2018 Economic Outlook Brazil: Structural Reforms

This is the second chapter of the series of posts on the “2018 Economic Outlook Brazil” that is based on the Presidential Message delivered to the Brazilian National Congress in February, 2018 by President Temer. The official document, in its entirety, advises on the key national policies divided into five central pillars: Economy, Infrastructure, Social, Foreign Affairs and Public Administration.

Read below the policy highlights on Structural Reforms. The other posts are Regulated Markets and Foreign Policy.

1. Economic Outlook

The year 2017 presented the end of the longest economic recession ever recorded in the Brazilian history. The Gross Domestic Product (GDP) is increasing, inflation has slowed and unemployment and interest rates dropped. The year ended with an inflation rate of 2.95% p.y. (Extended National Consumer Price Index, or IPCA for Portuguese) and with the basic interest rate of 7% p.y. (Selic – Sistema Especial de Liquidação e de Custódia), the lowest since 2002.

Desempenho PIB 2017

2. Cash Withdraws From Severance Funds

Cash withdraw measures adopted in 2017, from public funds, contributed to the reduction of household debt and the expansion of consumption. The Federal Government facilitated access to the FGTS accounts (Guarantee Fund for Length of Service) of 26 million beneficiaries, which injected R$ 44 billion in the economy, along with the anticipation of R$ 2,2 billion in withdraws from 1,6 million retiring beneficiaries of the PIS/Pasep accounts (Social Integration Program and Heritage Formation Program for Public Servers).

3. Fiscal Reform

The Constitutional Amendment No. 95 of December 15, 2016 was responsible for creating the new Fiscal Regime, which limited public spending growth, modified the fiscal policy and, along with other proposals related to public accounts, reduced the uncertainties regarding fiscal policy conduct in the country.

4. Regime for the Fiscal Recovery of States

The Complementary Law No. 159 of May 19, 2017 established the Fiscal Recovery Regime (Regime de Recuperação Fiscal – RRF), seeking to enable the recovery and solvency of states suffering from serious financial crises. In general terms, when adopting the RRF, both State and Union recognize the financial imbalance of the State and specify the adjustment measures, with respective impacts and deadlines, as well as the sources of funding that will be used in the period of the recovery plan.

5. Modernization of Labor Laws

The labor market also presented significant changes and signs of mild recovery. The modernization of the labor laws, a reform approved in July 2017, resulted in the Law No. 13.467/2017, which updated the Consolidated Labor Laws (CLT) framework. The new structure reduces uncertainties and allows greater autonomy for workers and employers to enter into agreements. With the newly adopted legal framework, the government expects to reduce informality in employment and increase job posts and wages.

6. Social Security Reform

In 2017, Social Security registered a record deficit of R$ 268.7 billion. The National Congress is currently debating over its Social Security Reform as an essential component of the reform package for economic recovery, aimed at balancing the public social pension accounts.

The demographic dynamics of the country is imposing significant challenges on policy-making, and in the case of social security, the impacts are direct. Brazil is experiencing an increase in life expectancy, and consequently, in the amount and duration of payments of the security benefits. Added to this is the decrease of reproduction rates, which alters the proportion of active individuals in the job market. This is a relevant fact because the Brazilian social security system is based on simple allocation, being that active workers pay the benefits for those who have withdrawn from the labor market. In 1980, there were 13 adults for each elderly person. Today, there are nine adults for each elderly person. The demographic bonus for federal and state public servers is in an even more critical condition: 1,2 and 1,4 active worker for each beneficiary, respectively.

7. Long Term Rate for Public Financing

The new Long Term Rate (Taxa de Longo Prazo – TLP), established by Law No. 13.483 of September 21, 2017 replaced its former equivalent, as the basis for compensation on the main sources of long-term financing in Brazil. The new TLP will remunerate these financings when applied by the official credit operators contracted from January 2018 onwards. The new rate is composed by the variation of the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – IPCA) and by a monthly prefixed interest rate that is based on the earnings of the National Treasury Notes – Series (NTN-B) for a five-year period. This term reflects the average time for the BNDES (National Bank for Economic and Social Development) loans that use such rate as a basis for compensation.

Source: Presidential Message to Congress 2018 (adapted translation)

Market research: Business environment in Brazil

Economy: Brazil is a developing country, currently facing great economic growth. Middle class is changing its consuming habits as a response to income increase and easier access to credit, but still suffers from great economic inequality and great shortage of qualified technical manpower, especially in the ITCs and engineering sectors. This enhances the obstacles to the appropriate infrastructure expansion needed in order to meet its economic growth, but it also represents an opportunity for foreign investors and specialized technical manpower. Abundant natural resources and strong agribusiness, mineral and energy sectors.

