Brazil – February 2022
Brazil is the world’s 12th largest economy, and the largest in Latin America. Brazil has significant resources wealth, including gold, uranium, iron, and timber, and is the world’s largest producer of coffee. Like the rest of the world, Brazil has been hit hard by the COVID-19 pandemic, but is now on a path to recovery. Per capita incomes and economic growth prospects are weaker than the average for Latin American countries. Creditworthiness and the business climate are in line with the regional average.
The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2022 and 2026. Business climate is measured by the World Bank’s latest Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.
Due to various domestic and structural impediments, the economy grew at a modest 1.6% to 1.8% per annum for several years before the pandemic. Brazil suffered one of the worst economic contractions in its history as a result of the COVID-19 pandemic, leading to a GDP contraction of 4.1% in 2020. A stimulus package of US$156.8 billion, or about 11.4% of Brazil’s GDP, helped the country prevent a sharper contraction and supported the economic recovery in 2021. The package comprised direct cash transfers (under the Bolsa Conditional Cash Transfer Program) and support for firms to prevent layoffs, similar to Australia’s JobKeeper program. Real GDP grew 5.2% in 2021.
The recovery has slowed in early 2022. Rapid spread of the Omicron variant remains a significant economic and social challenge, although authorities have kept restrictions largely unchanged as the domestic vaccination campaign picks up pace. Inflation remained above 10% year-on-year in January 2022, pointing to further interest rate hikes, which will likely weigh on domestic demand. Confidence indicators point to pessimism among consumers and businesses as the pandemic persists and financial conditions tighten. Moreover, fragile public finances and political polarisation in the run-up to October’s elections could all weigh on economic activity. Chronic structural and fiscal challenges will remain a key challenge for Brazil to tackle as it emerges from the pandemic. According to the World Bank, the closure of schools in Brazil is expected to reverse a decade-long improvement in Brazil’s Human Capital Index. The IMF estimates GDP growth of just 0.3% in 2022, and 2% per annum, on average, thereafter.
Per capita income more than tripled between 2004 and 2011 from US$4,000 to above US$12,000, as strong GDP growth and rising commodity prices help lift Brazil into upper-middle-income status. The country helped take millions of people out of poverty. But per capita incomes sat at roughly US$7,700 in 2021, about one-third lower than in 2014. The COVID-19 crisis has exacerbated the hit to incomes still reeling from the recession in 2015-16 and lingering high unemployment. A return to economic growth and prospects for structural reforms over the next five years, if effectively implemented, should support a gradual strengthening in GDP per capita.
Country risk in Brazil is moderate to high. The OECD rating is 5, indicating a moderate to high probability the country will be unable or unwilling to meet its external debt obligations. Over the past five years, Brazil’s political tensions, tepid economic performance and growing risks to fiscal sustainability have resulted in sovereign credit rating downgrades into sub-investment grade territory.
Brazil ranked 124th out of a possible 190 countries on the World Bank’s latest ease of doing business scorecard, broadly in line with the Latin America and Caribbean average of 116. Brazil outperforms the regional average in enforcing contracts, protecting minority investors and resolving insolvency. But paying taxes and dealing with construction permits is somewhat harder. Progress on the government’s economic reform agenda, including fiscal consolidation, administrative reform, deregulation, tax reform, trade liberalisation, privatisation and infrastructure investment remains important to enhance Brazil’s business climate in coming years.
Brazil has a low to moderate risk of expropriation, as no major expropriation actions have taken place against foreign investors in recent years.
Brazil’s governance indicators are largely in line with the Latin American average. The notable exceptions are lower scores on political stability/absence of violence and government effectiveness.
The free and fair election of President Jair Bolsonaro in 2018 restored some confidence in Brazil’s political institutions. The new government has made progress on its fiscal and economic reform agenda, including significant pension reform that is necessary to ensure compliance with the government spending ceiling and put public debt on a downward trajectory. That said, political and social risks are on the rise, as the COVID-19 crisis has exacerbated pre-existing income inequalities and presidential elections in 2022 pose a risk to policy continuity.
Brazil was Australia’s 31st largest trading partner in 2020, and largest export market in Latin America by a significant margin. Total goods and services trade amounted to $2.6 billion in 2020 or 0.3% of Australia’s trade portfolio; that is about $1 billion lower than the high in 2018. The COVID-19 pandemic has disrupted bilateral trade over the past couple of years. Goods exports to Brazil consisted mostly of coal (two-thirds of goods exports in 2020) and aluminium. Major goods imports from Brazil included medicaments, civil engineering machinery and parts, and coffee in 2020.
Brazil remains the 4th largest source of international students in Australia behind China, India and Nepal. Prior to the pandemic, more than 40,000 Brazilian students enrolled in Australian institutions in 2018 and 2019 before dropping in 2020 and 2021 on the back of COVID-19 and associated international travel restrictions. Australia’s top eight universities (Group of 8) have agreements with universities and research organisations in Brazil to promote enrolments in Australian universities moving forward.
The COVID-19 pandemic and associated international travel restrictions has hurt tourism significantly over the past couple of years. Prior to the COVID-19 shock, the number of Brazilian tourists visiting Australia more than doubled over the ten years to 2019 – almost 58,000 Brazilians travelled to Australia in 2019. The ongoing pandemic also points to another year of uncertainty for tourism, and broader services, exports in 2022.
Most of Australia’s foreign direct investment in Latin America goes to Brazil. More than 75 Australian companies operate in Brazil in a wide range of sectors, including advanced manufacturing (Amcor), agribusiness (Macquarie), engineering services (Worley), financial services (Macquarie) mining (BHP Billiton), plasma products and vaccines (CSL), and retail clothing (Cotton On, Billabong, Rip Curl), among others.
Brazil’s growing infrastructure needs, and large mining and agricultural industries present investment opportunities for Australian firms. A 2017 report from Pricewaterhouse Coopers projects Brazil will become the world’s fifth largest economy by 2050 thanks to its favourable demographics and expanding middle class. This will likely create opportunities for Australian firms engaged in transportation, financial and insurance services and waste management sectors. Meanwhile, Brazilian companies continue to expand operations and invest in Australia, in part to benefit from Australia’s extensive free-trade network in Asia.