31 March 2016
Brazil: Economic Development Stalled
- Large domestic market
- Abundant natural resources
- Diversified industrial base
- Political unrest
- Weak public finances
- High inflation
Brazil is a federal republic. The president is both head of state and head of government. President Dilma Rousseff approval rating has sunk to single-digits, amid a faltering economy, high inflation, and a corruption scandal at Petrobras, the state-controlled oil company. In order to bolster support among allies, she reshuffled the cabinet in last October and handed the PMDB greater power in the government.
The Workers’ Party has a track record at reducing poverty, thanks to its social program. For instance, created in 2003 when the party came to power, the Bolsa Familia programme provides poor families with children with an average of R$70 per month. Other programmes include non-contributory pensions for rural workers, food benefits for the poor and unemployment benefits. But at the same time, the generous social programmes have contributed to a bigger loophole in public finances. Facing recession and an unemployment rate rising to 7.5% in November from 4.8% a year earlier, Rousseff’s main job is to turn the economy around and shore up public finances.
The government has introduced some austerity measures. In September 2014, it unveiled spending cuts in health and low-cost housing programs, investments in infrastructure, agricultural subsidies as well as salaries and bonuses for government employees. It also planned to raise taxes by bringing back an unpopular financial transactions tax that was abolished eight years ago.
Brazil is Latin America’s largest economy. Industries are diversified, ranging from the manufacturing of consumer durables to automobiles and aircraft. The country is rich in natural resources, particularly iron ore. Rising unemployment rate and austerity measures have weighed on private consumption, which accounts for over 60% of GDP. The Brazilian economy is expected to contract by 3.1% in this year and 2.5% in the next. The Brazilian real is among the worst performing emerging market currencies. Over the past 12 months, it has depreciated by 34% against the US dollar.
The central bank has raised interest rates by a total of 7% to the current level of 14.25% since April 2013, amid elevated inflation. In November 2014, the inflation rate stood at 10.48%, well above the central bank’s mid-point target of 4.5%. The high inflation is mainly due to a weaker currency and higher government-administered prices in utilities such as electricity. The central bank signaled that the interest rate will stay at its current level for a prolonged period, which would in turn curb economic activity. Meanwhile, Brazil’s high interest rates also make public debt costlier to service. Interest payments accounts for 8.7% of GDP in 2014, compared to around 4% in 2012.
Despite the poor economic performance and the pressures on the external sector, there is no immediate threat of an external crisis, as Brazil has US$ 360 billion of reserves (about 20% of GDP). FDI financed more than 70% of the current account deficit in 2014. The exchange rate would remain the main shock absorber. Nevertheless, strong congressional opposition to austerity and political uncertainty imply it would take a longer time for the economy to recover.
Hong Kong-Brazil Trade
Total exports from Hong Kong to Brazil decreased by 4.5% from HK$15,210 million in 2013 to HK$14,520 million in 2014. The top three export categories to Brazil were: (1) electrical machinery, apparatus & appliances, & parts (+15.9%), (2) telecommunications, audio & video equipment (-11.0%), and (3) office machines & computers (-18.8%), which represented 70.1% of total exports to Brazil.
ECIC Underwriting Experience
The ECIC imposes no restrictions on covering Brazilian buyers. Currently, the insured buyers in Brazil range from small and medium sized companies to listed companies. For 2014, the number and the amount of credit limit applications on Brazil decreased by 15.1% and 61.4% respectively while the insured business increased by 38.7%. Major insured products were electronics, chemical products, and toys, which represented 49.6% of ECIC’s insured business on Brazil. The Corporation’s underwriting experience on Brazil has been acceptable, with three payment difficulty cases and one claim case reported in from December 2014 to November 2015, involving mineral products, electronics and toys.