COUNTRY PROFILE: BRAZIL
Today, the world is paying very close attention to the transformation
proccess of the Brazilian economy as it moves from a state controlled
and closed economy toward a market directed economy. In the globalized
world, what happens in Brazil will immediately affect not only all the
other Latin American countries, but also the flow of funds toward the
third world in general. It is necessary to remark that Brazil represents
35 percent of the Latin American GDP being the ninth largest economy in
the world
Brazil began its economic structural reforms after the other Latin
American countries. Being in the middle of this process, Brazil today is
suffering several side effects of the anti-inflation policy. Control of
the rate of inflation was necessary in order to apply trade
liberalization and privatization programs. Unfortunately, reducing the
inflation rates also caused an overvaluation of the local currency. This
in turn negatively affects the national export performance ratio. But
the government’s attempts to devalue the Real will only result in an
outflow of external capital. This will have just as negative an overall
effect as a high rate of inflation.
Therefore, we can easily see the dilemma that faces the current
government of Brazil. The deep historical problems associated with the
state controlled/closed economic model coupled with the current reforms
in process, have created a dependence on the international flows of
investments. This over dependence has produced a severe vulnerability
and weakness in Brazil’s overall economy strategy.
I- DOMESTIC INSTITUTIONS AND MAIN SOCIETAL GROUPS IMPLICATED IN ECONOMIC
POLICY MAKING REFORM
Brazil is a federative republic of 26 states and the federal district of
Brasilia with a presidential system.. Congress is bicameral, comprising
a 513 members Chamber of Deputies and a 81 members Senate.
While the president holds a great deal of power, State governors
simultaneously tend to exert a strong influence on the federal deputies
and senators. In spite of the fact that the Constitution rules that
Congress must act as a check on the executive, the president often rule
by decrees. These decrees are theoretically only for emergencies. On the
other hand, eighteen weak political parties have Congressal
representatives. These congressmen tend to be regional interest groups
and have little political party loyalty. These factors produce a
Brazilian political system that favors strong politicians and the
strongest and most economically powerful state governors and city
mayors. These main political figures make the decision to enact or
refuse the President’s proposals, and then the Congress acts in
consequence.
The 1988 Constitution was amended in 1995 in response of a series of
Executive proposals. Most of these proposals concerned deregulation of
the economy and had a very decisive impact in the transformation of
Brazil’s economy during Mr. Fernando Cardozo’s administration. The most
important amendments allowed private companies to participate in
distribution of gas services; allowed foreign companies to exploit
natural resources –especially mining and hydroelectricity-, and ended
with the state’s monopoly in telecommunication, oil, and reinsurance
sector. Even today, some of these proposal are yet pending, for example,
the reform of the social security system which would became an important
source of national saving has not yet being approved. According to
Brazilian and international press, the social security reform will be a
very difficult amendment for legislators to approve. (Clarin Economico)
Even though these reforms introduced great changes, the constitution
“has became an obstacle to economic, social and political progress”
(E.I.U., pa 7) . according to external observers. At the same time, the
characteristic of the political system makes the changes impossible in
the near future.
Among the politically strong social groups, the trade unions and
businessmen’s association are the most important; but their level of
organization and pressure have varied over the times of deep economic
reforms. At the time that the former became divided the later became a
powerful voice in national politics through their national or state
bodies organizations. The agricultural sector is politically represented
by a very aggressive and important group of congressmen so called
ruralists who support landowners and form an active lobby in the
government in opposition to representatives of the most industrialized
states. The army are far from being a veto power as they used to be in
the past.
The multi political party system implies that presidents represent the
most important political minority. Since the change of regime produced
in 1985 no political party in power was strong enough to result in
influential economy policies. Only the current President, Fernando
Enrique Cardozo and the alliance of parties in power, showed political
ability and popular charisma to lead to structural changes in the
economy.
The economic crisis was the justification of Cardozo’s reinforcement of
the supremacy of the Executive branch over other institutions.
