Business Profile of Brazil - Essay Example

?Business Profile of Brazil Executive Summary This report would be published in The Economist magazine. This kind of report is especially developed for CAs, business persons, investors and traders. The report will provide details about investment opportunity in Brazil’s economy. There are different parameters that ensure the investment opportunity and risk associated with it. This report will include parameters for investment such as GDP rate, growth rate, exchange rate and several other factors. There are graphical representations provided to clearly understand the growth and opportunity for investment. Along with this there are recommendations for investment in certain sectors and the government focuses upon these sectors with FDI policy. This report details out factors that are analysed for investment criteria in Brazil economy that will benefit investors and traders. Table of Contents Executive Summary 2 Introduction 4 Brazil Economy 4 GDP (Gross Domestic Product) Growth 6 Inflation Rate 7 Inflation and Interest Rates 9 Interest Rates 11 FDI Policy by Brazil Government and Investment in Automobile Sector 12 International Trade Theory & Investment Opportunity 13 Balance of Trade 14 Exchange Rate 15 Exchange Rate and Current Account 16 Economic Indicators 16 Better Investment Opportunity in Energy Sector in Brazil 17 Conclusion 21 References 22 Introduction The report illustrates the investment opportunity for a company that wants to invest in Brazilian economy. The potential of the Brazil’s economy will be provided in detail along with the sector that will benefit from the investment opportunity of the company. The report will be published in The Economist magazine so that the investment opportunity in Brazil can be highlighted to the general public for investment purpose. For the analysis of the investment opportunity, the economic aspects of the international economy along with Brazil’s economic conditions will be discussed. The Brazil’s economy has been chosen as the option as it is one of the BRIC nations and is known as one of the largest emerging markets and is the fastest growing economy. Being part of BRIC, Brazil along with other nations has been able to contribute majority of world GDP (Gross Domestic Product) growth (Economy Watch, 2011). Brazil Economy In South America, Brazil is the biggest country and it is the fifth largest country in the world in terms of area. Brazil is well known for its raw materials production and has been able to contribute more to the world’s GDP. The economy of Brazil is largest in South America and it has been able to boost the development of mining, agriculture, manufacturing and service sectors (Economy Watch, 2011). The economy of Brazil outweighs other nations of South America and its economy is expanding and its presence can be felt in the international arena as well. Since 2003, the economy of Brazil has improved steadily with the macroeconomic stability, reduction in its debts and building up foreign reserves. According to CIA, it was in the year 2008 when Brazil became ‘net external creditor’ and was awarded in the investment category status related to its debt by two rating agencies. Even after the financial recession in 2008, the economy of Brazil was the first to recover quickly. In 2010, the ‘consumer and investor confidence index’ revived and grew. The high interest rate and the growth of the Brazil’s economy make it attractive for the purpose of investment. There was large inflow of foreign capital in the economy that raised the value of the currency and government has also increased the tax upon certain foreign investments (CIA, 2011). There has been a significant increase of 7.5% in the economy of Brazil. This was due to the stronger currency value during the year 2010 and is expected to grow. ‘A GDP of 3.675 trillion Reais was converted at the year’s average exchange rate into US $2.089 trillion’. This is the reason that Brazil economy overtook Italy’s economy and the per-capital income of Brazil exceeded than Mexico. The growth is illustrated in figure 1 below (The Economist, 2011). Figure 1: Rise in Brazil Economy (The Economist, 2011). GDP (Gross Domestic Product) Growth There was an expansion of 0.70% in the fourth quarter of 2010 in the economy of Brazil. It is expected with the investment incremental schemes of the government of Brazil that the GDP and the sectors producing raw materials will be boosted. The GDP growth rate chart has been presented below in figure 2. Figure 2: GDP Growth Rate (Trading Economics, 2010). The GDP growth of the economy has increased and there are lot of expectations. There was a decline