translates into a compound annual growth rate (CAGR)
of 9.3%. With the size of the Brazilian population forecast to
increase by 6% over the same period, total food consumption
is expected to grow by more than 60%.
This growth is expected to be driven by consumers trading up
to higher-value, branded and premium products and by lower-
income consumers simply buying more. In urban locations, there
is also an ongoing trend towards value-added convenience foods
as working lifestyles increasingly come to mirror those in the
developed world. Industry confidence in the continued growth of
domestic demand is reflected both in investments in production
facilities and in a renewed focus on popular multinational brands.
Processed Food:
• Canned food volume sales compound annual growth to
2017: +4.3%
• Canned food value sales compound annual growth, local
currency, to 2017: +9.4%
Brazilians are very fond of canned foods, especially vegetables,
meat, fish and beans, sales of which are expected to increase over
the forecast period, both in terms of values and volumes. This
is especially true among the poorer segments of the population,
where these comparatively cheap and easy-to-store products
form a substantial part of the average person's diet.
Dairy: The dairy sector in Brazil remains one of the most ar-
chaic and fragmented sectors within the country's agricultural
industry. This means that the supply of raw milk is limited and
that prices are higher than they might otherwise be. This in turn
limits scope for expanding consumption among the country's
large low-income population, with per capita consumption of
dairy products low, even in comparison with some of the world's
other emerging markets.
On the plus side, the undeveloped nature of the sector leaves
tremendous room for further growth, and dairy consumption
has been rising steadily. This strong growth is a result of ris-
48 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
ing disposable incomes, population growth and the increased
perception of dairy products as healthy and nutritious.
In the meantime, the Brazilian dairy sector is rapidly consolidat-
ing, with all of the leading firms keen to secure market share.
With the number of remaining opportunities diminishing, all
the big firms are now concentrating on soaking up the smaller,
regional firms that can help their expansion in less-consolidated
regions. In a move further encouraging this trend, in November
2008, Brazil joined the International Dairy Federation (IDF),
bringing IDF's global representation up to 54 countries and
increasing IDF's presence in Latin America – alongside Mexico.
With dairy produce becoming one of the fastest-growing food
sectors in Brazil, this process of consolidation is expected to
remain in place over the next five years. A recent report from
Rabobank suggests that growth in Brazil's dairy sector is ex-
pected to be driven by the yoghurt and cheese markets, which
are both relatively immature.
Confectionery:
• Confectionery volume sales compound annual growth to
2017: +6.8%
• Chocolate volume sales compound annual growth to 2017:
+10.1%
• Sugar confectionery volume sales compound annual growth
to 2017: +4.6%
• Gum volume sales compound annual growth to 2016: +1.4%
Over the 2006-2011 review period, confectionery value sales
in Brazil increased significantly. In 2011, an estimated 67.5%
of the overall market was accounted for by chocolate confec-
tionery, followed by sugar confectionery and gum, with market
shares of 25.5% and 7% respectively. Between 2012 and 2017,
overall confectionery sales in local currency terms are forecast
to nearly double, with all sub-sectors expected to continue to
grow rapidly thanks to the country's strong economic growth
and large youth population.
There is a gradual trend towards the purchase of premium
confectionery products, particularly among Brazil's growing
middle-class population. This trend explains the success of
premium chocolate manufacturer and retailer Kopenhagen,
which has retail outlets in most Brazilian malls. As a result of
this trend, value sales of confectionery are expected to increase
slightly faster than volume sales.
Discussion about obesity levels and dietary choices has been
intensifying, with busier lifestyles and consumption of conveni-
ence foods having led to an increase in related diseases. Thus,
demand for healthier food and confectionery options, which
retail at a premium, is increasing in Brazil – in line with global
trends – as consumers try to adopt healthier lifestyles. A key
challenge and opportunity for manufacturers is to serve the north
and north east of the country, where income levels are lower but
growing quicker, as distribution has so far been focused mostly
on the more affluent south east.