Nevertheless, the political system itself forced his purposeless to be
significantly altered through negotiations with these various interest
groups. Even though the economic policies are unpopular and have created
a larger gap between the poorest and wealthiest parts of the population,
Cardozo still maintain his popularity in office. In the past October was
re-elected President of Brazil.
THE MAIN ECONOMIC SECTORS
role in the country’s economy. Nowadays, the volume, value and variety
of semi processed and manufactured agricultural products are increasing
substantially but single crops still dominate the agricultural sector.
Sugar, cotton, cocoa, rubber and coffee plantations were and are the
main country's link to the world economy. Historically, the agrarian
economy was based on large holdings dedicated to a single export crop
–dependent on slave labor in the past century-.
In the present day Brazil is still the world's largest producer of
coffee and sugar, second among the cocoa producers, fourth among tobacco
growers, and sixth in cotton growing. The 1970s and 1980 saw a general
diversification of agricultural products exported. The production of
grains has grown consistently, including wheat, rice, corn, and
particularly soybeans. Forest products, especially rubber (once a vital
element in Brazilian exports), as well as Brazil nuts, cashews, waxes,
and fibers, now come mostly from cultivated plantations and no longer
from wild forest trees as in earlier days. Brazil produces almost every
kind of fruit, from tropical varieties in the north (various nuts and
avocados) to an enormous output of citrus fruit and grapes in the
temperate regions of the south. Brazil is the fourth largest beef
producer in the world and it ranks fifth in beef exports.
During the past two decades, the agriculture sector has received
important financial assistance from the Federal Government in order to
increase efficiency and to reduce the susceptibility to "boom-bust"
agricultural cycles. This assistance has resulted in an important
development, which shows the agricultural sector’s ability to access
government funds and thus reach its goals.
The owners of plantations in the richest states dominate the local
political arena, directly or through a traditional scheme of figurehead
in the state administration and through state representatives in the
Federal parliament. These economic and regional alliances become the key
of their political support or represent their great opposition from
Federal proposals. Therefore, the resolutions must be obtained by
bargaining. This is one factor that explains the existence of so many
political parties, and the permanent divisions and or temporary
alliances toward specific policies or elections.
In spite of traditional resistance to change, opening of the economy has
brought private investment and the participation of international firms.
These newplayers have helped being about the diversification and
industrialization of the agricultural sector. Actually, both the Federal
and state help and external investments are producing important economic
modernization.
INDUSTRIES AND FOREING TRADE
Even when the Brazilian foreign trade still represents a modest
percentage of its GDP, foreign trade flow has continued to steadily
during the last decades. A system of tax and credit incentives to export
together with the growth of the world economy has produced the
diversification of industrialized products. “The share of industrialized
goods out of total Brazilian exports grew from approximately 15% in the
mid-sixties to over 70% in the early ‘90s, while the share of
commodities declined from 85% to around 25% during the same period.” .
In the same period, manufactured goods, and especially higher value
added products had experienced a significant expansion.
In the wake of a liberalization program, the imports of capital goods
have been growing after 1993 and are mainly linked to improvement to the
industrial sector. “Foreign companies have been actively instrumental in
building an extensive, diversified, and vertically integrated industrial
base” . The foreign funds invested in Brazil were mainly targeted toward
processing industries related with chemicals, transportation materials,
electric and electronic supplies, metallurgy, and mechanical.
Moreover, the industrial sector has tended to overcome inefficiencies
through investment in quality and productivity programs resulting on
increase of profitability and competitiveness. Nowadays, some of the
most important Brazilian companies have begun a process of
transnationalization through mergers or direct investment in foreign
countries, most of them in Latin America. The government finds its most
important political support for continuing these economic policies among
these business leaders.
Intermediary goods and raw materials together account for on average 70%
of the import. The domestic production and development of alternative
energy sources and the international fall of oil prices has produced a
decline in the relative share of these commodities.
It is important to mention that in 1990 a trade deregulation program was
launched, resulting in an impressive reduction of nontariff barriers to
import – i.e. main tariff rates were cut back from 32% in 1990 to 14% in
1994.