in the agricultural output in 2010 by 0.8%. The mining industry has showed growth which provides a better opportunity for investment. Apart from this there are potential in the agricultural sector. There has been increase in the export growth rate by 3.6% that indicates positive signs for investment (Trading Economics, 2010). Inflation Rate The inflation rate (consumer prices) had shown volatility during the past five years. It was 6.90% in 2006 that decreased to 3.00% in 2007, increased to 3.60% and 5.70% in 2008 and 2009 respectively and it became 4.90% in 2010. This has been represented below with a suitable graph in figure 3 (Index Mundi, 2010). Figure 3 Source: (Index Mundi, 2010). There has been volatility and after the financial recession in the year 2008, there has been an increase in the inflation rate again. The expected economic growth might increase the inflation rate more in the future. This will affect the investment either in positive or negative way. The inflation, average consumers price and the changes in percentage have been illustrated below in figure 4. Figure 4: inflation, average consumers price and percentage change (Index Mundi, 2010). Inflation and Interest Rates Since the recession period which started from the end of 2008, there were changes in inflation and interest. The Central Bank of Brazil had revised their monetary policy and controlled the money market strongly that affected the rate of interests. This is well represented through the graph below in figure 5. Figure 5: Inflation and Interest Rate (Plummer, 2010). The interest rate after 2005 had showed a decline but post 2007 it again started to rise. During 2008, it was increased but in the later phase of 2009, it started to decrease again. It was expected that there will be increase in the interest rate. This was estimated to attract Foreign Direct Investment (FDI) in Brazil. Interest Rates There have been changes in the interest over the past few years. The reasons for the changes were for several factors that also include the FDI. To regulate the FDI flow in Brazil, the Central Bank of Brazil's Monetary Policy Committee (COPOM) has implemented the monetary policy. The interest rates from the year 2004-10 are represented below in figure 6 in order to understand in a better way. Figure 6: Interest Rates (Trading Economics, 2010). The interest rate of Brazil was recorded as 11.75% at the end of 2010. There is every possibility of increase in the interest rate that will be beneficial for the investment. FDI Policy by Brazil Government and Investment in Automobile Sector The Brazilian government’s ‘Real Plan’ policy that brought macroeconomic stability in Brazil and thereby cutting inflation was successful. Through this plan the policy competition was implemented in different sectors, especially in the production sector such as automobile and energy sector, in order to attract the FDIs in Brazil. The investment was encouraged in the domestic and international market. There is huge opportunity for the company to invest in the automobile and energy sector in Brazil. The expected return will be high from these sectors and therefore government is also focusing upon these sectors (Christiansen & Et. Al., 2002). There has been ‘fiscal war’ between the states of Brazil. The government has provided importance upon the local car manufacturing industries. The company should take the advantage in the government approach towards this sector. There is a competition between the sub-government of Brazil related to FDI and they are trying to attract more FDIs through better incentives. This is the period of opportunity for investment that will provide higher incentives from the investment in this sector. The government and sub-national government offer in relation to auto-sector investment incentive, which includes the benefit of fiscal and financial incentives. Investment will obtain incentives that will be higher than investment in other sectors (Christiansen & Et. Al., 2002). International Trade Theory & Investment Opportunity International Trade Theory engross cross border exchange. Among the economists, this theory has always been preferred. The international trade model explains the pattern of international trade and provides or suggests different ways in maximising gains from the trade. According to The Ricardian model related to international trade, the country produces the goods and services that the county have specialised due to having comparative advantage. Brazil has been specialised in producing natural resources such as minerals and other raw materials for industrial purpose. The country gains competitive advantage and investment in this