In 2012, Brazilian biscuit consumption was expected to be
9.9kg per capita. This compares with per capita consumption
of 6.9kg in 2002 and demonstrates the rapid advancement of
the market. This relatively high level of consumption can be
attributed to a longstanding tradition of biscuit consumption
at every socioeconomic level, with biscuits already purchased
by 98% of Brazilian households. This wide base means that
consumption can be expected to continue advancing rapidly as
affluence increases throughout the income spectrum. We are
currently forecasting that per capita consumption will reach
12.9kg in 2017, representing growth of 35% in the size of the
overall market (in volume terms) over the next five years.
Hot Drinks:
• Coffee volume sales compound annual growth to 2017:
+6.1%
• Coffee value sales compound annual growth, local currency,
to 2017: +11.3%
• Tea volume sales compound annual growth to 2017: +16.5%
• Tea value sales compound annual growth, local currency,
to 2017: +22.2%
Brazil is the largest grower of coffee in the world and the second
largest coffee market, behind the US. The increased popularity
of coffee in Brazil can be attributed to the improved quality of
locally processed coffee (ABIC – the country's coffee industry
association – introduced a coffee quality programme in 2004), as
well as rising consumer affluence. The industry is set to receive
a further boost from growing international demand for coffee
that has been processed in Brazil.
49Business Monitor International Ltd www.businessmonitor.com
KEY SECTORS
According to figures from ABIC, total domestic volume sales
of roast/ground coffee increased by more than 20% between
2004 and 2009, while sales of soluble/instant coffee increased
by 35%. Despite this strong growth, per capita consumption
remains relatively low in comparison with more mature markets
such as Argentina, leaving plenty of room for further increases.
Nevertheless, consumption growth has increased markedly since
2003, and in June 2008 US coffee shop chain Starbucks revealed
that its Brazilian stores were currently generating the highest
number of sales transactions per store in Latin America. As a
consequence of this success, it announced in August 2010 that
it would take full control of its operations in Brazil through the
acquisition of local firm Cafés Sereia do Brasil Participações,
which owned a 51% stake in the network. Starbucks also said
it plans to expand aggressively in the country. The success of
Starbucks highlights the growing demand for higher-value
gourmet coffee varieties and this trend should mean value sales
increase at a faster rate than volume sales over the next five years.
The company's US origins and high prices have made it some-
thing of a status symbol for affluent young Latin Americans.
In addition, Starbucks has brought a consistency of quality to
the market place, which is currently lacking in the region's
independent coffee houses, which use lower quality beans to
keep prices affordable. The firm has been to some extent limited
by the number of consumers willing to pay up to US$5 for a
cup of coffee. However, the ongoing explosion in the number
of middle class consumers in emerging markets such as Brazil
means this problem is gradually diminishing.
Growing international demand for coffee that has been processed
in Brazil is set to give a further boost to the coffee industry. The
emergence of a sophisticated local market has facilitated the
development of higher-quality domestic processing and ABIC
figures reveal that, during 2008, Brazilian exports of roasted
and ground coffee more than doubled.
While this sub-sector still represents only a tiny percentage of
Brazil's total coffee exports, the phenomenal growth rate is an
indicator of the industry's potential and, with domestic consump-
tion also on the rise, the Brazilian coffee-processing industry
looks to have a bright future.
Meanwhile, tea value sales are expected to increase over the
forecast period, albeit from a low base, as consumers drink
more herbal and speciality varieties thanks to the perceived
health benefits. Neverthelesss, at the end of the forecast period
in 2017, tea sales are expected to represent no more than 15%
of the total value of the hot drinks market, with per capita con-
sumption still only just 0.61kg.
Alcoholic Drinks:
• Alcoholic drinks volume sales compound annual growth
to 2017: +5.7%
• Alcoholic drinks value sales compound annual growth,
local currency, to 2017: +10.7%
The economic slowdown, combined with increased duty, have
combined to slow growth in the previously very dynamic beer
sector. During 2011 sales in volume terms were virtually flat,
and in 2012 the market continued to prove tricky.
