BRAZIL

Brazil’s economy is the largest in South America and the country boasts well developed agriculture, mining, manufacturing, and service sectors. Since 2003, Brazil has improved its macroeconomic stability, built foreign reserves, reduced debt, kept inflation rates under control and committed to fiscal responsibilities. After witnessing unprecedented economic growth in 2007 and 2008, the global financial crisis finally hit Brazil. Brazil’s currency and stock market saw huge fluctuations as foreign investments dwindled, demand for commodity exports dried up and external credit increased. However, Brazil was one of the first emerging markets to stage a recovery, with GDP growth returning to positive levels. The Central Bank predicts growth of 5% in 2010.

Brazil Economic Structure: The Road Ahead

With the global economy improving, Brazil’s markets are echoing similar sentiments. Latin America Monitor, an economic research firm, is forecasting a primary surplus of 3.3% of the GDP in 2010, up from 2.1% in 2009. The nominal fiscal deficit forecast for 2010 is 3.2% of the GDP. There are further expectations of a gradual recovery process for the nominal fiscal balance of -2.14% of the GDP by 2014, while primary surplus would be boosted to 3.3% of the GDP in 2010, from 2.1% in 2009.Brazil is unlikely to witness any major economic deterioration in the near term. However, in the light of the government’s ambitious spending plans ahead of the FIFA World Cup in 2014 and the Rio de Janeiro Olympic Games in 2016, raising sufficient capital and managing credit risks could be a serious challenge for the next government.

DEVALUATION CRISIS AND INTEREST RATESAfter a decade of inflation rates ranging from 100% to nearly 3,000% per year, Brazil’s central bank made an effort during the 1990s to reign in inflation and public spending. In 1994, the government reissued the real and instituted a crawling peg. The new currency, in combination with interest rates in excess of 30%, stabilized inflation for the first time in decades. High interest rates lowered inflationary pressures, by reducing the incentive to hold currency. Investors, attracted by high interest rates, poured money into the Brazilian economy at unprecedented rates.Investors, foreseeing a devaluation, began exchanging domestic currency in 1998. As the data below shows, the central bank raised interest rates from 1996-1998 in an effort to slow the outward flow of capital. After the devaluation, investors slowed their exodus from the real, resulting in an increase in the money supply and a decrease in the interest rate.

Effect of Devaluation (1996-2001) 1996 1997 1998 1999 2000 2001 2002Real GDP ($R bn) 664 686 687 692 722 731 745% change 2.7% 3.3% 0.1% 0.8% 4.3% 1.3% 1.9%Unemployment 10.6 14.2 14.1 13.3 11.3 11.7 12.3Money market rate 27.5 25.0 29.5 26.3 17.6 17.5 19.1

Source: Economist Intelligence Unit

GROSS DOMESTIC PRODUCT

The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living

Brazil's nominal GDP is currently around US$ 1.5 trillion. From 1990 until 2010, Brazil's average quarterly GDP Growth was 0.79 percent reaching an historical high of 9.03 percent in September of 1994 and a record low of -7.68 percent in June of 1990.

Whatever the criteria employed in measuring the size of national economies, Brazil's is always ranked among the ten biggest in the world. It is the second largest economy in the Americas after the United States and the second largest economy in the developing world after China. The services sector is the largest contributor to GDP at 67.7%, followed by the industrial sector 25.8% and agriculture 6.5%

Brazil’s GDP in terms of purchasing power parity is at USD 2.024 trillion. A nation's GDP at purchasing power parity (PPP) is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. This is the measure most economists prefer when looking at per-capita welfare and when comparing living conditions or use of resources across countries.

With a population of over 186 million people and a per capita income of around US$ 7,600 per annum, Brazil has the largest domestic market in Latin America.

Real GDP Growth

Real gross domestic product is measure of the value of output economy adjusted for price changes (that is, inflation or deflation). The following table summarizes the real GDP growth rate of the last 7 years

Year 2003 2004 2005 2006 2007 2008 2009

Real GDP Growth

1% -.2% 5.1% 2.3% 3.7% 5.4% 5.1%

2002 2003 2004 2005 2006 2007 2008 2009 2010-1

0

1

2

3

4

5

6

Real GDP Growth(in percent)

Real GDP Growth(in percent)

Brazil is part of the BRIC nations and is expected to be growing at a very fast pace, but when compared to countries like India and China the growth does not seem to be very impressive. But the fact is that the reported GDP of Brazil does not show the true scenario. The reported GDP of Brazil is highly understated due to Brazil’s fledgling underground economy. The cost of goods and services produced last year by Brazil’s underground economy amounted to the equivalent of 27.1 percent of the nation’s gross domestic product, according to a study released by the private Fundacao Getulio Vargas (FGV) Foundation.