economy will enhance the opportunity of deriving better investment incentives. Even the government’s FDI policy is beneficial towards investment in these sectors along with energy sector for the future. From the point of view of the international theory and the model of international theory, the investment opportunity in Brazil is huge and returns are there with systematic risk involved in it (University of London, 2011). Balance of Trade The Brazilian economy had reported a surplus that was approximately estimated to be US$1199 million in 2011 by February in the balance of trade. The economy has been export-driven economy and the government has focused in automotive parts, auto sector, coffee, industrial raw materials and many other industries. The information of balance of trade for past years is provided below in graph 7. Figure 7: Balance of Trade (Trading Economics, 2010). From figure 7, it can be understood that there is potential for the trade activities with Brazil and there lies better opportunity for the investment purpose. Exchange Rate There had been decline of 5.61% of Brazilian Real exchange rate (USDBRL) during the last 12 months. From January 2010 to March 2011, the data of exchange rate of Brazil has been represented below in graph 8. Figure 8: Exchange Rate (Trading Economics, 2010). The decreasing value of the currency is not good for the economy for Brazil as well as for FDI. The investment with fall in value of currency might affect the investment in a negative way. Exchange Rate and Current Account The exchange rate and the current account have been illustrated in the graphical form in figure 9 below to understand the economic condition for investment in a better way. Figure 9: exchange rate and current account (EDC, 2011). There has been huge volatility in both and it affects the investment incentive to increase and decrease. The average incentive will be better for investment in Brazil. However, both were low or had fallen in 2010. Economic Indicators The economic indicators of the Brazil’s economy are listed below in figure 10 in order to explain the potential in the investment in this economy. Figure 10: Economic indicator (EDC, 2011). From the above table and the new government policy, it can be seen that there are investment opportunities with varied risks involved in it. The investment might offer better incentives because of the upcoming events in Brazil, i.e. World Cup in 2014 and Olympics in 2016. The economy is positive concerning the Brazilian economy, but risk associated with it in the current account balances might lead to more exposure to adverse financial conditions. The FIFA World Cup and the Olympics will offer a brilliant investment opportunity for the next five to seven years (EDC, 2011). Better Investment Opportunity in Energy Sector in Brazil The prospect of Brazil’s electric power demand will be growing more and it is expected to continue in the next few years. According to the analysis by various agencies, it has been estimated that within the next 10 years and by 2030 there will be an increase in annual growth of electricity demand by 4.5%. The increasing trend and the demand show that there is possibility of better return from this sector. The trends have shown that the energy sector will be booming not only in the Brazil’s economy but also over the international economy. The increase in the energy consumption indicates the growth of economy but the higher demand also signifies the need for constant supply and there lies the investment opportunity. Brazil has always been the supplier of raw materials and there are various industries. With the increasing demand there will be increase in the sector that will ultimately affect the investment and investment incentives. There is huge potential for deriving better investment incentives in this sector from the Brazilian economy for the long term purpose. According to an analysis there is requirement to invest more than R$167.5 billion. A higher expected return can be anticipated with the minimum risk as the demand will increase in this sector (De Castro & Et. Al., 2010). Over the past ten years, the economy was focused upon communication sector that gained huge investment and provided incentives as well. However, there are possibilities in the energy sector in offering better investment incentives. The potential in investment in the sector is represented below in figure 11 (De Castro & Et. Al., 2010). Figure 11: Growth Expectation (De Castro & Et. Al., 2010). From figure 11, it is clear that there is more opportunity in the energy sector than other sectors in the Brazilian economy and the government is also focusing upon this sector