Among the Latin American countries, Brazil has the highest diversified
market of import sources and exports destinations. Industrial countries
account for over 50% of its exports and imports. However, during the
nineties, Brazil has increased its trade significantly with Latin
American countries. Its exports have far exceeded its imports.
II -POLITICS OF LIBERALIZATION
Brazil’s national economy is today relatively open. However, its
openness must be seen in light of the historical trend that
characterized Brazil between the1940s and the 1980s. During this time,
the economy was expanded through the process of import-substituting
industrialization (ISI). Large state owned enterprises; strong state
economic regulation, and legal distinction and restriction to foreign
companies and investments were the regular political instruments of the
Brazilian industrialization model. Nevertheless this model showed signs
of exhaustion by the 1980s when investment capital collapsed; there was
hyperinflation, and income distribution worsened.
Large debt and hyperinflation characterized the exhaustion of the
economic model. Brazil like other Latin American countries acquired
large foreign debt during the 1970’s and 1980’s, with two thirds of this
total being owed by the government and state-owned enterprises. At the
time than public finances were worsened, the government expenditures
were increasing. This gap was financed by high rates of inflation and
price indexation. Policies based on freezing of prices were not enough
to reduce inflation to regular rates.
From1990 on, different administrations through successive plans have
been changing the economic rules regarding external investment
deregulation, trade liberalization and privatization. Even though this
process is taking place gradually Brazil still holds the largest stock
of foreign funds invested in developing economies anywhere.
At the time that non-tariff barriers were removed, productivity growth
has risen from 1990 to 1995 between 6-7%
In addition to the trade liberalization, another fundamental part of the
economic plan followed by Cardoso is the Brazilian exchange rate regime.
“Since 1994, the Real has functioned as an anchor for the government’s
stability of Brazil’s currency”. (Financial Times). There is a ceiling
of 1R: $1 for the conversion of dollars by the Central Bank but the
currency can be appreciated by a maximum of 0.6 per cent per month
against the US dollar. High interest rates are used in order to attract
a large flow of foreign capital into the economy while incentives to
dismantle the non -tariff barriers are in place. As a result of this
policy, inflation rates dropped and external reserves and external
account rates improved as well.
Evidently this stabilization program has induced two valuable
accomplishments: a higher growth and lower inflation. At the same time,
the structural reforms cause severe dislocations in firms and an
increase in unemployment. The lower exchange rate undermines. Even more,
a high interest rate increases the cost of the debt at the time that the
government collects fewer taxes. Along with the declining productivity,
when the realization that a small devaluation of the Real is necessary
in order to curb distortions, analyst will quickly encourage investors
not to place assets in Brazil. At this point, Brazil seems to have only
this one option. Although recessive, the program supplies external
capital that is currently needed. But this continuation of the current
program will require building of political support for the future.
Cardoso announced the package of a new fiscal adjustment in order to
avoid a devaluation of the Real. It would pursue the reduction in
government spending on wages and increase of taxes. This policy was the
last round of major reforms between the Executive and the Congress; and
it took over two years to be finally approved by the Chambers. It would
allow the government to dismiss and hire civil servants under the same
labor regime as the private sector but stipulate that the public sector
pay rises must be approved by law. Unfortunately, political reality
dictates that the Congress can, and most likely will, delay each phase
of this proposal. At the time that Brazil needs to reduce external
speculations concerning its economic instability the new measures will
produce more unemployment and consequently more political and social
conflicts.
