Are you familiar with the BRICS group of nations?
These countries were deemed to be the best performing economies during the 2000s. They have some important common characteristics such as large territories, large populations, and therefore large economies, and they were supposed to be the new powerhouses of the new century.
In this article we will talk about the five opportunities and the five risks of doing business in one of the BRICS, Brazil.
Brazil is a large South American country located on the Eastern part of South America. It was part of the Portuguese Empire until 1822, when it became independent.
Its capital is Brasilia, but its main economic city is Sao Paulo, and the language is still Portuguese.
First opportunity: large market
The first opportunity is the size of the market. Brazil is a huge country, the 4th most populated country in the world, with a GDP per capita of almost $16,000, which makes it the 8th largest economy in the world. Consider Brazil as a huge middle-income market.
Second opportunity: fast growth
The second opportunity is the pace at which this market is growing. Brazil industrialized during the late 1950s and 1960s, in the so-called Brazilian economic miracle. After a period of instability, the country joined back the global economy as a leading exporter of natural resources and it reached an economic growth rate of 7.5% in 2010, at a time when the rest of the developed world was still mired into a recession.
Third opportunity: abundance of natural resources
The third opportunity is related to the abundance of natural resources that there are in this country. It is so wide that we could call it a portfolio of natural resources because it really stretches from agricultural products to oil and gas to mining.
Due to this incredible advantage, Brazil has been able to adapt to the changes in the global economy by being independent from the importation of natural resources. In the late 19th century Brazil was a major exporter of agricultural products, then in the fifties and sixties it became a closed industrialized economy, i.e. Brazil put high custom tariffs in order to incentivize its domestic industrial companies to grow, but it could do so because of the relative independence that it had from foreign markets, especially when it came to importing raw materials. When globalisation accelerated in the 1990s and 2000s, Brazil went back to the global economy and joined the BRICS group of nations as a leading exporter of what it was able to do the best: exportation of natural resources.
Fourth opportunity: booming infrastructure and real estate
The fourth opportunity in Brazil is the booming infrastructure and real estate investment environment. The bulk of the population in Brazil live close to the coastline; this occurs because the continental land is mountainous, and it is not easy to populate or to build a suitable infrastructural network. While millions of new homes have been built during the recent commodity boom, the infrastructural network in Brazil is still poor. For a full usage of the abundance of natural resources that Brazil has, as the country continues to grow and it becomes developed, infrastructure will be a must to develop in this country. We think that, notwithstanding the actual conditions of the infrastructural network in Brazil, there are good reasons for being bullish in new investments in this sector.
Fifth opportunity: world-class agricultural sector
The fifth opportunity is represented by the traditional sector in Brazil: the agricultural sector.
Brazil has one of the best agricultural industry in the world.
It stretches from more traditional productions like cotton and coffee, to newly developed cultures such as soybeans. The discovery of a new way to fertilize the continental lands, that were deemed impossible to cultivate, led to the growing of soybeans, which now represent one of the major exports in this country.
Brazil represents one of the largest sources of China food imports. This country is one of the best places where to find a grocery supplier.
Just look for a good food manufacturer directory or one of the many food trade shows and food exhibitions that take place every year in Brazil.
First risk: safety issues
Apart from the opportunities there are also risks of doing business in Brazil.
The first one that we have identified has to do with safety issues, which sometimes turn out to be very violent. This is in great part attributable to the high level of inequality that stems from the way in which Brazil industrialized during the late 1950s and 1960s.
The industrialization of Brazil occurred at the expense of the large agricultural sector, which was export-oriented; as a result, a lot of farmers had to leave the rural areas in search for a job in the cities. These became megalopolis, like Sao Paulo. The migrants did not have the skills needed for the newly industrialized sector that was developing in Brazil, and they ended up forming what is now called the favelas. They are still not integrated, and, especially during tough times, this is an issue to keep in mind.
Second risk: inefficient public sector
The second risk in Brazil is related to the inefficiency of its public sector. According to Transparency International, Brazil has a high level of corruption, ranking 96 over 180 nations, which is roughly in line with other South American nations, but in absolute terms it is a high level of corruption. When we also consider the slowness of its bureaucracy and the complicacy of its laws, for example the tax code which is famous for being Byzantine, we understand why this country is not really an attractive place for doing business.
Third risk: low income and high inequalities
The third risk has to do with the fact that Brazil is still an emerging market and its GDP per capita is still quite low, more or less in between Algeria and China at almost $16,000, yet, because of the high inequalities that occur in this country, the average monthly wage is around 600 US dollars. Considering also the high custom tariffs that Brazil has, which are among the highest in the world, the overall impact on the market is that it may not be as great as it looks like.
Fourth risk: dependency on commodities
The fourth risk that we identified in Brazil is the dependency on commodity prices. More than 40% of Brazil’s exports are derived from commodity exports whereas, for example, only 3% from the exportation of cars. This dependency on commodities means that Brazil is dependent on fluctuations of commodity prices on the international markets. Therefore, whenever there is a crash on the international markets, the foreign currency that Brazil receives from the export of natural resources drops dramatically.
This puts the national finances under pressure, especially the currency, which is the fifth risk that we identified in this country.
Fifth risk: volatile currency
Brazil has a history of volatility in its currency, which relates again with the way in which this country industrialised.
We just wrote that Brazil was partially independent from the outside world because of its abundance of natural resources: that is true. But you cannot be 100% independent, there is always something that a country has to import, such as machineries or other things that it needs for industrializing. Since Brazil became a closed economy and it did not export anymore because the agricultural sector was really beaten down during the industrialisation years, the balance of payments was put under pressure many times, and, as a consequence, sometimes Brazil had to devalue so much that its internal inflation reached 100% in just one year. This happened again, not so dramatically, when the Brazilian Real had to devalue during the recent crash in commodity prices, which put the country into a prolonged recession during 2015 and 2016.
After the devaluation, the government managed to stabilize the exchange rate, yet there will be pressures in our opinion coming from public finances in Brazil that are going be put under pressure by the number of Brazilians that will retire soon, also taking into consideration the pension benefits that the Brazilian system allows.
These were in our opinion the opportunities and risks of doing business in Brazil, if you had the opportunity to carry on business in this great South American country and you think that there are more opportunities or more risks than the ones we have identified, please write it below in the comments.
Overall, we think that Brazil is a great market for doing business and for investment opportunities in infrastructure and real estate.
However, it is still an emerging economy and high inequality, inefficient public sector and dependency on commodity prices could slow the development of the country in the future.
For more information about Brazil visit our Country Data page: Brazil
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