to meet the demands in future. The changes in the energy sector from the communication sector in terms of growth and investment is illustrated below in figure 12. Figure 12: Energy and Communication (De Castro & Et. Al, 2010). According to the analysis for the period 2008 to 2011, there was a growth of 13.2% per annum from the investment of R$231.7 billion in this energy sector. There is increasing trend in the energy sector that will require more investment and offer better investment incentives. The opportunity should not be missed and there should be active participation in investment in order to gain maximum incentives. There is more opportunity with less systematic risk in the investments in the Brazil’s economy in the energy sector (De Castro & Et. Al., 2010). Conclusion In Latin America, the Brazilian economy is the largest and their microeconomic conditions are better for investment in the recent economic situations. The World Bank has ranked Brazil as the tenth largest economy in the world. It has reported that Brazil’s economy has been stable due to its macroeconomic management, better debt management and better fiscal and monetary policy. The investment opportunity in Brazil’s economy in the automobile and energy sector is going to offer better incentive from the investment as there is growing demand and government is focusing upon these sectors. Apart from this, the FIFA World Cup 2014 and the Olympics in 2016 provide an opportunity to invest and thereby gain in the long run. The GDP is expected to increase with the interest rates with better FDI policies of the economy. From the overall analysis of the economic conditions of Brazil it can be stated that Brazil economy is suitable for investment that will offer better investment incentives. References CIA, 2011. The World Fact Book. Brazil. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/br.html [Accessed March 14, 2011]. Christiansen, H & Et. Al., 2002. Policy-Based Competition for FDI: The Case of Brazil. OECD. [Online] Available at: http://www.oecd.org/dataoecd/43/38/2489894.pdf [Accessed March 14, 2011]. De Castro, N. J. & Et. Al., 2010. Recent Evolution of Brazil’s Economy, Macroeconomic Outlook and Electricity Sector Dynamics. International Seminar. [Online] Available at: http://docs.google.com/viewer?a=v&q=cache:Nkmx7_WOk30J:www.brazilink.org/tiki-download_file.php%3FfileId%3D118+sectoral+growth+of+brazil+economy+over+five+years&hl=en&gl=in&pid=bl&srcid=ADGEESjmCIzA8t8yAfqH4Yx9goTS0P2qqW0RDgObfgjweKht2bJbU2BjvOBgVjaAxTp3d1WjfVVvDJlnr8p1UCBmd9J--yQ-LTDhgCRVOSTVUcJB6qU4J1JmWTxpRYTyFFHCQLhtXkyu&sig=AHIEtbSwuSuZpwfvpzgFdNsbnK5ATZ4pWg [Accessed March 14, 2011]. EDC, 2011. Brazil. Economy. [Online] Available at: http://www.edc.ca/english/docs/gbrazil_e.pdf [Accessed March 14, 2011]. Economy Watch, 2011. The BRIC Countries: Brazil, Russia, India, China. World Economy. [Online] Available at: http://www.economywatch.com/international-organizations/bric.html [Accessed March 14, 2011]. Economy Watch, 2011. Brazil Economy. World Economy. [Online] Available at: http://www.economywatch.com/world_economy/brazil/ [Accessed March 14, 2011]. Index Mundi, 2010. Brazil Inflation Rate (Consumer Prices). Inflation Rate. [Online] Available at: http://www.indexmundi.com/brazil/inflation_rate_%28consumer_prices%29.html [Accessed March 14, 2011]. Plummer, R., 2010. What Future for Brazil's Inflation Hawk. BBC. [Online] Available at: http://www.bbc.co.uk/news/business-11709228 [Accessed March 14, 2011]. The Economist, 2011. Measuring Brazil's Economy. Statistics and Lies. [Online] Available at: http://www.economist.com/node/18333018 [Accessed March 14, 2011]. Trading Economics, 2010. Brazil GDP Growth Rate. GDP. [Online] Available at: http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=BRL [Accessed March 14, 2011]. Trading Economics, 2010. Brazil Interest Rate. Benchmark Interest Rate. [Online] Available at: http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=BRL [Accessed March 14, 2011]. Trading Economics, 2010. Brazil Balance of Trade. Indicator Historical Data Chart. [Online] Available at: http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=BRL [Accessed March 14, 2011]. Trading Economics, 2010. Brazilian Real Exchange Rate Chart (USDBRL). Indicator Data Chart. [Online] Available at: http://www.tradingeconomics.com/Economics/Currency.aspx?symbol=BRL [Accessed March 14, 2011]. University of London, 2011. The Ricardian Model of International Trade. International Trade Theory. [Online] Available at: http://www.londoninternational.ac.uk/current_students/programme_resources/lse/lse_pdf/further_units/16_int_econ/16_chpt1.pdf [Accessed March 14, 2011]. Read More