In the beer sector, BMI expects the market share of premium
beers to increase over the next five years. We are therefore
forecasting that value sales will grow at a faster rate than vol-
ume sales. In the next five years, BMI expects value sales to
increase by 69% in local currency terms, while volume sales are
expected to increase by 33% to come in at 16.6bn litres in 2017.
Meanwhile, wine is gradually becoming more popular among
middle-class Brazilians as an accompaniment to a meal, and value
consumption is thus forecast to gradually rise over the forecast
period. Despite the historic dominance of beer, BMI believes a
shift towards wine remains a long-term possibility as consumer
affluence increases. In European markets traditionally dominated
by beer, such as Germany, Ireland and the UK, the past 20 years
have witnessed a phenomenal rise in wine consumption and an
associated drop in the consumption of beer. This has been driven by
wine's well-publicised health benefits, the growing trend towards
drinking at home and the increased affordability of good-quality
wine. All of these trends may eventually be mirrored in Brazil.
BMI believes the final factor – the availability of good qual-
ity, affordable wine – is likely to be the main sticking point
currently limiting consumption growth. High import taxes and
low sales volumes mean that foreign wine is expensive and can
often be difficult to find, while the quality of Brazil's domestic
wine often leaves a lot to be desired. However, with this now
changing, with wine distribution increasing and investment in
the local industry increasingly resulting in wines of comparable
quality to its regional neighbours, the Brazilian wine sector could
potentially be one of the most dynamic in the Latin American
food and drink industry over the next five years.
50 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
Brazil already has a fairly strong spirits culture and over the
next five years we see gaining market share from the beer sec-
tor. Rising affluence will increasingly push consumers towards
premium varieties and as a result BMI is forecasting that total
spirits sales in Brazil will increased by 52.3% in value terms to
reach BRL45.95bn in 2017.
Soft Drinks:
• Soft drinks volume sales compound annual growth to
2016: +3.6%
• Soft drinks value sales compound annual growth, local
currency, to 2016: +9.3%
Brazil's climate favours the consumption of cold soft drinks,
while consumption is also boosted by the young average age of
the country's population. However, sales figures released by the
country's national soft drink association ABIR show that growth
in the sector has not been uniform across categories, with volume
sales of fruit juice/juice drinks and energy drinks greatly outper-
forming sales of carbonated soft drinks, iced tea and bottled water.
This contrasting growth is expected to be a feature of the sec-
tor for the five years to 2017 and is reflected in our five-year
forecasts, with volume sales of carbonated soft drinks expected
to grow by 15%, sales of fruit juice expected to grow by 52%
and sales of bottled water forecast to grow by 24%. We also
expect strong growth of the functional drinks market through
to 2017, of 46% in volume terms.
Mass Grocery Retail:
• Mass grocery retail value compound annual sales growth
to 2017: +8.7%
• Supermarket sector value compound annual sales growth
to 2017: +8.4%
• Hypermarket sector value compound annual sales growth
to 2017: +7.3%
• Discount sector value compound annual sales growth to
2017: +10.4%
• Convenience sector value compound annual sales growth
to 2017: +11.3%
The dynamism of the Brazilian consumer has translated into
strong growth for the mass grocery retail segment. While retail
sales moderated following the global financial crisis, the indi-
cator remained in positive territory throughout the downturn.
With the favourable economic climate adding wind to a sector
that is already powering forward thanks to changes in consumer
behaviour and sustained investment, we are anticipating dynamic
levels of growth in the mass grocery retail (MGR) sector over
the next five years.
BMI forecasts that sales in the MGR sector will grow by nearly
52% between 2012 and 2017, compared with the 62% growth in
the 2007-2012 historical period. Supermarkets will continue to
take the lion's share of sales by value, but of increasing impor-
tance are the convenience, discount and hypermarket formats,
which are all expected to register significantly more rapid
growth over the forecast period. Hypermarkets are growing in
popularity, and through their sheer size and selling power per
unit are expected to experience significantly more rapid sales
growth. Smaller outlets in the form of discount stores will also
experience considerable growth rates, albeit from a lower base.
