ECONOMY
President Lula and his economic team have implemented prudent fiscal and monetary policies and have pursued necessary microeconomic reforms. Brazil's economy, aided by a benign international environment, grew approximately 2.8% in 2006 and 4.5% in 2007. Brazil is now a net creditor nation, and sustained growth, coupled with booming exports, healthy external accounts, moderate inflation, decreasing unemployment, and reductions in the debt-to-GDP ratio led two major rating agencies to give Brazil an investment-grade sovereign debt rating in early 2008.
However, significant vulnerabilities remain. Despite registering year-on-year declines from 2004 to 2007, Brazil's local currency government debt remains high. Total tax burden is high, and income and land distribution remains skewed.
Sustaining high growth rates in the longer term depends on the impact of President Lula's structural reform program and efforts to build a more welcoming climate for investment, both domestic and foreign. In its first year, the Lula administration passed key tax and pension reforms to improve the government fiscal accounts. Judicial reform and an overhaul of the bankruptcy law were passed in late 2004, along with tax measures to create incentives for long-term savings and investments.
Legislation promoting public private partnerships, a key effort to attract private investment to infrastructure, also passed in 2004. Labor reform and proposals to increase autonomy for the Central Bank are pending. Despite this well-considered reform agenda, much remains to be done to improve the regulatory climate for investments, particularly in the energy sector; to simplify tax systems at the state and federal levels; and to further reform the pension system.
Trade Policy
President Lula has made economic growth and poverty alleviation top priorities. Export promotion is a main component in plans to generate growth and reduce what is seen as a vulnerability to international financial market gyrations. To increase exports, the government is seeking access to foreign markets through trade negotiations and increased export promotion as well as government financing for exports.
To increase its international profile (both economically and politically), the
Lula administration is seeking expanded trade ties with developing countries, as
well as a strengthening of the Mercosul (Mercosur in Spanish) customs union with
Uruguay, Paraguay, and Argentina. In 2004, Mercosul concluded free trade
agreements with Colombia, Ecuador, Venezuela, and Peru, adding to its existing
agreements with Chile and Bolivia to establish a commercial base for the
newly-launched South American Community of Nations. Mercosul is pursuing free
trade negotiations with Mexico and Canada and has resumed trade negotiations
with the EU. The trade bloc also plans to launch trilateral free trade
negotiations with India and South Africa, building on partial trade
liberalization agreements concluded with these countries in 2004. In July 2006,
Venezuela officially joined the Mercosul trade bloc; its full membership is
pending. China has increased its importance as an export market for Brazilian
soy, iron ore, and steel, becoming Brazil's fourth-largest trading partner and a
potential source of investment.
Agriculture
Agriculture is a major sector of the Brazilian economy, and is key for economic growth and foreign exchange. Agriculture accounts for about 5% of GDP (25% when including agribusiness) and 36% of Brazilian exports. Brazil enjoyed a positive agricultural trade balance of $40 billion in 2007. Brazil is the world's largest producer of sugar cane, coffee, tropical fruits, frozen concentrated orange juice (FCOJ), and has the world's largest commercial cattle herd (50% larger than the U.S.) at 170 million head. Brazil is also an important producer of soybeans (second to the United States), corn, cotton, cocoa, tobacco, and forest products. The remainder of agricultural output is in the livestock sector, mainly the production of beef and poultry (second to the United States), pork, milk, and seafood.
Environment
About half of Brazil is covered in forests, and Brazil has the majority of the world's largest rain forest, the Amazon. In the last 30 years, migrations into the Amazon and the conversion of forest land, primarily for agricultural use, has reduced the Brazilian Amazon by almost 20%. In 2006, the government created the Brazilian Forest Service with the aim to manage in a sustainable manner the Amazon forest resources. Due to concerns over possible unauthorized taking and commercialization of genetic resources or traditional knowledge of indigenous communities (often referred to as "biopiracy"), Brazil has imposed substantial restrictions on foreign researchers collecting or studying biological materials.
Other Aspects
Brazil has one of the most advanced industrial sectors in Latin America.
Accounting for one-third of GDP, Brazil's diverse industries range from
automobiles and parts, other machinery and equipment, steel, textiles, shoes,
cement, lumber, iron ore, tin, and petrochemicals, to computers, aircraft, and
consumer durables. Most major automobile producers have established production
facilities in Brazil.
Brazil has a diverse and sophisticated services industry as well. Mail and telecommunications are the largest, followed by banking, energy, commerce, and computing. During the 1990s, Brazil's financial services industry underwent a major overhaul and is relatively sound. The financial sector provides local firms a wide range of financial products. The largest financial firms are Brazilian (and the two largest banks are government-owned), but U.S. and other foreign firms have an important share of the market.
Privatization triggered a flood of investors after 1996. The yearly investment average in the telecom sector the 4 years prior to the start of privatization was R$5.8 billion, and the annual average for the four years following privatization was R$16.3 billion, nearly tripling. Investment in the electrical power sector increased from R$5.3 billion annually in the pre-privatization era to R$7.2 billion. U.S. companies provided a great deal of this influx of cash. After 2000, many of these investors suffered huge losses in the face of adverse regulatory decisions and especially the sharp depreciation of the real. The energy sector was especially hard hit.
The Government of Brazil has undertaken an ambitious program to reduce dependence on imported oil. In the mid-1980s, imports accounted for more than 70% of Brazil's oil and derivatives needs; the net figure is nearing zero. Brazil announced in early 2008 the discovery of the Tupi and Carioca oil fields off the coast of Rio de Janeiro. The oil reserves in these fields could be upwards of 40 billion barrels. Output from the existing Campos Basin and the discovery of the new fields could make Brazil a significant oil exporter by 2015. Brazil is one of the world's leading producers of hydroelectric power. Of its total installed electricity-generation capacity of 90,000 megawatts, hydropower accounts for 66,000 megawatts (74%).
Proven mineral resources are extensive. Large iron and manganese reserves are important sources of industrial raw materials and export earnings. Deposits of nickel, tin, chromite, bauxite, beryllium, copper, lead, tungsten, zinc, gold, and other minerals are exploited. High-quality, coking-grade coal required in the steel industry is in short supply.
Economy (2007)
GDP: $1.269 trillion (official exchange rate).
GDP: $1.838 trillion (purchasing power parity).
Annual real growth: 4.5%.
Per capita GDP: $9,700 (purchasing power parity).
Natural resources: Iron ore, manganese, bauxite, nickel, uranium, gemstones, oil, wood, and aluminum. Brazil has 14% of the world's renewable fresh water.
Agriculture (5.1% of GDP): Products--coffee, soybeans, sugarcane, cocoa, rice, livestock, corn, oranges, cotton, wheat, and tobacco.
Industry (30.8% of GDP): Types--steel, commercial aircraft, chemicals, petrochemicals, footwear, machinery, motors, vehicles, auto parts, consumer durables, cement, and lumber.
Services (64% of GDP): Types--mail, telecommunications, banking, energy, commerce, and computing.
Trade: Trade balance (2007)--$43.6 billion surplus. Exports--$159.2 billion. Major markets--United States 15.8%, Argentina 9.0%, and China 6.7%. Imports--$115.6 billion. Major suppliers-- United States 15.7%, China 10.5%, and Argentina 8.6%.
