Brazil: Country Study Research Term Paper
Brazil: Country Study Research Term Paper
Four major sections:
1. Country Profile
2. Economic background
3. Currency crisis
4. Current updates
Image result for brazilBrazil obtained its independence from Portugal 1822. It is located in the continent of South America and covers 8,459,417 square kilometers of land and 55,460 square kilometers of water, making it the fifth largest nation in the world with a total area of 8,514,877 square kilometers which is slightly smaller than the U.S. Its terrain comprises of mostly flat to rolling lowlands in the north; some plains, hills, mountains and narrow coastal belt. Brazil has many natural resources that include topaz, iron ore, tin, gold, bauxite, nickel, granite, limestone, clay, sand, gems and timber are the minerals. Brazil has a population of 207.3 million as of 2016. The official and most widely spoken language is Portuguese. The less common languages include Spanish, German, Italian, Japanese, English, and a large number of minor Amerindian languages. In the 2010 census 64.6% of the population declared themselves as Roman catholic, 22.2% as Protestant, 8% as non-religious and 5.2% as followers of other religion.
Brazil is by far the largest and most populous country in South America and before military peacefully surrendered to civilian rules, the country was under a populist and military government for half a century. Brazil has seen financial difficulty in the late 20th century and was able to successfully obtain industrial and agricultural growth. The 2014 FIFA World Cup and the 2016 Summer Olympic Games, first ever to be held in South America, was one of the strongest emerging markets and global growth contributor. Although, since 2013, Brazil has had a shrinking economy, growing unemployment, and rising inflation.
A comparative advantage that Brazil has is that they are the third largest agricultural exporter in the world. In 2015 Brazil exported 80 Billion dollars’ worth of agricultural items. The country shows patterns that they strategically specialize in the exportation of primary goods, and manufactured goods such as Agriculture products and raw materials. They have developed over time a large comparative advantage in the manufacturing products from segments with low R&D intensity such as steel textiles, and metal products. Brazil exports roughly around 210 products, the top ones being; oil seed, ores, slag, ash, meat, machinery including computers, mineral fuels including oil, sugar, iron, steel. Brazil has such a comparative advantage because of its share of global exports is a lot larger than it is expected to be from the size of its export economy.
Balance of Payment (BOP):
Exports: Soybeans, Iron Ore, Crude Petroleum, Raw sugar, Poultry Meat, Coffee, Sulfate Chemical Woodpulp. ($195 billion 2015)
Imports: Refined Petroleum, Crude Petroleum, Petroleum Gas, Vehicle Parts, and Cars.($170 billion 2015)
Positive Trade Balance: $25.3 billion (2015)
Net Capital account (BoP, current US$) $440 million (2015). Foreign direct investments into Brazil were at a high of 64 billion USD, during the years 2009-2001, but since then inflows have slowly been declining. In 2016 FDI inflows to Brazil hit just about 50 billion USD. Although inflows have slowed down Brazil still remains the eighth largest FDI recipient in the world and the largest in Latin America. Brazil is a large attractor of investors due to its easy accessibility of raw materials, large domestic market, diversified economy, and easy access to South American countries.
Foreign Currency Reserves:
$368,739 million (December 2015)
Gross Domestic Product (GDP):
Population: 207.8 Million
GDP: 1.775 Trillion USD (2015)
Real Growth Rate: -3.8% (2015)
Per Capita: 8,538.59 Billion USD (2015)
Inflation Rate: 9.01%(2015)
Inflation Rate:3.6% (current)
Interest Rate Level: 10.25% (2015)
Fiscal Balance/ Government Debt:
In 2015, the government’s budget deficit for Brazil was at a record high of 10.2 percent of the overall GDP. Brazil’s deteriorating finances led to a gross debt burden of 65.5 percent by the end of 2015.
Currency Regime History
Since the mid 1980’s the Brazilian economy has been suffering from fluctuating inflation and dejected economic growth. In 1994, the Plano Real “Real Plan” was introduced by the Brazilian government after many failed economic initiatives, its objective was to stabilize the economy from the hyperinflation that it had be suffering for the past decade. In 1994, when the plan was being implemented the inflation rate was at 2076 percent. The Real Plan introduced a new currency but it wasn’t completely fixed to the U.S. dollar. The exchange rate system was managed by a crawling peg, but by 1998 inflation was successfully eliminated by the Real Plan standing at 3.2 percent, but this is when true problems in the economy became more apparent.
Currency Crisis of 1998-1999
The Real Plan that had been implemented in 1994 was created to stabilize the economy from hyperinflation, and it did just that. But in 1998, right before the plan was abandoned problems began to rise to the surface, and many of these problems were caused by the crawling peg system that had been in place. One of the biggest problems was that the exchange rate was immediately fixed, but the inflation rate was still elevated because it takes a while for inflation to come down. In turn, this hurt the country’s competitiveness and made it harder for Brazilian exports to compete in the world market. Because inflation rates were so drastically different in Brazil than in the United States there was a lot of stress placed on the currency system. The Brazilian “real” was overvalued, making Brazilians more motivated to shop abroad because things were cheaper for them, but it was more challenging for Brazils’ products to be sold abroad because they were over priced or “too expensive” for foreign consumers. Another problem that arose from the appreciation of the currency was that there was an increase in the current account deficit. Typically, current account deficits are financed with no problems for the most part, in this case the foreign capital that was required to finance the deficit in Brazil only strengthened the “real” even more.
