Published: January 01, 2000
Brazil has morphed into a powerful economic force, not only in Latin America but also for the new global economy. In recent years it has become fashionable for companies to look towards the BRIC nations (Brazil, Russia, India, and China) as vehicles for growth. As a result, Brazil has garnered its share of well-deserved attention. As the only BRIC country in the Western Hemisphere, Brazil has emerged as a favoured location for virtually any multinational company with long-term aspirations.
Of course challenges persist in establishing operations here. Yes, the intrepid first-movers are already well-positioned in Brazil and enjoy a head start. But for those businesses interested in capitalising on an exciting, longer-term growth story driven by powerful secular trends, there is still time. That time is now.
A rich history of tradeTo genuinely understand the Brazil opportunity requires some historical context. The Portuguese first colonised Brazil in the 15th century, leveraging its vast resources and using them as an engine of commerce. For hundreds of years Brazil has, in some form or another, figured prominently in global trade thanks to its valuable resources like sugar, coffee, diamonds and gold. Is it really any surprise that the country remains a commodities powerhouse and has re-emerged as a coveted trading partner?
Brazil has always been connected to Portugal, and for a time the Portuguese royal family even lived in and legislated from Brazil. The entrepreneurial and exploring spirit established by Portugal is firmly embedded in modern day Brazilian culture. Portuguese remains the official language of Brazil, and that by itself underscores how the country is very different from its Latin American neighbours.
A massive migration and shift from rural to urban society accelerated after WWII, and in more contemporary economic times, Brazil enjoyed varying degrees of prosperity mixed in with some wild swings of economic instability. Most famous and noteworthy were a currency and debt crisis, along with a severe bout of inflation. Its long battle with inflation finally ended in the late 1990s with, among other measures, the implementation of the Plan Real, which constituted a series of fiscal and monetary reforms that ultimately helped lower annual inflation from over 2000% in the early 1990s to single digits later that decade.
Fernando Henrique Cardoso, who was minister of finance and subsequently went on to be a two-term president, is largely credited with implementing many important economic and social improvements. With the pivotal victory over inflation and implementation of other reforms, Brazil seemingly has been able to shake off its volatile past and is now in a position to take advantage of its many inherent strengths. This is further supported by an established legal framework, one that is respected and offers a clear path for dispute resolution. Although often characterised as an emerging market, a strong argument can be made that Brazil has, in fact, already emerged.
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Today, Brazil is a powerful economic force and a coveted location for new businesses in the Americas. A glance at some key statistics quickly reveals why. Brazil is the fifth largest country in the world with a total land-mass of approximately 8.5m sq. kilometres. A population of 203 million people makes it the most populous country in Latin America by a wide margin and the fifth most populous in the world. Brazil has the rare dual luxury of being both a major exporter, thanks to its bountiful natural resources, and also a consumer of significant size and scale. Historically, public education has been a limiting factor for Brazil; however, this too has been improving as the literacy rate has climbed above 88%.
In 2010, Brazil recorded GDP growth of 7.5% and a total GDP of almost $2.2tr, making it the eighth largest economy in the world. Naturally, the country did not escape the global economic upheaval, and Brazil fell into recession as global trade virtually ceased when credit markets froze in late 2008 and early 2009. GDP contracted nominally in 2009 (estimated at negative 0.2%), but Brazil’s underlying strength was evident once again as growth quickly rebounded much faster than in most developed countries. Unemployment declined during 2010 to 7%, and once again it appears that Brazil is poised for solid growth in coming years.
The ascension of Brazil to a ‘must-have’ business location status happened quickly over the past decade. To a large extent this can be credited to its good fortune and good geology. Brazil has benefited, and is likely to continue to benefit, from the booming worldwide demand for commodities and raw materials. This natural resources windfall has enabled Brazil to sign high profile trade agreements with China, the world’s second largest economy, among others. The growth trajectory of China, which is now Brazil’s largest trading partner, only strengthens the longer-term potential.
Brazil boasts a mature mining sector and is a significant source of iron ore, bauxite, lumber, gold, diamonds and, of course, oil and natural gas. Its already significant proven oil reserves have been augmented recently by some of the world’s most important and impressive new oil field discoveries in the deep-water, pre-salt region off the Atlantic Coast. These finds instantly propelled Brazil to a tier-one player in the oil industry, giving it enormous leverage on the world economic stage.
The ascension of Brazil to a 'must-have' business location status happened quickly over the past decade.
Brazil is also a major provider of important agricultural products, such as coffee, sugar, soybeans, corn, orange juice, and beef. In an era when much of the world is challenged by food inflation, the ability to be a net exporter of agriculture is an unusual position of economic strength.
It is important to note, however, that this is not a one- or two-horse economy. The manufacture of aircraft, automobiles, machinery and textiles add another level of diversity. And surprisingly for many, Brazil’s service sector employs two-thirds of the entire workforce.
Strength in Brazil’s currency, the real, also portends to continued global influence. The Latin America currency crisis and devaluation of the real in 1999 seem like distant memories right now. After winning its battle with hyperinflation, much of Brazil’s monetary and fiscal discipline has remained in place. In 2008,the country’s rating was upgraded to investment grade, which not only indicates a declining level of risk, but also increases the number of institutions eligible to invest here. Brazil’s public debt to GDP ratio is relatively healthy at less than 61%, particularly when taken in context of its proven oil reserves and current economic growth projections. Today, Brazil is a net creditor nation, having recently worked with the IMF to lend to other emerging economies in its region and to fund new trade agreements with fledgling partners. [[[PAGE]]]
A big part of the Brazil story centres around wealth creation and emergence of a massive middle class. Mass urbanisation occurred decades ago as Brazil evolved from a rural to urban-based society, and now many Brazilians are taking the next step up the wealth curve.
According to a 2010 report entitled Private Equity in Brazil by Ernst & Young LLP, nearly 30 million Brazilians have entered the middle class over the past decade, and the trend is expected to accelerate and become ‘a self-perpetuating cycle’. By some estimates roughly half the population now qualifies as middle class. Further supportive of this trend are Brazil’s favourable demographics, where the median age of the population is just over 29. The size of the middle class, coupled with the fact that per capita consumption is still relatively low for such a large economy, underscores why consumer companies are eager to tap this market.
Although historically limited by under-investment in infrastructure, Brazil’s ongoing Accelerated Growth Program illustrates a newfound commitment to logistics, energy, and transportation infrastructure. A high-speed train linking São Paulo and Rio de Janeiro, and the heralded new Port of Acu, a massive industrial complex and port facility in southeast Brazil, are just two high-profile examples of important new projects. New infrastructure associated with hosting the World Cup in 2014 and the XXXI Summer Olympics in 2016 will not only add jobs, but also be supportive for new local businesses.
Despite the favourable long-term prospects for this Latin American powerhouse, it’s important to stay firmly rooted in reality. Launching a new branch in São Paulo or Rio de Janeiro will never be as easy as rolling out another franchise in one’s home country. There are challenges that require careful planning.
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It is easy to see that Brazil is a special place with many inherent advantages. Although many companies are eager to participate, establishing new locations to take advantage of the growth opportunities and burgeoning consumer demand in Brazil is no small task. Middle market companies and multinationals alike would be wise to find a bank advisor with established relationships on the ground, and with an intimate knowledge of legal and business infrastructure. Moreover, a local liaison that understands the business culture nuances can prove invaluable and pay dividends when doing business in Brazil.
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