In 2001, Goldman Sachs chairman Jim O’Neill dubbed the now-ubiquitous acronym BRIC, referring to the four nations of Brazil, Russia, India and China (later expanded to BRICS to include South Africa in 2010).
The nations were unified by their more recent industrialization process, rapid growth, large populations and the hope that they represented the future stars of the global economy.
While each of the five nations has had its ups and downs ever since, one of the aforementioned countries is currently going through a period of serious economic turmoil: Brazil.
After experiencing a GDP growth rate of 4.5% from 2006-2010, the country’s growth slowed to 2.1% from 2011-2014, dropping to an alarming 0.1% by the end of 2014 growth rate.
Unfortunately, it didn’t stop there.
Deficit, inflation and corruption
According to Bloomberg, analysts estimate that Brazil’s economy contracted by 3.71% in 2015, and will contract another 2.95% in 2016. If this contraction occurs, it will mark the country’s first years of back-to-back contractions since 1930-31.
In the middle of its worst recession in 25 years, BBC also notes that Brazil is also suffering from a record public sector deficit, inflation of over 10%, and a fragile investor mindset amidst the scandal surrounding Petrobras, the country’s state-owned oil giant.
Politically, President Dilma Rousseff is facing potential impeachment from Congress, her Finance Minister quit in December, and the country’s debt has been reduced to junk rating by both Standard and Poor’s and Fitch Ratings.
What does this mean for importers and exporters?
These factors, along with several others, may lead many import-export professionals to act with caution when considering expanding their business into Brazil.
With Forbes reporting that Brazil shed nearly 900,000 jobs in 2015, unemployment expected to reach 12% in 2016, and cuts to subsidies for low-income families according to the IB Times, the number of potential consumers in the country continues to shrink.
However, with the world’s fifth-largest population – over 200 million people – the number of potential Brazilian consumers still remains much higher than many other countries, and could remain enticing to a business that can find the right fit in the market.
Companies looking to import from Brazil will also find difficulties, as, according to the Economist, the combination of a complex tax code, strict labour laws and economic protectionism, Brazil’s manufacturing base is the fourth-least productive amongst OECD countries.
Half of the country’s 2014 exports were raw products like oil, iron ore, soybean and corn, so the economy has been vulnerable to commodity price changes on those products.
These changes, Bloomberg argues, have further divided an already unequal society and decreased the number of middle class consumers.
Infrastructure issues and weaker foreign investment rates than other Latin American countries have also hurt Brazilian businesses looking to find customers abroad.
On the other hand, those companies able to navigate Brazilian manufacturing laws could find a large potential workforce and inexpensive materials to begin setting up factories and create their products to sell around the world at a profit.
Companies wanting to import raw products from Brazil may also be able to take advantage of the lower prices, and purchase from Brazil at competitive rates.
The Economist reports that as a result, consumer spending has decreased for the first time in over a decade, and with interest rates of 14%, it’s been difficult to add more loans to an already debt-laden economy to improve that spending.
More disposable income than ever before is needed to pay off existing loans, decreasing opportunities to make the kinds of sales necessary to succeed in the market.
With the Summer Olympics set for August 5-21 in Rio de Janeiro, companies could also find a tourism boom of those willing to spend while they visit the country to attend the events.
What do you think of Brazil’s economic outlook for 2016 and beyond? Would you consider it as a viable market for your business, or do the downturn and other factors dissuade your from doing business there?
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