The Sluggish Growth of the Brazilian Economy - Research Paper Example

Risk Analysis Brazil gained its independence in 1822 after a long struggle with the Portuguese rule. The country’s coffee exporters politically dominated the administration until 1930. For about fifty years, a military government ruled Brazil until 1985 after which the power was handed over to civilian rulers. The system of government today is a republic with a multiparty political system and periodical democratic elections. The country’s official language is Portuguese. Brazil is the largest country in Latin America with over 80% of the population been urban. The official currency is the Real that divides into 100 Centavos. Moreover, the country pursues industrial and agricultural growth and development of its interior. This entails exploiting the extensive natural resources in the country and utilizing the large labor pool. Today, Brazil enjoys the top position as the leading economic power and a regional leader in South America. In addition, the country led in the economic recovery efforts in the region. However, a wide gap in income distribution and crimes remain greatest problems in Brazil. The Wall Street Journal reported on Brazil’s economic growth on for the second quarter of the year 2012. According to the article, Brazil’s Listless Growth Continues, there is a continued slump in the country’s economy despite efforts by the government to salvage it. Government statistics show that there was slowed growth in the second quarter registered at 1.6%, much lower than the projected value. Brazilian government implemented tax cuts, record interest rate cuts and campaigned to weaken its currency in order to ignite more economic activities. However, these efforts did not increase the pace and the economy was still sluggish (Fick, Magalhaes and Lyons). The report further indicates that the country registered the fastest growth rate in the world during the global financial crisis in the recent years. As a result, numerous investors considered investing in Brazil due to the development leap. It also geared the hosting of two main global events namely the soccer World Cup in 2014 and 2016 Olympic Games. However, the optimism on the economy is slowly turning into apprehension. As a result, the current climate for multinational investment is marred with uneasiness. The investors appear unsure of the governments’ measures to stimulate the recovery of the domestic markets. Moreover, Brazil’s economy has downshifted to slower growth with the debt crisis and unpredictable recovery efforts. The government predicted an economic growth of 4.5% that gave the investors’ confidence in the markets. This was due to the increase in spending on key infrastructure projects such as ports and river dams. However, the target growth was never achieved; instead, the country recorded a growth of half the forecast rate (Fick, Magalhaes and Lyons). In a bid to stimulate further recovery and growth, the government through the central bank of Brazil has lowered the interest rates by 5% to 7.5%. In addition, there are other announced programs meant to build projects to improve transport and communication to boost growth. Officials in the country blame the world’s slow economic growth for the country’s performance. Furthermore, the administration cites the investor attitude towards emerging market countries as a cause for slowed growth in their economy. However, several present and projected macroeconomic variables affect the recovery and growth of Brazil’s economy (Fick, Magalhaes and Lyons). The country improved its macroeconomic stability through the creation of foreign reserves, and the reduction of debt profile through a shift in debt burden towards the denominated and domestically held instruments. After the 2008 recession period, Brazil was the first emerging market to recover. The GDP growth reached 7.5% in the year 2010. This was registered as the highest growth rate for the past 25 years of the economy. However, the increase in inflation led to a slowed growth in 2011 and 2012 to 2.7%. The country projected a similar level of economic growth for the initial quarter of 2013 financial year. In spite of the slowed growth rate, Brazil’s economy overtook the UK economy in terms of GDP. the GDP composition by sector shows that the service industry contributes more to the country’s GDP by 67% in 2011. This is followed by the industries on 27.5% and finally agriculture by 5.5%. The country’s GDP, per capita, has increased from $10,800 in 2009 to $11,600 in 2011. This shows increased economically beneficial activities in the three main sectors of the economy namely the industries, agriculture, and services. The IMF forecasts that Brazil will be the fifth largest economy in the world by 2015 if they maintain this rate of growth. Inflation in Brazil has maintained at manageable levels since 2003. According to the government reports, the inflation was 5.45% in October 2012. The inflation rate is considered as the general rise in prices of goods and