South America and South Atlantic Islands

Brazil
Last reviewed: 7 January 2009

Country information

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ECONOMY

Basic Economic Facts

GDP: R$2322bn(2006) - approx. US$1067 bn
GDP per head: US$ 5.71 (2006)
Annual Growth: 5.4% (2007) 3.7% (2006); 2.9% (2005); 5.7% (2004)
Inflation: 4.46% (2007)
Major Industries: Agriculture (soya meat, sugar, fruit, vegetables), iron ore and minerals, iron and steel, oil and derivatives, food processing, wood products, footwear and textiles, automotive, aerospace, petrochemicals, financial services, electronics
Major trading partners: United States, China, Argentina, Germany, Japan, Italy, France, and the United Kingdom.

Brazil has the tenth-largest economy in the world. It is a diversified middle income economy, but with wide variations in development levels. Most large industry is agglomerated in the South and Southeast. The Northeast is the poorest region of Brazil, but it is beginning to attract new investment. Brazil has a history of economic boom and bust, where high inflation and foreign debt have hampered its development. Economic reforms in the 1990s, however, helped to bring stability to the country's finances. These reforms included the launch of a new currency (the Real) to tackle inflation, an extensive programme of privatisation and a focus on fiscal discipline.

In the run up to the 2002 elections Brazil suffered a serious confidence shock as investors waited to see whether President Lula delivered on his commitment to a responsible economic policy. This led to sharp spikes in both Brazil's risk rating and the exchange rate (with the Real peaking at R$4/US$). Since then, however, market sentiment has improved as President Lula and his team have carried through sound macroeconomic policies built on the three pillars of inflation targeting, a floating exchange rate and fiscal austerity. As a result, the 2006 elections brought about very little market reaction.

Annual headline inflation in 2007 was 4.46%, just below the 4.5% centre point of Brazil’s inflation target. However, rising food and energy prices, combined with rising domestic demand, have pushed up inflation in 2008 to well over 6%. But a high base rate (currently 13.75%), falling commodity prices and a reduction in the rate of domestic demand growth, appears to have brought this under control. Year end inflation is expected to be within the target band.

Brazil's economy grew 5.4% in 2007 compared to 3.7% in 2006. Once again this was built on the back of strong balance of trade figures. (Brazil's main export markets are the EU, US, Argentina and, increasingly, China. Commodities in particular have been strong performers.) And in mid-2008, as a result of Brazil’s solid macroeconomic performance, two of the three main ratings agencies uprated Brazil to investment grade.

Brazil has been hit less hard by the global economic crisis than many. It has a tightly regulated, domestically focussed, cash-rich economy, and is continuing to stick resolutely to orthodox macro-economic policies. Brazil’s banks are profitable and well capitalised. Brazil has a problem with liquidity, not solvency and the Government has taken a number of effective steps to minimise the impact (including significant reductions in reserve requirements). As a result, GDP growth for 2008 is expected to exceed 5% (growth in 2009 is forecast at around 3%).

Brazil has relatively little foreign debt, In December 2005 Brazil it re-paid its IMF debt (US$15.5bn) - two years ahead of schedule, saving US$900 million in interest payments. It has also fully re-paid its Paris Club obligations to the UK, and retired all of its Brady Bonds, again ahead of schedule.

The Brazilian Government remains committed to tackling its high public sector net debt/GDP ratio (of around 40 %) and has consistently surpassed its annual primary surplus target (which currently stands at 3.8% of GDP). However, public spending remains high and fundamental structural reform s, including of the taxation and social security systems, are widely acknowledged as impediments to growth. Investment has historically been low but the Government’s Accelerated Growth Plan (PAC), launched in January 2007, aims to rectify this.

Mercosul and UNASUL

Brazil is a founder member of Mercosul, (the Southern Cone Common Market – known as Mercosur to its Spanish speaking members) along with Argentina, Paraguay and Uruguay. Venezuela became a full member in July 2006 but its accession has yet to be approved by the Brazilian Congress. Bolivia, Chile, Peru, Ecuador and Colombia are currently Associate Members although discussions are underway regarding Bolivia's request for full membership. Mercosul is the world's fourth-biggest integrated market and represents 75% of South America’s GDP. Mercosul has been successful in promoting increased trade among its members as well as with the outside world. In recent years, however, regional economic instability has slowed the integration process. Negotiations over an EU/Mercosul agreement have yet to be concluded. Brazil is also a key member (and instigator) of USASUL , the Union of South American Nations which was formally created in May 2008 . The grouping, originally called the Community of South American Nations (CASA), was proposed by President Lula in 2004 with the aim of promoting regional integration. In effect, UNASUL combines the countries (Mercosul) with those from the Community of Andean Nations (CAN), along with Chile, Guyana and Suriname into a wider regional integration project.

Mercosul Secretariat
European Commission - EU's relations with Mercosur