Most industrial economic activity, which includes automobiles, steel, petrochemicals, computers and steel, is focused around the southeastern states of Rio de Janeiro, Minas Gerais, and São Paulo. Brazil’s agricultural sector is well diversified and the country is a world leader in producing sugarcane, coffee, soybeans, and orange juice. [1]

There are a number of promising areas for foreign exports and investment, including: agricultural equipment; agriculture; aircraft and parts; airports; computer software; e-commerce; highways; insurance; iron and Steel; IT hardware; medical equipment; mining; oil and gas; pharmaceuticals; pollution equipment; ports; railroads; safety and equipment; telecommunications and tourism. [2]

Foreign trade overview for 2011.1, compared to 2010.1 [3]

  • International trade in Brazil reached a record USD 223,6 bi. A 30,1% growth over the same period in 2010.

  • Basic goods exports increased 44%, semi-manufactured 29,6%, manufactured 19,1% and industrialized 50,3%

  • Destination markets: Exports to Asia showed a 37,9% increase, along with 23,9% for Latin America and the Caribbean, and 31,4% for the European Union.

  • For imports, the acquisition of raw materials and industrial supplies and materials represented 45,5% of total, while 21,5% where of capital goods. This shows strong correlation with productive investments.

  • Consumer goods imports increased 31,1%, fuel and oil 39,2%, capital goods 27,5% and raw material and industrial supplies and materials 24,8%.

Society and Culture

Brazil is a democratic and federation structured society, with a population of over 190 million people of vast ethnic and cultural diversity. Increase of minimal wage and expanded coverage of income transfer policies in past years have contributed to the recent changes in its distribution pyramid. [4]

Demography [5]

  • Metropolitan areas concentrate major population groups with large demographic density disparity between regions.

  • Lower fecundity and birth rates indicate the reduction of children and teenage population, while the increase of life expectancy shows older population growth. According to UN statistics, life expectancy in Brazil reaches 72,9 years.

Education

  • In 2009, the population between 18 and 24 years old with 11 years of schooling was extremely low, at 37,9%. In the same year, 48,4% of students aged between 18 and 24 were at a graduation level of study.

  • In 2009, the illiterate population was still at 9,7% (14,1 million people). From this group, 32,9% were 60+ years old and 52,2% lived in the northeast region of the country. It is also a fact that Brazilian women are more literate than men.

Households

  • There was a total of 58,6 million households in Brazil. 85% (49,8 million) located in urban areas, averaging 3,3 people per household (2009).

  • Only 62,6% of urban households were connected to the water supply and sewage systems, and offered waste management services. (North: 13,7%; Northeast: 37%; Southeast 85,1%)

  • 49,1% of households had a landline while 83,1%  of households had at least one person with a mobile phone. This is a reflection of the high cost of landline phone services and the absence of such service in many locations.

  • Internet access: 31,5%. Computer possession: 39,3%. An important note is that internet access needs great investments regarding service offer and accessible prices.

  • Two million children aged between 5 and 15 were under some type of labor; 44% of them located in Brazil.

  • 48,5% of low income families where situated in northeast (2009).

People

  • The elderly population of 60+ years old accounted for 11,3% of the population. 55,8% of this group were women, and 30,7% had less than one year of schooling.

  • In 2009, 48,2% of the population declared being of white race (mostly European ethnicity); and a growth of indigenous population in rural and urban areas.

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[1] US Department of Commerce. Doing Business in Brazil. Access on August 31, 2011.

[2] Ibid.

[3] MDIC. Balança Comercial. Access on August 24, 2011.

[4] Portal Brasil. Business Environment in Brazil. Access on August 24, 2011. pp. 28-29.

[5] IBGE. Síntese de indicadores sociais. Access on August 24, 2011.

Brazil investments in its Infrastructure and transportation system

One of the greatest development challenges for Brazil lies in its infrastructure; be it its communication, information technology, energy, civil construction or transportation systems. Financial resources is available like never before, high end technology is today offered by national and foreign intelligence production and services organizations, and public policies are strategically steaming for economic growth.

But Brazil is a culturally complex nation. Its vast territory and historical colonization process, and later dictatorial government have led the country into a corrupt political structure and society. And here is where foreign investor might find hardest to deal with, when looking for good investment opportunities. Younger generations strive for better educational and health systems, higher quality of life, and higher standards for moral and ethical values, but they are still very much conducted by a misleading and alienating mass media, along with a limited communication system.

In shorter words, it is my advice to foreign investors to hire highly qualified and ethical professionals for assistance in their business deals in the country. Hence my passionate approach to International Relations in Brazil, when in this article I speak about the improvement of its transportation system as indeed one of the top priority issues.

Economic growth means a stronger and more productive industry, and therefore logistics is very necessary for establishing efficient supply and distribution chains. The Ministry of Transportation is the federal governmental institution who coordinates national transport infrastructure expansion and maintenance through the National Department of Transport Infrastructure. Brazil is still highly dependent on its road system for national distribution, which holds the country in a position of a highly expensive and oil dependent internal logistics chain.

There are strong public policies for rail road expansion, urban metro systems, and air and sea ports expansion and improvement calls, and we can see a lot more work getting done nowadays through PAC – Growth Acceleration Plan and growing investments due to the major international events hosting in the near future like the World Cup 2014 and the Olympic Games in 2016.

Bellow is a few official sources for strategic investment planning, available in portuguese (please use google translator for better understanding).