services in the economy with respect to the standard purchasing power. The level of inflation in Brazil shows that the economy is safe for investors. In addition, the low levels of inflation enable the central bank to continue lowering their lending rates. Consequently, there are increase property market operations and reduced costs of borrowing. This enhances business and other economically viable activities due to affordable finances to the citizens. The central bank predicts that the rate of inflation is likely to decrease to 5.21% by the year 2013. The government’s inflation rate target in the next economic year is 4.5%, plus or minus two percentage points. Similar to the majority of the economies in the world, Brazil operates a mixed economy. Therefore, the country includes characteristics of both capitalistic and socialistic planning of the economy. This economy is characterized by large, mining, agricultural, and manufacturing sectors owned by the government. In addition, some of the sectors such as railroads and other utilities and industries are privatized (International Monetary Fund). The unemployment rate in Brazil has decreased over the last three years. According to the statistics, the lowest level of the unemployment rate recorded in Brazil is 4.7% in the year 2011. The general trend of the unemployment rate indicates a decrease. However, the year 2009 indicated a rate that rose higher than the previous year. The rate averaged at 7.9% in 2008, 8.1% 2009 and 6.7% in 2010. In 2012, the rate of unemployment is 5.30%. This rate is projected to decrease further in the second quarter of 2013 to about 5.0%. These statistics show a latent decrease in the levels of unemployment in Brazil. This indicates the expansion of economic activities that lead to the growth of the economy. Moreover, the increased number of employments helps in alienating poverty that has been a long-term problem in Brazil. The Brazil’s overall markets are crucial to the economy due to their economic functions. The derivative markets play two main roles in risk shifting and price discovery. Risk shifting otherwise known as hedging entails transferring of risks to a willing entity to bear it. In Brazil, firms borrowing in international markets hedge their foreign exchange exposure to minimize the volatility of their local currency value (Allayannis and Ofek 273). The Brazil’s stock exchange, Bovespa is the 7th largest futures and options exchange market in the world. It trades options, under the current law in Brazil, trade forwards, call and put options on single stocks and stock indices. The future contracts are similar to forwards in that they are highly standardized in Brazil, publicly traded, and cleared through a clearinghouse. However, the forwards are usually traded over the counter (Allayannis and Ofek 280). Brazil’s economy experienced two decades of large capital inflows on record levels especially in 1970s. However, the system collapsed in early 1980 because of the Mexican debt crisis. Therefore, Brazil had to deal with the effects of the collapse for the next ten years until recovery in early 1990s. The implementation of the Real Plan enabled the country to resume the capital flow. Several policies made by the government encouraged the large capital inflow into the Brazil’s economy. There is a recent increase in flows to and from the country’s economy, which indicates the trend towards the participation of direct investors. This has been supported by the cycle of abundant international liquidity. The consent to allow non-resident direct investment to Brazil led to an increase in the country’s GDP. This indicated a growth in the economy because of capital flows in the country. In addition, privatization and deregulation programs in Brazil encouraged inflows that resulted to foreign participation in numerous sectors of the economy. Consequently, there is stimulation of FDI in other sectors because of the favorable environment created. The positive changes towards the foreign capital flows have resulted to the growth and development of Brazil’s economy over the years. The exchange rate has distinct, well-defined regimes chosen by governments and maintained by the central banks. Brazil adopted an exchange rate-based regime in the year 1994 after a long period of hyperinflation. In an effort to reduce inflation, the then finance minister introduced the pegged exchange rate regime under a Real Plan strategy (International economics). The plan entailed the introduction of a new currency. The implementation of the Real Plan was successful in terms of boosting the domestic consumption and growth. Moreover, there were registered an increase in real-income and the rapid procedure of monetization. This led to expansion of short-time credit and sustained high levels of growth and increasing trade deficits (International Monetary Fund). Brazil had pegged its nominal exchange rate to the dollar in 1995 as a way of accomplishing price stability. There were favorable results in this pegged regime since the country’s