The large number of low-income consumers in Brazil, and
the recent focus on the discount format by the country's major
retailers, means that sales from discount stores are forecast to
grow by 64% through to 2017. Sales in convenience stores are
expected to increase by 71% over the forecast period as they
become increasingly popular with Brazil's growing number of
urban middle-class consumers.
TABLE: FOOD CONSUMPTION INDICATORS – HISTORICAL DATA & FORECASTS, 2010-20172010 2011 2012f 2013f 2014f 2015f 2016f 2017f
Food consumption (BRLbn) 350.3 374.2 407.9 451.5 495.0 544.1 598.9 660.6
Food consumption (US$bn) 199.0 223.4 203.9 210.0 217.6 224.4 249.5 293.6
Per capita food consumption (BRL) 1,797 1,903 2,056 2,257 2,454 2,676 2,924 3,202
Per capita food consumption (US$) 1,021 1,136 1,028 1,050 1,079 1,104 1,218 1,423
Total food consumption growth, BRL (% y-o-y) 11.00 6.82 9.00 10.69 9.63 9.92 10.07 10.31
NB nominal growth rate; f=BMI forecast. Source: Agency for Statistical and Geographic Information, BMI
51Business Monitor International Ltd www.businessmonitor.com
KEY SECTORS
The key task to master for MGRs will be taking advantage
of Brazil's large consumer base while accounting for the fact
that large parts of the population continue to suffer from low
incomes. In terms of future market position, the degree to which
individual operators manage to attract today's low-income con-
sumers, many of which might belong to the middle classes of
tomorrow, will be decisive.
MGRs, in the medium-to-long term, are expected to benefit
from the Growth Acceleration Programme, which is aimed at
increasing infrastructure-related investment via tax incentives
and large public and private investments. The planned measures,
if successful, could ease retailers' logistical problems, which are
mainly caused by poor road networks in many parts of the country.
Trade:
• Exports value compound annual growth to 2017 (US$):
+8.8%
• Imports value compound annual growth to 2017 (US$):
+2.2%
Brazil has a highly positive food and drink trade balance thanks
to the country's highly developed agricultural sector. Brazil is
the world's largest exporter of coffee, soybean, poultry, beef,
orange juice and sugar.
Statistics from the UN Conference on Trade and Development
show that Brazil's food and drink exports continue to grow rap-
idly. The rapidly rising global demand for food caused by the
swift economic advancement of emerging markets means that
BMI forecasts Brazil's food and drink exports to grow by 53%
over 2012-2017. In 2017, exports are forecast to reach a value
of US$88.1bn, with imports amounting to just over US$5.3bn,
having grown by 12% in the five years to 2017.
53Business Monitor International Ltd www.businessmonitor.com
KEY SECTORS
Other Key Sectors
Latest Forecast DataBelow are the latest forecast tables for our other core key sectors:
TABLE: PHARMA SECTOR KEY INDICATORS 2012e 2013f 2014f 2015f 2016f 2017f
Pharmaceutical sales, US$bn [2] 25.880 25.882 26.272 26.450 28.656 32.746
Pharmaceutical sales, US$bn, % chg y-o-y [2] -9.88 0.01 1.51 0.68 8.34 14.27
Pharmaceutical sales, BRLbn [2] 51.760 55.645 59.769 64.142 68.775 73.679
Pharmaceutical sales, BRLbn, % chg y-o-y [2] 7.60 7.51 7.41 7.32 7.22 7.13
Health expenditure, US$bn [3] 208.229 212.627 218.789 222.482 242.942 281.770
Health expenditure, US$bn, % chg y-o-y [3] -7.88 2.11 2.90 1.69 9.20 15.98
Health expenditure, BRLbn [3] 416.457 457.149 497.746 539.518 583.061 633.982
Health expenditure, BRLbn, % chg y-o-y [3] 9.99 9.77 8.88 8.39 8.07 8.73
Communicable, maternal, perinatal and nutritional conditions, DALYs [1,4] 4,839,006 4,699,774 4,564,905 4,434,404 4,308,273 4,186,518
Non-communicable diseases, DALYs [1,4] 22,051,353 22,272,002 22,483,891 22,687,012 22,881,355 23,066,912
Notes: e BMI estimates. f BMI forecasts. 1 Data is DALYS, disability-adjusted life years. Sources: 2 The Brazilian Pharmaceutical Industry Federation (Febrafarma), Group of Executives of the Pharmaceutical Market (Grupemef), IMS Health, BMI; 3 World Health Organization (WHO), BMI; 4 WHO, World Bank, IMF, BMI research.