The underground economy, or black market, in which commerce is carried out without regard for taxation, price ceilings or other rules imposed by the government, was fueled in 2008 in Brazil by increased tax collection efforts and unemployment.

Recent statistics published by FGV indicated that Brazil's Gross Domestic Product of unreported economic activity reached 578 billion reais (US$ 334 billion) in 2009, 18.4% of Brazil's GDP, rising from 357 billion reais (US$ 206 billion) in 2003.  

The so-called 'underground' economic system - mainly consisting of activities such as informal labor, trade, tax evasion as well as the more serious conduct of prostitution, animal smuggling and drug trafficking - has been pointed as being larger than the size of Argentina's entire GDP. 

The large growth of the underground economy, it is stated, occurred as a result of the Plano Real - between 1994 and 2004 - where its share of GDP grew from 20.71 percent to 42.60 percent.  

Brazil's high tax burden, which forms over a third of the country's Gross Domestic Product, and a lack of public accountability are the main contributory factors; despite having one of the highest global taxation regimes, the investment levels in Brazil are one of the lowest. 

This gray market limits the effectiveness of otherwise sound macroeconomic measures and reduces the potential for economic growth

CURRENT INTEREST RATE SCENARIO

The benchmark interest rate in Brazil was last reported at 10.75 percent. In Brazil, interest rate decisions are taken by The Central Bank of Brazil's Monetary Policy Committee (COPOM). The official interest rate is the Special System of Clearance and Custody rate (SELIC) which is the overnight lending rate. From 1999 until 2010, Brazil's average interest rate was 17.22 percent reaching an historical high of 45.00 percent in March of 1999 and a record low of 8.75 percent in July of 2009.

Brazil's Monetary Policy Committee (Copom) from the Brazilian Central Bank (BC) boosted this Wednesday the country's basic interest rate (Selic) to 10.25% a year, in line with the expectations of the financial market. Analysts expect the rate to continue increasing this year up to 11.75% as a way to contain inflationary pressures.

In a short note, the Copom informed that "in continuation to the process of adjusting monetary conditions to the prospective scenario of the economy, to ensure convergence of inflation to the target's trajectory, the Copom decided unanimously to raise the Selic rate to 10.25 % a year without bias," ie without the possibility of revision until the next meeting in 45 days.

This was the second adjustment of the Selic this year. The first occurred at the end of April, when the rate, which serves as a parameter for the national financial system, was fixed at 9.50%, after nine consecutive months at 8.75% - the lowest in the history of the BC since 1964.

Country Interest Rate Growth Rate Inflation Rate Jobless Rate Current Account Exchange Rate

Brazil 10.75% 1.20% 4.49% 6.70% -3000 1.7108

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 8.75 8.75 8.75 9.13 9.50 9.88 10.50          

2009 13.25 12.75 12.00 10.75 10.25 9.75 9.00 8.75 8.75 8.75 8.75 8.75

2008 11.25 11.25 11.25 11.50 11.75 12.00 12.63 13.00 13.38 13.75 13.75 13.75

* The table above displays the monthly average.

About Government Bonds

A government bond is a bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. The first ever government bond was issued by the English government in 1693 to raise money to fund a war against France. Government bonds are usually referred to as risk-free bonds, because the government can raise taxes to redeem the bond at maturity. Some counter examples do exist where a government has defaulted on its domestic currency debt, such as Russia in 1998 (the "ruble crisis"), though this is very rare. As an example, in the US, Treasury securities are denominated in US dollars. In this instance, the term "risk-free" means free of credit risk. However, other risks still exist, such as currency risk for foreign investors (for example non-US investors of US Treasury securities would have received lower returns in 2004 because the value of the US dollar declined against most other currencies).

Secondly, there is inflation risk, in that the principal repaid at maturity will have less purchasing power than anticipated if the inflation outturn is higher than expected. Many governments issue inflation-indexed bonds, which should protect investors against inflation risk. Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. However government bonds are instead typically auctioned. A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to

finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds.

Brazil Government Bond 10 Year Yield

Brazil's Government Bond Yield for 10 Year Notes declined 126 basis points during the last 12 months. From 1998 until 2010 Brazil's Government Bond Yield for 10 Year Notes averaged 9.64 percent reaching an historical high of 28.11 percent in September of 2002 and a record low of 3.81 percent in August of 2010. Generally, a government bond is issued by a national government and is denominated in the country`s own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. The yield required by investors to loan funds to governments reflects inflation expectations and the likelihood that the debt will be repaid. This page includes: Brazil Government Bond 10 Year Yield chart, historical data and news.