BRAZILIAN MAIN ECONOMIC INDICATORS
ECONOMIC INDICATORS 1993 1994 1995 1996 1997
GDP US $ 437.8 546.2 704.1 774.9 792.3
Real GDP Growth 4.5 5.8 3.0 2.9 2.4
Consumer Price Inflation % 1,891.7 2,502.5 76.8 16.5 6.4
Merchandise exports fob ($ m) 39,360 44,102 46,506 47,747 52,986
Merchandise imports fob ($ m) 25,301 33,241 49,663 53,286 61,358
Exports + Imports / GDP 0,14 0,14 0,13 0,13 0,14
FDI/GDP 0.003 0.005 0.007
Current Account ($m) 20 -1,153 -18,136 -20,758 -32,530
Total External Debt ($bn) 143.8 151.2 159.7 179.0 184.7
Reserves exc. Gold ($ m) 30,604 37,070 49,708 58,323 50,827
Exchange rate R=$ 0.032 0.639 0.918 1.005 1.078
Sources: EIU Country Report 3rd. Quarter 1998, The Economist
Intelligence Unit. Limited
World Bank Development Indicators 1997
The table clearly shows the incidence of the liberalization program
–privatization, trade fee reduction, and especially Real Plan- over the
Brazilian economic structure since 1994. In that case, the 1993
indicators should be considered as a parameter of the previous economic
performance. The following are the most important consequences:
- The gross national product has increased notably in the first years of
the plan, but projections expect a reduction for 1998 and 1999.
- The reduction of the inflation rates is the most important success of
the Plan.
- While the imports have steadily increased, the exports have decreased
in the same proportion over the GDP. This explains the constant ratio of
X+M/GDP. At the same time, this result is imputed to the negative
incidence of the overevaluated local currency/Dollar over the national
production. The same can be said about the negative amounts of the
current account.
- The stability of the reserves reflects the monetary policy. This
figure have shown extreme variability during the present year due to the
outflow of external funds during the Asian and Russian Crises. The lack
of confidence on the part of external investors may generate a Brazilian
crisis.
- Finally, the relationship between Real = Dollar near the unit but
increasing at a rate of 6% per year, is the target of the Real plan.
This relationship is managed by the Central Bank through buying and
selling of dollars.
COMPONENTS OF GDP IN 1995 %OF TOTAL
Private consumption 65.1
Government consumption 15.2
Fixed investment 21.0
Change in stocks 0.6
Exports of goods &services 11.7
Imports of goods & services -13.6
SOURCE: EIU Country Report 3rd. Quarter 1.998; The Economist
Intelligence Unit Limited
III- FINANCIAL SECTOR
In the same way that the services sector is undergoing, transformation
in the financial sector also is just starting the process of
transformation into open market rules. Nevertheless, this process of
transformation will require a long time. First of all, because the
government has internal opposition to the reform. Secondly, the Real
Plan requires a high level of government intervention regarding high
interest rates. Finally, the change from hyperinflation to low inflation
rates would imply a slow-moving process in order to avoid banking risks.
The Central Bank of Brazil (BACEN) is linked to the Executive Branch
under the Ministry of Finance supervision. One of the organs of the
Ministry is the National Monetary Council (NMC) presided by the
Minister. This organ elaborates the currency and credit policies,
supervises the application of resources of public and private financial
institutions, coordinates monetary, creditor, budgetary, and fiscal
policies etc. The BACEN’s principle functions are fulfill and carry out
financial norms expedited by the National Monetary Council. In addition,
it has to be a depository of reserves, and control credit etc. Unlike
other countries of the third world, Brazil has not changed the
regulatory functions of the Central Bank in order to make it independent
from the Executive tutorship. On the contrary, it is the main arm in the
enforcement of the monetary policy addressed by the President.
There are strong public financial institutions that really constitute
state arms in the execution of Government policies. The Bank of Brazil,
for example, is the most important financial source of rural and
industrial activities and carries out foreign commerce policies. The
National Bank of Economic Development (BNDES) is the main instrument of
the execution of investment policies of the Federal Government. Finally,
the Federal and State Saving Banks administer the state managed workers
funds and social funds.
The current administration is interested in the privatization of the
strong state owned banks. There are “too laden with bad loans and other
problems to be serious lending factors” (Latin Trade) . But most of
these banks are regional and both the local bourgeoisie and politicians
are not interested in it. On the contrary, they are the main source of
resource for the state administrations and the landowners. As it was
said before, this group forms a powerful economic sector that lobbies in
the Congress in favor of their interest.