TABLE: TELECOMS SECTOR KEY INDICATORS 2011 2012e 2013f 2014f 2015f 2016f 2017f
Number of Main Telephone Lines in Service ('000) [1] 42,691 42,928 42,761 42,541 42,374 42,289 42,286
Number of Main Telephone Lines in Service, % chg y-o-y [1] 1.6 0.6 -0.4 -0.5 -0.4 -0.2 -0.0
Number of Main Telephone Lines/100 Inhabitants [1] 21.7 21.6 21.4 21.1 20.8 20.6 20.5
Number of Cellular Mobile Phone Subscribers ('000) [2] 242,232 266,455 287,771 307,570 319,442 331,261 342,988
Number of Cellular Mobile Phone Subscribers, % chg y-o-y [2] 19.4 10.0 8.0 6.9 3.9 3.7 3.5
Number of Mobile Phone Subscribers/100 Inhabitants [2] 123.2 134.3 143.8 152.5 157.1 161.7 166.3
Number of Mobile Phone Subscribers/100 Inhabitants [2] 123.2 134.3 143.8 152.5 157.1 161.7 166.3
Number of Mobile Phone Subscribers/100 Inhabitants, % chg y-o-y [2] 18.3 9.1 7.1 6.0 3.0 2.9 2.8
Number of Internet Users ('000) [3] 92,365 102,370 112,473 122,079 129,379 135,201 139,284
Number of Internet Users, % chg y-o-y [3] 12.1 10.8 9.9 8.5 6.0 4.5 3.0
Number of Internet Users/100 Inhabitants [3] 47.0 51.6 56.2 60.5 63.6 66.0 67.5
Number of Internet Users/100 Inhabitants, % chg y-o-y [3] 11.2 9.9 8.9 7.7 5.1 3.7 2.3
Number of Broadband Internet Subscribers ('000) [1] 16,497 19,548 21,550 23,440 24,910 26,355 27,760
Number of Broadband Internet Subscribers, % chg y-o-y [1] 19.6 18.5 10.2 8.8 6.3 5.8 5.3
Notes: e BMI estimates. f BMI forecasts. Sources: 1 World Bank (International Telecommunications Union – ITU), BMI research, Teleco, Operators, Anatel; 2 World Bank (International Telecommunications Union – ITU), BMI research, Operators, Anatel; 3 World Bank (International Telecommunications Union – ITU), BMI research, Teleco, Anatel, Ibope.
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Construction industry value, BRLbn [1,2] 146.78 182.48 204.07 222.86 247.95 274.98 303.11 333.73 367.38
Construction industry value, US$bn [2] 73.4 103.7 121.8 114.2 116.6 120.9 125.0 139.1 163.3
Construction industry, real growth, % y-o-y [2] -6.26 11.70 3.62 2.21 5.76 6.20 5.23 5.30 5.48
Construction industry value, % GDP [2] 4.5 4.8 4.9 5.1 5.2 5.3 5.4 5.5 5.5
Notes: e BMI estimates. f BMI forecasts. 1 http://www.sidra.ibge.gov.br/bda/cnt/default.asp. Sources: 2 IBGE.