inflation decreased from 2,076% in 1994 to 3.25 in 1998. However, other effects in the economy led to the country’s dropping the pegged regime and adopting the floating exchange rate regime. For instance, the previous regime deepened Brazil’s external weakness. This led to the loss of Brazil’s market and economy confidence from other economies in the region. The external vulnerability heightened with the increase in public debt especially of the central government. In 1999, the newly elected president led to the adoption of the floating exchange rate regime. Devaluation of Brazil’s currency, Real, in mid-1999 eased the pressure, and the vulnerability subsided. The economy gradually gained stability and the investors continued regaining confidence in the country’s economy and markets. There was an optimistic approach towards investments and recovery by the year 2000 (International Monetary Fund). Sovereign debt is the amount of money a government borrows in foreign currency. The amount is normally issued as bonds issued by the national government in foreign currency. The Brazil’s government intends to continue tapping the debt market in the year 2012. According to government officials, the future issues will be in dollars or Brazilian Reais in ten-year or thirty-year maturities. Moreover, Brazilian government intends to tap international debt market in a year issuance as treasury sells bonds at the lowest yield ever secured in Latin American sovereign. Records show the Brazil has its budget deficit well funded thus the government is in a comfortable position on foreign exchange reserves. The government further aims at increase liquidity of their bonds in the secondary market. In 2012, the treasury sold $3.7 billion in overseas bonds, which was double the 2011 amount of $1.65 billion. In addition, the Brazilian government set a new record for international debt markets raising $1.35 billion from the sale of 10-year bonds and paying the lowest yield in the region (International Monetary Fund). Brazil form of government is republican also referred to as federative republic government or federation of states. The federal government deals with large issues such as monetary policy, national defense, and security. In contrast, the states handles issues like education, infrastructure, and taxes at local levels. The states are granted power over areas of the country that affect the states directly. The federation of Brazil has 26 states and 1 federal district. The Brazil government branches include the executive, chamber of deputies, judicial, and legislative branches. These branches have distinct responsibilities in the government. The country has 21 different political parties that enjoy democracy and freedom to recruit members and run for various political positions in the country. The parties are known to form coalition governments in order to edge their political rivals since a single party has minimal chances of gaining the coveted power. The national elections are held every four years in Brazil. The current president is the first woman president in the country. The ruling party Partido dos Trabalhadores, PT won the elections in 2010. The chief party rivals include the Partido do Movimento Democratico Brasileiro (Brazilian Democratic Movement Party), Partido dos Trabalhadores (Workers' Party), Partido Democratico Trabalhista (Democratic Labour Party), Partido Progressista (Progressive Party), and Partido da Social Democracia Brasileira (Brazilian Social Democracy Party) in terms of the number of members (International Monetary Fund). Brazil President, Dilma Rousseff instills the philosophy of growth and development in the country. Having experienced stagnation in growth of the economy in 2011, the president has prioritized faster growth as a political necessity. The country has large aspirations in economic growth through the establishment of new foundations of prosperity. Accordingly, the implementation of the expansionary fiscal and monetary policies protected the economy from the global financial crisis effects. The policy makers have ensured the continuation of these policies until the second quarter of 2012. This has resulted to growth in GDP with the expectation of continued growth towards the end of 2013. Therefore, the country’s philosophy is based on continued growth of the economy, increasing the GDP and strengthening the economy. According to the most recent estimates, Brazil has a population of 190 million people. Therefore, it is the most populous country in South America. It is also ranked as the fifth most populous country globally. The ethnic composition in Brazil consists of about 55% of the European descent, principally known as Portuguese, 38% is represented by a mixture of ethnic groups that include Africans, Germans, Japanese and other minority groups. The population consists of approximately 29% of the young generation between the ages of 0 and 14 years. The old age is represented by 5% of the total population. The majority of individuals in the population lie between