As the economy grows the banking system is finding attraction in small
business lending and consumer lending at an annual rate of approximately
45%, even when competition has led to a decline in the interest rates.
There are basically two reasons that explain these high levels of
interest in the Brazilian banking system. The administration has kept
interest rates high as a tool to cut and maintain low inflation. At the
same time, the banks are moving cautiously toward a market increase
because it is still risky and the process of adjusting to an economy
without hyperinflation is not yet finished. According to a Brazilian
banking analyst, “that likely won’t happen until Brazil’s stabilization
program becomes more entrenched and the economy demonstrates steady and
sustainable growth” (Latin Trade,). Nevertheless, the lending overall
increases expected for 1998 are over 25% (Latin Trade .
Brazil is the biggest banking market in Latin America and six of top ten
banks in Latin America are Brazilian. The state owned Bank of Brazil
–second in Latin American top ten list- is active in the retail market.
The bigger private Banks are focused on the upscale market and also lend
to small banks and mid-sized businesses. They are also confortable with
top corporate borrowers and wealthy individuals, but this is an
extremely competitive business.
The same big international holdings that have made great investment in
other Latin American Banks have shown interest in Brazilian banks. HSBC
–based in London and Hong Kong- purchased the fourth largest private
bank. Spain’s Banco Santander and Banco Bilbao de Biscaya is planning to
be the next newcomer. As a consequence of that, many local banks are
spending additional time, money, and resources improving their credit
systems. On the contrary, small banks are eager to merge or sell their
equities because it is expected that this returnless process would imply
some bankruptcies among the less prepared. (Latin Trade )
Because this process is new and the data available comes from previous
years , it is possible only to make some assumptions. According to the
circumstances in other Latin American financial markets, it is probable
that concentration and reduction in the amount of banks will be quickly
produced in the next few months in Brazil. Nevertheless, it is also
probable that strong private Brazilian banks will be more able to
compete with international banks compared to those in others countries.
Not only that, but also some of them are opening branches in neighbor
countries.
Another open question is whether the state-owned banks will be
privatized or at least, how much financial health will they have. The
answer may lay in the political distribution of power between the
federal and state levels of government, and their respective economic
supporting interests.
BRAZILIAN BANK BY CATEGORIES
CATEGORY NUMBER OF
BANKS PORCENTAGE OF THE TOTAL
Total banking system 203
Federal state owned banks
5 2.47%
State owned banks
20 9.82%
Private banks
178 87.71 %
Foreign
32 15.78%
National
146 71.93%
SOURCE: BOLETIM DO BANCO CENTRAL DO BRASIL, SEPARATA; February 1998,
Brasilia DF; Brazil.
THE TOP TEN LARGEST BANKS OF BRAZIL IN 1996
INSTITUTION OWNSHIP DEPOSITS
In US$ Mill. DEPOSITS SQUARES
DEP./ SYSTEM
(*)
CAIXA ECONOMICA FEDERAL
STATE
51,174
2,618,360
0.090
BANCO DO BRASIL
STATE
41,473
1,720,000
0,059
BRADESCO
PRI.NAT.
14,190
201,350
0.0069
ITAU
PRI.NAT 10,822 117,070 0.0040
UNIBANCO PRIV.NAT 6,773 45,830
0.0015
HSBC BAMERINDUS PRIV.NAT
5,894 34,690 0.0012
BANCO REAL PRIV.NAT 4,116
16,890 0.0005
BANCO SAFRA
PRIV.NAT 2,779 7,670
0.0002
NOSSA CAIXA
STATE 7,454 55,550 0.0019
BANRISUL
STATE 9,501 90,269 0.0003
BRAZILIAN BANKS ORDERED BY ASSESTS
ALL DATA ARE IN US$ BY DECEMBER 1996. PURCHASES BY INTERNATIONAL FIRMS
JUST STARTED IN 1.997.
SOURCE: LATIN TRADE, JULY 1997. PA 41
*TOTAL SYSTEM CONSIDERED = DEPOSITS OF THE TOP 25 BRASILIAN BANKS