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 5.13 5.24 4.90 4.88 4.93 4.81 4.44 4.07 3.84      

2009 6.47 6.82 6.81 6.34 6.00 6.09 5.87 5.61 5.22 5.02 5.04 4.93

2008 5.67 6.04 6.32 6.20 6.07 5.98 5.91 5.93 6.20 8.63 8.14 6.95

* The table above displays the monthly average.

So after considering various macro factors of Brazilian economy we have reached to a positive conclusion that Brazil may well be the most attractive on the planet on a risk-return basis. Here are seven reasons:

It is just about the only investment grade country where inflation is slowing, the central bank has been easing, and where you can pick up a yield of over12% for 10-year paper.

Its most recent change was a credit upgrade last September (Moody’s) and overall the rating agencies are generally favourable over the outlook.

The inflation rate is 4%, slowing down and at the low end of the range of the past decade.

The current account is in very small deficit, at just over 1% of GDP.

The debt ratios are very well contained – 12 % gross external debt and 43% government debt as a share to GDP (the US comparables are 95% and 62% respectively).

The real is on an appreciating track (+27% in the past year) and that is because Brazil’s terms-of-trade (export price to import price ratio) is flirting near a 12-year high.

Given that real short-term rates are around 4.5% and the consensus view is 5% real growth this year, there would be little reason to be bearish on the currency (and FX reserves at $240 billion are up  15% in the past year and 30% in the past two years.

STOCK MARKETS

A stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately, over-the-counter.

Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance.

This market can be split into two main sections: the primary and secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market.

FUNCTION OF STOCK MARKETS

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development.

Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption.

With plummeting share prices making headline news, it is worth considering the impact of the Stock market on the economy. How much should we worry when share prices fall? How does it impact on the average consumer? and how does it affect the economy?

ECONOMIC EFFECTS OF STOCK MARKET

How much should one worry when share prices fall? How does it impact on the average consumer? and how does it affect the economy? These are the questions that are to be considered by an investor who is planning to invest in a particular economy on the basis of Stock Market Indices.

The following list enumerates the effects of a falling stock indices on an economy.

1. Wealth Effect

The first impact when stock indices fall is that people with shares will see a fall in their wealth. If the fall is significant it will affect their financial outlook. If they are losing money on shares they will be more hesitant to spend money; this can contribute to a fall in consumer spending. However, the effect should not be given too much importance. Often people who buy shares are prepared to lose money; their spending patterns are usually independent of share prices, especially for short term losses.

2. Effect on Pensions

Anybody with a private pension or investment trust will be affected by the bear run in stock market(that is falling stock market indices), at least indirectly. Pension funds invest a significant part of their funds on the stock market. Therefore, if there is a serious fall in share prices, it reduces the value of pension funds. This means that future pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet their promises. The important thing is the long term movements in the share prices. If share prices fall for a long time then it will definitely affect pension funds and future payouts.

3. Confidence

Often share price movements are reflections of what is happening in the economy. E.g. recent falls are based on fears of a US recession and global slowdown. However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourage people from spending. On its own it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor.

4. Investment

Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares – it provides a low cost way of borrowing more money. However, with falling share prices it becomes much more difficult.

There is an oft repeated quote saying the stock market has predicted 10 out of the last 3 recessions. The point is that falling stock markets do not necessarily predict the economic future. Share prices can fall without causing a downturn in the economy. For example, one thinks of the stock market crashes of October 1987; there wasn’t an obvious economic factor causing this share price fall. The major economies remained relatively unaffected by this stock market crash. In fact, the UK had record growth in the late 1980s. This time the stock market fall is due to economic weaknesses so is a better guide to future economic performance.

Stock market index of Brazil

The BM&FBOVESPA (in full, Bolsa de Valores, Mercadorias & Futuros de São Paulo) is a stock exchange located at São Paulo, Brazil. On September 24, 2010, it became the second largest exchange in the world in terms of market capitalization with $17.8 billion, behind to the Hong Kong Stock Exchange with $19.8 billion. Earlier in May 2008, the São Paulo Stock Exchange (Bovespa) and the Brazilian Mercantile and Futures Exchange (BM&F) merged, creating BM&FBOVESPA. The benchmark indicator of BM&FBOVESPA is the Índice Bovespa. There are nearly 450 companies traded at Bovespa. BM&FBOVESPA has offices in New York, Shanghai and London.