54 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
This report is abstracted from BMI's industry report series, which covers 22 sectors across global markets. Every quarter, we will provide tables
showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector. If you would like to order a full report, or find
out about BMI's other 1,113 industry reports, please contact [email protected]
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 2011 2012e 2013f 2014f 2015f 2016f 2017f
Defence expenditure, BRLmn [1] 65,871.9 69,279.6 78,777.0 89,349.7 101,802.8 115,665.8 131,104.1
Defence expenditure, BRL, % chg y-o-y [1] 7.7 5.2 13.7 13.4 13.9 13.6 13.3
Defence expenditure, % of GDP [2] 1.6 1.6 1.6 1.7 1.8 1.9 1.9
Defence expenditure, BRL per capita of population [2] 335.0 349.3 393.8 443.0 500.8 564.7 635.5
Defence expenditure, US$mn, constant prices [1] 36,843.9 30,500.9 30,646.0 31,470.1 32,159.2 35,279.0 41,101.4
Defence expenditure, US$, constant prices % chg y-o-y [1] 6.7 -17.2 0.5 2.7 2.2 9.7 16.5
Defence expenditure, constant US$ per capita of population [1] 187.4 153.8 153.2 156.0 158.2 172.2 199.2
Notes: e BMI estimates. f BMI forecasts. Sources: 1 SIPRI/BMI; 2 SIPRI, BMI calulation.
TABLE: FREIGHT SECTOR KEY INDICATORS2011 2012e 2013f 2014f 2015f 2016f 2017f
Port of Santos container throughput, TEU 2,985,922 3,105,359 3,291,680 3,495,568 3,707,883 3,939,106 4,191,138
Port of Santos container throughput, TEU, % y-o-y 14.8432 4.0000 6.0000 6.1940 6.0738 6.2360 6.3982
Air Freight Tonnes (000) 1,179.60 1,251.09 1,359.86 1,470.79 1,592.66 1,732.25 1,882.60
Air Freight Tonnes % chg y-o-y 3.55 6.06 8.69 8.16 8.29 8.76 8.68
Source: BMI
55Business Monitor International Ltd www.businessmonitor.com
Chapter 6: BMI Global Assumptions
TABLE: GLOBAL ASSUMPTIONS2011 2012e 2013f 2014f 2015f 2016f 2017f
Real GDP Growth (%)
US 1.7 2.2 2.1 2.5 2.5 2.4 2.4
Eurozone 1.6 -0.7 0.4 1.4 1.7 1.9 1.9
Japan -0.6 0.5 0.9 1.2 1.1 1.1 1.1
China 9.1 7.7 7.5 6.7 6.0 5.8 5.8
World 3.1 2.5 2.9 3.4 3.4 3.5 3.5
Consumer Inflation (ave)
US 3.0 2.1 2.1 2.1 2.1 2.1 2.1
Eurozone 2.6 2.1 1.7 1.8 1.9 2.1 2.2
Japan -0.2 0.0 0.3 0.8 1.3 1.8 2.3
China 5.6 3.0 2.6 2.9 2.8 2.7 2.7
World 4.1 3.5 3.3 3.2 3.2 3.3 3.3
Interest Rates (eop)
Fed Funds Rate 0.00 0.00 0.00 0.00 0.00 1.00 2.25
ECB Refinancing Rate 1.00 0.50 0.50 0.50 0.50 1.00 1.50
Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.10 0.25 0.50
Exchange Rates (ave)
US$/EUR 1.39 1.27 1.25 1.20 1.20 1.20 1.20
JPY/US$ 79.74 79.00 75.00 76.00 78.00 82.25 84.75
CNY/US$ 6.46 6.34 6.40 6.55 6.60 6.60 6.60
Oil Prices (ave)
OPEC Basket (US$/bbl) 107.52 107.05 99.10 96.15 95.20 93.25 93.30
Brent Crude (US$/bbl) 111.05 110.00 102.00 99.00 98.00 96.00 96.00
e/f = estimate/forecast. Source: BMI
Global Outlook
Growth May Be Turning The Corner Our global real GDP growth forecasts remain steady, at 2.9%
in 2013 and 3.4% in 2014 and 2015, following estimated 2.5%
growth in 2012. Nonetheless, we have upwardly revised growth
estimates and forecasts for a few key states, most notably the US
and China. Despite these amendments, our core global outlook
remains relatively unchanged. We believe that 2013 is likely to
see improved economic activity, with cyclical indicators begin-
ning to indicate that the near-recessionary conditions seen in
mid-2012 are abating. Developed states still have a long way
to go before recovering pre-crisis output levels, while emerging
market (EM) performance will be mixed.
