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Brazilian Securities Commission

Brazil:
Macroeconomic Features

by Euchério Lerner Rodrigues

June, 1996

Index: | Income | Foreign Trade | Prices | Foreign Investments |

INCOME AND PRODUCTION

Brazil's Gross Domestic Product for 1995 totalled US$632 billion, placing it ninth among the leading nations in the world. Owing to its extensive territory and considerable population, considered in conjunction with a per capita GDP of US$4,051, Brazil offers investors one of the worldís most attractive consumer markets.

GDP per capita from 1991 to 1995

** At constant prices (US$ 1,995)

Source: IPEA/ IBGE

The distribution of the GDP according to sectors has undergone few modifications over the last 25 years.

Sectorial Distribution of the GDP in Brazil

Source: IBGE

Over the last five years, GDP growth was most pronounced in the agricultural sector, reaching 22.6%. The industrial and services sectors expanded by 16.3% and 15.2% respectively in the corresponding period.

Brazilian agriculture offers significant comparative economic advantages, owing to the vast extension of area suitable for agricultural production, a climate which varies from tropical to temperate according to region, topography which lends itself to mechanization and, further, the large-scale availability of fresh water.

The country as a whole produced around 80 million tons of grain in 1995 and boasts one of the three largest livestock herds in the world, totalling about 150 million head of cattle. It is also one of the worldís leading exporters and producers of coffee, soya, cocoa, orange juice, sugar, alcohol and tobacco.

The total of forested area in Brazil in 1995 was 5.6 million square kilometers.

Mineral resources in Brazil are abundant. The most important are: bauxite, iron ore, nickel, magnesium and gold. The premier area is the Carajás Project in the north, where extraction is developing at an accelerated pace to take advantage of the rich deposits of iron ore, magnesium and other minerals.

Since the post-World War II period, industrial development has become a principal sector and priority of successive Brazilian governments. There have been many programs geared towards stimulating the growth of the main industrial segments and the creation of companies to manufacture machinery and equipment. Today, the country's industrial capacity is highly diversified and notable for exports of manufactured and capital goods.

Overall, manufacturing has been the most dynamic field in the industrial sector, representing 20% of the Gross Domestic Product in 1993. Looked at from the standpoint of added value, the structure of manufacturing in 1992 presented the following sectorial distribution:

Structure of industrial production in Brazil (1992)

Source: IBGE

Turning to the energy sector, the country is now able to produce enough oil to satisfy 60% of its requirements, compared to only 20% during the 1970s. As new hydroelectric stations come on line, more electric energy is being produced. The infrastructure in the telecommunications and transport sectors continues to expand and the privatization process is well under way.

BRAZIL - Infrastructure Indicators (1992)

Source: IBGE

FOREIGN TRADE

Brazilian trade has been surging in recent years. Trade flows reached US$76.6 billion in 1994 and peaked further to US$96.2 billion in 1995, including imports of US$49.7 billion and exports of US$46.5 billion. In 1995 the trade deficit stood at US$3.2 billion, representing the first negative result since 1980. These statistics are clear evidence of the intensification of commercial relations abroad and the opening-up of the domestic market to imports.

Brazil's trade balance has evolved in the following manner:

Structure of Brazilian Imports (in per cent)

Structure of Brazilian Exports (in per cent)

* Textile fibers are included among "other primary products", while cloth and garments appear under "other manufactured goods".

Brazil's principal trading partners according to volume of trade, are the following:

Principal Trading Partners with Brazil

Source: Banco Central do Brasil (Brazilian Central Bank)

PRICES, INTEREST AND EXCHANGE RATES

Prices

Two years ago Brazil was a country which suffered one of the highest rates of inflation in the world. In 1994, the inflation recorded by the IGP-DI (the General Price Index - Domestic Reserves) rocketed to 1,094% but, following the introduction of the stabilization program, plummeted to 14.77% in the following year.

A new currency came into being in July, 1994, the Real, which gave continuity to the program of economic stabilization launched a few months earlier. The outcome was a dramatic decline in the inflation rate of more than 30 per cent a month, settling to an average of 1.2% per month. This pattern has since been maintained, thereby confirming the success of the policy to control inflation. The Brazilian Government has concentrated its efforts on the fostering of the necessary fiscal austerity to guarantee the success of the new monetary regime.