BM&F BOVESPA Indices of the past years

Stock Market index

FII inflows

FDI inflows

Year BM&FBovespa FII Inflows FDI Inflows

2002 10843 1980742540 16590204193.11

2003 21170 2972604810 10143524670.99

2004 25529 2080933160 18165693855.28

2005 33121 6451252310 15066291734.98

2006 43264 7715813474.51 18782215423.1

2007 63593 26217335943.55 34584901025.14

2008 37614 -7565367449.97 45058156303.77

2009 68213

Stock Indexes and FII Inflows for BRIC countries

Enrollment in local colleges, 2005

Year

2002 2003 2004 2005 2006 2007 2008 2009

Russia

Stock Index

FII Inflows

FDI Inflows

3921.4 4218.4 2698.7 -9984.9 6479.7 1867.5 -15005.4

3461.8 7958.1 1544.4 1288.6 2970.4 5507.3 7288.5

India

Stock Index

FII Inflows

FDI Inflows

3377 5838 6602 9397 13786 20286 9647 17464

1022.4 8216 9054 12151 9509 34986 -15029

5626 4322 5771 20335 .9474 25127 .1559 41168

China

Stock Index

FII Inflows

FDI Inflows

2249 7729 10923 20346 42861 18509 8721

49307 47076 54936 79126 78094 138413 147791

FDIs and FII in Million dollars\

STOCK INDICES

Russia

China

UNEMPLOYMENT IN BRAZIL

Unemployment meaning

The labour force is defined as the number of people employed plus the number unemployed but seeking work. The participation rate is the number of people in the labour force divided by the size of the adult civilian non institutional population (or by the population of working age that is not institutionalised). The non labour force includes those who are not looking for work, those who are institutionalised such as in prisons or psychiatric wards, stay-at home spouses, kids, and those serving in the military. The unemployment level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age). In these statistics, self-employed people are counted as employed.

When looking at the overall macro economy, several types of unemployment have been identified, including: Frictional unemployment — This reflects the fact that it takes time for people to find and settle into new jobs. If 12 individuals each take one month before they start a new job, the aggregate unemployment statistics will record this as a single unemployed worker. Technological change often reduces frictional unemployment, for example: the internet made job searches cheaper and more comprehensive. Structural unemployment — This reflects a mismatch between the skills and other attributes of the labour force and those demanded by employers. If 4 workers each take six months off to re-train before they start a new job, the aggregate unemployment statistics will record this as two unemployed workers. Technological change often increases structural unemployment, for example: technological change might require workers to re-train. Natural rate of unemployment — This is the summation of frictional and structural unemployment. It is the lowest rate of unemployment that a stable economy can expect to achieve, seeing as some frictional and structural unemployment is inevitable. Economists do not agree on the natural rate, with estimates ranging from 1% to 5%, or on its meaning — some associate it with "non-accelerating inflation". The estimated rate varies from country to country.

Current Unemployment Rate scenario

The unemployment rate in Brazil was last reported at 6.70 percent in August of 2010. From 2001 until 2010, Brazil's Unemployment Rate averaged 9.95 percent reaching an historical high of

13.10 percent in August of 2003 and a record low of 6.80 percent in December of 2008. The labour force is defined as the number of people employed plus the number unemployed but seeking work. The non labour force includes those who are not looking for work, those who are institutionalised and those serving in the military.

ECONOMIC CRISIS AND LABOUR MARKETS IN BRAZIL

Before the onset of the economic crisis in Brazil in September 2008, economic growth had been robust, averaging 4.4 per cent annually in real terms during the 2004-07 period and 6.4 percent for the first three quarters of 2008. Moreover, there was an important recovery of wage levels and an expansion in employment, particularly formal employment. Unemployment fell from 9.0 per cent in 2004 to 7.7 per cent in 2008 and the percentage of workers contributing to the social security system surpassed 50 per cent in 2007, reaching 52.1 per cent in 2008.

Nevertheless, the international crisis halted economic growth and had an immediate and sharp impact on employment. Year-over-year GDP growth in the fourth quarter of 2008 decreased to 1.3 per cent and there was a net job loss of 634,000 formal jobs in the quarter, compared with a net gain of 10,400 formal jobs in the fourth quarter of 2007. As a result of the recession, the unemployment rate in the six major metropolitan areas surveyed in the Monthly Employment Survey (PME) increased from 7.3 per cent in fourth quarter of 2008 to 8.6 per cent in the first and second quarters of 2009.

However, by the third quarter of 2009, economic growth had resumed and the unemployment rate in the six major metropolitan areas had returned to near pre-crisis levels (7.9 per cent in 2009Q3 compared with 7.8 per cent in 2008Q3). Moreover, administrative records of formal employment creation show that there has been net job growth since February 2009 and since April 2009 in the industrial sector, which is the sector that was hardest hit by the recession.

Between January and October 2009, 1.2 million formal jobs had been added, representing again of 3.6 per cent over the 2008 employment stock. Household employment data from the PME survey also demonstrate positive job growth, and in October 2009 the unemployment rate of 7.5 per cent was equivalent to the rate for October 2008.

Unemployment rate in percentage points (pp).

Brazil: metropolitan areas, from July 2007 to June 2010.