With the global economy only likely to slowly pick up mo-
mentum, further stimulus is desirable, particularly in developed
states where economic slack remains significant. Japan and the
US are set to up the ante on this front in the new year. Given
the state of the Japanese economy, we believe that the further
enactment of expansionary monetary and fiscal policy is almost
guaranteed, and we expect budget proceedings to come to the
fore in Q113. Although we believe that the Bank of Japan (BoJ)
is likely to expand its asset purchases at its next few meetings,
we expect the newly elected Liberal Democratic Party govern-
ment to keep pressure on the central bank to increase money
supply further, and see scope for the party to exert influence
over the appointment of the next BoJ governor.
In the US, the decisions announced by the Federal Reserve (Fed)
on December 12 2012 changed the game for monetary policy
once again. The Fed will now purchase an additional US$45bn
56 Business Monitor International Ltdwww.businessmonitor.com
BRAZIL Q2 2013
TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS2011 2012e 2013f 2014f
Developed States Aggregate Growth 1.4 1.0 1.3 1.9
G7 1.4 1.2 1.5 2.0
Eurozone 1.6 -0.7 0.4 1.4
EU-27 1.7 -0.5 0.7 1.5
Selected Developed States
Australia 2.3 3.2 1.5 2.0
Austria 2.7 0.4 0.9 1.5
Belgium 1.8 -0.5 1.1 1.6
Canada 2.6 2.0 1.9 2.5
Denmark 1.0 -0.1 1.2 1.7
Finland 2.8 -0.4 0.6 1.9
France 1.8 -0.2 0.6 1.4
Germany 3.0 0.7 1.3 1.9
Ireland 1.4 -0.5 0.3 1.4
Italy 0.5 -2.3 -0.2 1.2
Japan -0.6 0.5 0.9 1.2
Netherlands 1.2 -1.1 0.6 0.9
Norway 1.6 3.5 2.1 2.3
Portugal -1.6 -3.4 -1.9 0.1
Spain 0.8 -2.1 -0.5 0.5
Sweden 3.9 0.6 1.2 2.6
Switzerland 2.1 0.7 1.5 1.8
UK 1.0 0.0 1.0 1.4
US 1.7 2.2 2.1 2.5
e/f = estimate/forecast. Source: BMI
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%)US Eurozone Japan Brazil China Russia India
2012 Bloomberg Consensus 2.2 -0.4 1.7 1.5 7.7 3.6 n/a
BMI 2.2 -0.7 0.5 1.0 7.7 3.4 5.7
2013 Bloomberg Consensus 2.0 0.1 0.7 3.8 8.1 3.5 5.8
BMI 2.1 0.4 0.9 3.5 7.5 3.4 6.2
n/a = not available. Source: BMI, Bloomberg
per month in 'longer-term' treasury securities, meaning that, be-
ginning in January 2013, the growth of the Fed's balance sheet
will accelerate to US$85bn/month, with US$40bn accounted for
by QE3. The Fed also set out explicit quantitative targets that
must be reached before monetary policy is tightened, so will
keep rates at near-zero levels 'at least as long' as the unemploy-
ment rate remains above 6.5% and the one- to two-year inflation
outlook remains below 2.5%. Our view on US rate policy is not
substantially changed by the newly created explicit targets, and
we continue to expect the next funds rate hike in 2016; however,
we now expect to see at least US$1trn in asset purchases until
early 2014, marking a substantial expansion of the Fed's balance
sheet by around a third.