As economist became more aware of problems with the Brazilian budget, a higher call for devaluation of the “real” became more apparent from economist. After the new governor of the Brazilian State Minas Gerais announced that they would not be paying the government of Brazil their states debt payments for three-months, capital outflows skyrocketed and the devaluation of the “real” rapidly increased. A month later, in January of 1999 the Brazilian government announced that the real would no longer be pegged to the US dollar and that the exchange rate would now be a floating rate. In the same week the Central Bank decided to announce an additional change that was being made, which was that it would increase the prime lending rate from 36 percent to 41 percent in turns to regulating the inflationary pressures that came from the devaluation of the real.
Post-Crisis Consequences and Aftermath
The currency crisis of 1999 in Brazil was short-lived and pretty mild, many would say if it was being compared to other similar crises around the globe during that period. The Brazilian crisis impacted mainly what was considered an already trouble country and region. Another large impact the crisis had was on investors, since currencies tended to be rapidly fluctuating and inflation was unpredictable in the past decade investors had a tough time investing in such a high risk and uncertain environment. The crisis caused investors to lose confidence in the Brazilian economy and search for opportunities in other countries. In 2000, shortly after the crisis economic activity began to increase. The construction industry had a sufficient expansion and the output of capital goods increased to just around 13 percent. The Brazilian fiscal policy had helped restore confidence in the fundamentals of the Brazilian economy, because of its strictness it helped in stabilizing the debt/GDP ratio. At the end of the year 2000, Net foreign investments closed at the highest in history of $30.6 billion USD.
Brazil GDP Current Currency and Economic Updates__
In terms of economic performance, according to the Brazil institute of Geography and Statistics, Brazil’s GDP from 1999 to 2008, grew 3.4% on average per year after the global economic crisis ten years prior. The growth was mainly driven by the Brazilian commodities. In 2009 Brazil’s economy shrank by 0.3%, the exports fell along with the foreign credit. Nevertheless, Brazil was able to turn it all around the following year, the GDP grew 7.5%. This is the highest growth rate Brazil has experienced in the 25 years. The economy since then has slowed, mostly due to inflation. Unfortunately, Brazil’s history has repeated itself. Currently, Brazil is recovering from a recession in 2015 and 2016 according to the World Factbook and it has ranked the worst in the country’s history. The falling commodity prices reduced export revenues and investment, which then weakened the Brazilian Real and cut tax revenues. The weaker currency made the existing public debt, which was largely related to foreign currency. In 2016 economic reforms are aiming at slowly the government spending and reduce the barriers that are set up to limit foreign investment.
The Brazilian government has been a bit rocky while the former President Dilma Rousseff was impeached and convicted in August 2016 for moving funds around in the government financial budgets. Their government has been affected by these scandals more than once involving private companies and government persons. This has limited and declined investments and business associated with untrustworthy sources. Michel Temer, a Brazilian lawyer and politician took office the end of August 2016, after the impeachment and removal of Dilma Rousseff. At 75 years, he is the 37th president and the oldest person to assume office. Temer is to serve out what Brazil Unemployment Ratewould have been the remainder of Rousseff’s second term until January of 2019. Temer says that one of the governments goals is now to generate jobs. According to the Trading Economics, the unemployment rate continues to rise. From January 2017, the unemployment rate rose from 12.6 to 13.6 in April of 2017. This is lower than the markets expectations of 13.9 in 2017. Before then the employment rate was, on average consistent.
Moving on from the unfortunate unemployment situation of Brazil, their currency has been ranked among the most overvalued currencies in the world. The Brazilian Real is the currency of Brazil. It is subdivided into 100 centavos. The Central Bank of Brazil is the central bank and the issuing authority. The currency symbol is similar to the dollar and is officially written with two vertical strokes rather than one. As of 2016, the Brazilian real is the ninetieth most traded currency in the world by value. The real has been relatively stable since June 1994. During that time, the exchange rate was close to par with the US dollar. Since then, it has fluctuated and in August of 2000, dropped as low as R$ 4.03 to 1.00 USD$. According to United Nations Conference on Trade and Development, in 2011 the Brazil currency was trading 80% higher than its ‘optimal’ level. Meaning that the priced currency should be able to reallocate the economy’s resources towards their highest productivity. The UNCT argued that Brazil’s real has been overvalued ever since the inflationary period in the 1990s. One cause could have been the increased foreign demand for Brazil’s assets and domestic products, which priced high in real, bid up the cost for Brazil in foreign exchange markets. The World’s Trusted Currency Authority live market rate shows that in 2017, 1 USD = 3.2954 BRL. This is not the highest we have seen but it has increased significantly over the recent years.
Brazil is not far behind the import, exports and trade balances among the other countries. “In 2015 Brazil exported $195 billion, making it the 21st largest exporter in the world” (Atlas). C:\Users\amanday5627\AppData\Local\Microsoft\Windows\INetCache\Content.Word\en_profile_country_bra.png Brazil’s exports have actually decreased from $207 billion in 2010 to $195 in 2015. The most recent exports are soybeans, followed by Iron of 7.8% and Crude Petroleum of 6.0%. The imports have also decreased from 2010 from $181 billion to $170 billion in 2015. The most recent imports are Refined Petroleum at 4.7% and Crude Petroleum at 3.8%. On a positive note, the 2015 trade balance has a positive number of $25.3 billion in net exports. This is a huge increase from 1995 when the trade balance was negative and carried a net balance of $4.26 billion in imports. As you can see from the graph, from 1995 to 2003 there was not much trade being established. From 2004 trade started to increase until 2008, this is when it peaked and dropped down below 140 billion. After 2009, there was a rapid increase until 2013 it started to decrease again. Brail’s top trade exports includes China, the United States, Argentina, the Netherlands and Germany. The top imports for Brazil include China, the United States, Germany, Argentina and South Korea.
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