Interest rates

When compared to standards elsewhere in the world, Brazil's financial market is found to be highly developed. Interest rates throughout the various sectors of the financial market are determined by the forces market.

The Brazilian government, offering bonds on the open market, determines from their earnings the scenario for interest rates. As the cardinal agent in the financial system, the government has played a decisive role in setting of interest rates in this country.

Three principal forces are currently orienting government attitudes on how the policy on interest rates will be conducted: the handling of domestic debt, the control of inflation and the volatility of interest rates.

The government has favored a policy inclined toward high interest rates as a means of holding back inflation and a significant consequence of this has been the entry of foreign capital. This approach leaves no doubt about the intention to use interest rates as a mechanism to gain control over aggregate demand and, consequently, over inflation.

The government's economic think-tanks have diagnosed a reduction in the basic rates of interest for 1996. Nevertheless, fidelity to the policy of high interest rates is a key to sustaining the plan to stabilize the economy. A natural consequence is that, in the face of inflationary pressures, the Government will not hesitate to use mechanisms to restrict demand.

Exchange

Brazil follows a semi-convertible exchange regime. The financial institutions which have been licensed to deal in foreign exchange in Brazil operate according to a quota system and register all transactions with the Brazilian Central Bank, which monitors all dealings. The Central Bank itself operates on the exchange market with a view to discouraging short-term speculation and containing fluctuations within bands deemed acceptable by the bank. Brazil has two types of official exchange: commercial exchange, which is reserved for operations in foreign trade, and floating exchange, which applies to all other international financial operations.

Exchange rates are set by the Brazilian government, whose aim is to maintain balance in trade and to control inflation. For these purposes, it has adopted a policy of maintaining stable nominal exchange rates. The thinking behind this policy is to maintain a balance between the parity of the Real in comparison with a basket of foreign currencies and incorporate, at the same time, the relative gains from the country's productivity. The maintenance of a stable exchange rate is regarded as vital in the battle to give credibility to the policy to control inflation.

One aspect which can be regarded as propitious for the sustainability of this active exchange policy is the volume of international reserves available to the Government; in December, 1995, they reached US$50.5 billion in cash and US$51.8 billion in international net assets, sufficient to cover about 13 months of imports. In 1970, the reserves were just US$1.2 billion. The table below shows the trends in Brazilian international reserves:

Brazilian international reserves (in US$ billions)

Source: BACEN

FOREIGN INVESTMENTS

Foreign capital is seen by the Government as crucial to the development process and as a complementary factor alongside domestic savings in the build-up of fixed capital. However, the domestic need to control the money supply and exchange means that the Government has to take a selective approach in accepting foreign investment. As a general rule, priority has been given to direct investments which come to maturity over a longer period and in sectors which are likely to yield bigger returns in employment and income. Consequently, there has been an emphasis on avoiding the intense and frequent two-way flow of highly mobile capital as these restrict the ability of the government to control domestic interest and exchange rates, which are the pillars of the plan to stabilize the economy.

This attitude has meant that the input of foreign capital is subject to a set of specific regulations which determines the conditions and pre-requisites for the entry and repatriation of capital.

According to the "Law on Foreign Capital," foreign investments are classified as all those pertaining to individuals or legal entities resident, domiciled or based abroad. All foreign investments must be registered at the Central Bank.

Since the 1980s, when foreign portfolio investments were regulated, the capital markets have been increasingly opened up. Various structures were created which were geared to the channelling of foreign capital to the Brazilian capital market.

At the time of writing, beside direct investments, which enjoy fiscal incentives in various Brazilian states, the foreign investor is allowed to enter the Brazilian capital market and take advantage of fiscal incentives by means of these mechanisms:

• Investment companies
• Investment funds
• Managed portfolios
• Portfolios of institutional investors
• Debt conversion funds
• Privatization funds
• Shares in Real Estate Funds
• Shares in emerging companies funds

In addition to the mechanisms set out above, Brazilian public companies are allowed to obtain resources in overseas markets through the issue of fixed income bonds and through the mechanism of depositary receipts. From January, 1992, liberation was also given to the investments held by individuals or legal entities domiciled in member countries of the Mercosul treaty - the Common Market of the Southern Cone. These countries are: Argentina, Uruguay and Paraguay, not to mention Brazil itself.

Foreign investments in the Brazilian capital market, provided that they have been made through one of the mechanisms described above, enjoy a differentiated fiscal treatment which confers advantages to the investor.

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