the age of 15 and 64 years old with about 66% representation. One of the main determinants of the population structure in Brazil is the immigration activities during the colonial times. The country does not have any official religion. However, over 70% of the population professes Christianity and Roman Catholic faith. Several African slaves earlier practiced Islam. However, today the Arab immigrants represented by a small number of the entire population profess Muslim faith. Other religions exist led by Buddhism practiced by the Japanese immigrants, Daoism, Hinduism, and Shamanism practiced by several other minority religion groups. The Brazil’s official language is Portuguese. It is practiced as the principal medium of communication in all government, educational and recreational institutions. Other languages used in the country include Spanish, English, German, and French. English is taught in their educational institutions as part of the curriculum. Majority of the educational institutions are well equipped. However, there are several underdeveloped regions with numerous deficiencies in their institutions. The literacy level in Brazil is at 84.1% today for people aged over 15 years and 97.5%, for the individuals aged between 6 and 14 years of age. The country’s average rate of literacy is 92.0%. On average, an individual is expected to average at least 7.2 years of formal education. The country’s population also enjoys social safety and security offered by the government. There have been minimal issues over the decades concerning the social benefits of the citizens of Brazil. In Brazil, there is an increase in the Foreign Direct Investment (FDI) over the years. The four main factors that have attracted FDI in the country include stable property rights, peaceful industry-labor relations, political stability and cost advantages in wages, taxes, and infrastructure. The stable property right is fundamental to investments in privately held companies and assets. Brazil has a working framework for investors that offer easily searchable means of recording titles to property, mortgages, and other interest bearing securities, gaining basic data on other organizations, cost-effective approach to transferring titles of real property and protection of the intellectual property rights (International Monetary Fund). This encourages investors from all parts of the world to exploit the Brazilian markets. Brazil has also efficiently dealt with the industry-labor relations over the years. The government through the relevant department has minimized the threat of dominance of mainstream economics and organizational behavior on the industry-labor relations. Therefore, the relations remain vital in determining work done and progress in constituent sectors of the economy. In addition, political stability in Brazil has contributed massively on its economic growth and development. This is because it provides a conducive environment for doing business for both local and international investors. Moreover, the government is in full control of all the political activities likely to encourage or hinder any type of investments in the country thus encouraging FDI in the country. Finally, the cost advantages in wages, taxes, and infrastructure affect the FDI in Brazil. This is because they determine the costs of foreign direct investments incurred. As a result, investors take advantage of subsidized taxes, and standardized wages that enhance profitability in the long-run (International Monetary Fund). Brazil’s economy is one of the fastest growing economies in the world today. The current government is dedicated to the growth of the GDP, a decrease in inflation, and a decrease in the unemployment rate. The country led in the economic recovery efforts in the world after the global financial crisis in the year 2008. However, there is a continued slump in the country’s economy despite efforts by the government to salvage it especially in the last three years. The government has implemented various policies in a bid to revive the economy and ensure continued growth. Such efforts include lowering of the interest rates, increasing the capital flows and encouraging FDI. The country’s demographics indicate that the official language is Portuguese. Moreover, there is no official religion in the country and 95% of the population is made up of the natives. Works Cited Allayannis, G. and Ofek E. Exchange rate Exposure, Hedging, and the use of Foreign Currency Derivatives. Journal of International Money and Finance, 20, (2001): 273-296. Fick, J. , Magalhaes, L., and Lyons J. Brazil's Listless Growth Continues. The Wall Street Journal. August 2012: Print.  International economics. Exchange Rate Regime of Brazil. 19 March 2008. Web. 27 Nov. 2012 http://intl.econ.cuhk.edu.hk/exchange_rate_regime/index.php?cid=18 International Monetary Fund. Brazil Exchange Rate History. 7 Oct. 2008. Web. 27 Nov. 2012. http://www.imf.org/external/country/BRA/index.htm International Monetary Fund. Country Report: Brazil July 2012. No. 12/191. Read More