Developed StatesOur developed state aggregate growth estimate for 2012 has risen
to 1.0% from a previous forecast of 0.9%, while it has fallen to
1. 3% from 1.4% for 2013. The 2012 upgrade is due to a change
in our US real GDP growth estimate for that year, which has
been revised up to 2.2% from the 2.0% forecast we set out at the
beginning of the year. Our general outlook for a slow and erratic
growth path for the US economy therefore remains in place. Our
2013 growth forecast for the eurozone has slipped slightly to
0.4% from 0.5% previously, owing mainly to a downgrade in
the Italy projection to -0.2% from 0.0%. Meanwhile, we have
downgraded other growth forecasts for both 2012 and 2013,
including those of Austria, Sweden and the UK.
57Business Monitor International Ltd www.businessmonitor.com
BMI GLOBAL ASSUMPTIONS
TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS2011 2012e 2013f 2014f
Emerging Markets Aggregate Growth 5.6 4.7 5.0 5.1
Latin America 4.1 3.0 3.4 3.7
Argentina 8.9 2.8 0.9 2.7
Brazil 2.7 1.0 3.5 3.7
Mexico 3.9 4.0 3.4 3.7
Middle East 3.9 5.1 3.9 4.8
Sub-Saharan Africa 4.0 4.2 6.1 5.8
South Africa 3.1 2.3 2.8 3.4
Nigeria 7.4 6.6 7.1 7.2
Saudi Arabia 7.1 5.2 4.5 3.6
UAE 4.2 3.3 3.6 4.3
Egypt 1.4 2.2 3.0 5.2
Emerging Asia 7.2 6.1 6.2 6.0
China 9.1 7.7 7.5 6.7
Hong Kong 5.0 1.8 2.5 3.6
India* 6.5 5.7 6.2 6.6
Indonesia 6.5 6.2 5.6 6.5
Malaysia 5.1 4.2 4.5 4.3
Singapore 4.9 1.9 3.6 3.4
South Korea 3.7 1.9 3.0 4.6
Taiwan 4.0 0.9 3.0 4.0
Thailand 0.1 4.3 4.4 4.4
Emerging Europe 4.8 2.6 3.2 4.0
Russia 4.3 3.4 3.4 3.6
Turkey 8.5 3.0 4.4 5.0
Czech Republic 1.9 -1.2 0.5 1.9
Hungary 1.7 -1.2 1.2 2.3
Poland 4.3 2.3 2.3 3.7
e/f = estimate/forecast; *Fiscal years ending March 31 (2011 = 2010/11). Source: BMI
Emerging MarketsEMs are estimated to have grown by 4.7% in real terms in 2012,
and we forecast a slight acceleration in growth in 2013 to 5.0%.
While our aggregate regional forecasts are relatively steady, we
have modestly downgraded the 2013 outlook for some major
EM economies, including Turkey, the Czech Republic, Poland,
Brazil and India.
Owing to the strength in the recent rebound in economic data
and upside risks to the external economy, we have upgraded
China's real GDP growth forecast for 2013 to 7.5% (from our
previous forecast of 7.1%). We have been calling for a cycli-
cal bounce in Chinese growth for a couple of months, and a
number of leading and coincident indicators suggest that this
is now well in play. Despite this upward revision, we remain
below the consensus forecast of 8.1% for 2013 and believe
that the current growth momentum is likely to fade towards
the middle of the year.
Analyst: Katherine WeberEditor: Mark SchaltuperSub-Editor: Kerry LambethSubscriptions Manager: Shineade Nicol-SeyMarketing Manager: Joanna AshtonProduction: Neil Murphy, Reema PatelPublishers: Richard Londesborough, Jonathan Feroze
©2013 Business Monitor International. All rights reserved.
All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd.All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.
Business Monitor International Limited,85 Queen Victoria Street, London, EC4V 4AB, UKTel: +44 (0)20 7248 5162Fax: +44 (0)20 7248 0467Email: [email protected]: www.businessmonitor.com
Copyright of Brazil Business Forecast Report is the property of Business Monitor International and its content
may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express
written permission. However, users may print, download, or email articles for individual use.