market analysis brazil

OriginBusiness Engineering

Market Analysis Brazil

2010 | © Origin Business Engineering B.V. 2

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Index1. Introduction

2. Brazil Culture and Doing Business

3. Brazil and its Macroeconomic Situation


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Chapter 1 - IntroductionI


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Outline» Brazil and Its Culture

Culture, Politics, Economy, Social Issues, Technology;

» Doing Business in BrazilCompetitiveness

Staring a business

» Macroeconomic situation


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Chapter 2 – Brazil culture and doing businessII


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Brazil- Culture and Language» Primary Attribute: Brazil is not like the rest of Spanish‐Speaking Latin

America, and they are proud of it.

» Brazilian culture is diverse in nature. An ethnic and cultural mixing of Indians, Portuguese and Africans.

Italian, German, Spanish and Japanese immigrants settled Brazil and created a multicultural and multiethnic society.

Brazil was a colony of Portugal for over 3 centuries. The Portuguese arrived during this period (nearly 1 million) and brought their culture.

Brazil is a member of The Community of Portuguese Language Countries (CPLP).


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Brazil culture, language and religion» The native inhabitants had strong contact with colonists. » Many exterminated, while others mixed with the Portuguese. » Brazil holds Amerindian influences in its culture, food and language (Brazilian Portuguese has

hundreds of words of Indian origin, mainly from the Tupi‐Guarani).

» Brazil has the largest Catholic population in the world. Many other beliefs have been incorporated into the Brazilian Catholicism:

• Spiritism,

• Buddhism,

• Hinduism,

• Ayahuasca,

• Judaism as well as religious syncretism, such as

• Candomblé,

• Umbanda,

• Macumba, which mix Catholicism with African tribal religions.


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Politics – President Lula» Lula’s second presidency was a step towards democratic consolidation;

» Orthodox expenditure policies permitted an increased emphasis on anti‐poverty initiatives;

» It boosted Lula’s popularity, despite scandals that emerged in 2005;

» For his second term, Lula announced an economic program that would accelerate GDP growth through increased Government investment.

» Earns lot of respect from business arena in Brazil;

» Original Petrobras director;

» Has supported with success the monetary policy set in by former president Henrique Cardoso who was able to tame the hyperinflation that has a big influence on the country in the 1990’s;

» Currently Mr. Henrique Mereilles is heading the Central Bank of Brazil and has so far supported and sustained the anti inflationary policy of this predecessor;


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Politics- Lula» Lula’s second presidency was a step towards democratic consolidation.

» Orthodox expenditure policies permitted an increased emphasis on anti‐poverty

initiatives.

» It boosted Lula’s popularity, despite scandals that emerged in 2005.

» For his second term, Lula announced an economic program that would accelerate

GDP growth through increased Government investment. » “Growth Acceleration Plan” (January 2006) included investment projects and two

long term fiscal norms that will influence more than a third of federal expenditure. » The norms are:

Increase minimum wage (2008‐2011). Proposal already became Law.Limit annual increases in spending on federal government personnel. Not surprisingly this proposal is struggling to pass congress.

• Federal Government Personnel controls the institutions of Brazilian Government. Their multiple benefits are stipulated in the Brazilian Constitution.


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Politics- Party System» The party system is weak in this electoral system, which forms a single constituency within each

state, then votes on hundreds of candidates. Congressional representatives show greater loyalty to interest groups.Discipline is weak for members of Political Parties. The highly fragmented legislature makes it difficult for any party to secure a majority.Fragile coalitions are the norm. Individual politicians exert great influence, and switching party allegiances is common.

» The Partido dos Trabalhadores embraces views from traditional socialist to pro‐market Social‐democrat, like Lula.

» His views are not universally accepted within the PT.» The Partido do Movimento Democrático Brasileiro has been an important

factor in all legislatures since the return to democracy. » It has lent its support to both Cardoso and Lula, receiving concessions in

return. The party’s size and internal divisions produce unstable coalitions. » Its bargaining power increased after a majority of the party granted official

support to Lula in 2006.


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Economy: The Real» In 1994 Brazil adopted a fixed exchange rate to manage inflation. » Effective in ending hyperinflation, also affected competitiveness. » Now Targeted Inflation Rate is used to manage inflation.» The Real is “free” to move with the market. » Since Lula’s presidency, the Real’s nominal exchange rate has been

volatile. Currently the exchange rate is at R1.75:US$1, compared to R4:US$1 during the 2002 presidential elections.

The appreciation of the Real has made a lot of other Brazilian products more expensive and less competitive in international markets.


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Economy: Bovespa» The Bolsa de Valores de São Paulo (Bovespa) stock market outstanding

growth in recent years. » Largest stock exchange in Latin America reaching a record level of US$723

billion in 2006.» The Bovespa index broke records in 2007, as international credit rating

agencies put Brazil at one notch below investment grade.

As a result of abundant liquidity in global stock markets and business

confidence, number of IPOs rose from zero in 2002 and 2003, 26 in 2006 and 30

in the first half of 2007.

Foreign investors account for 35.5% of all investment in stock market in 2006, up

from 32.8% in 2005.


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Economy: The Banking Sector» Brazil’s banking sector is solid, diversified, and well regulated. » At the end of 2006, the banking sector had total assets of

US$875 billion and employed around 425,000 people.» Average return on equity for 2006 stood at 23% for the

second consecutive year. » During 2006, total credits increased 21%.» Lula’s government is trying the increase credit amounts for

micro‐credits by means of his Growth Acceleration National Program.


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Economy: Production and Employment» In 2007 and through to October of 2008, the Gross Domestic Product has

grown 4,7% and 5,2%. Somewhat inferior to the growth experienced in the region.

» Consumption is primary type of expenditure, 80% of the GDP.

» Brazil’s Balance of Trade is positive, representing 26% of the GDP for 2006. This percentage has dropped since 2004 (29%GDP). Explained by the increase in Consumption, creating demand on imports.

» The open unemployment rate in 2006 was 10%.

» Commerce and the Industrial and Service Sectors accounted for 520,000 new jobs.


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Labor Laws- CLT

» “The Brazilian worker is a worker surrounded by laws on all sides but dead from hunger. So many laws! But we lack one to keep him from dying of hunger.—Minas Gerais trade union leader from the 1950s (French, 2004)”.

The rights and duties of employers and employees in Brazil are set out in the “Consolidation of Brazilian Labor Laws – CLT”, issued in 1943. This system of labor and social security laws was "quite elaborate and advanced for an underdeveloped country which was just beginning to industrialize"—indeed, Brazil's system was considered "one of the most advanced in the whole world."


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Labor Laws: Benefits» Compulsory benefits add 60% to 80% in salary:

Employers contribute 8.5% of wages to deferred‐salary account at the Length of Service Guarantee Fund (FGTS). Employers contribute 20% of employee’s wages to the National Institute for Social Security (INSS), the country’s public pension system, as well as a maximum of 8.8% on other social security taxes. The INSS coverage includes medical and hospital assistance; sick pay after 15 days of absence, at 70% of salary; maternity benefits of up to one month’s minimum wage; and retirement pay.

» Paid vacations of 30 calendar days are granted after a full year of service. » Employees are granted full sick pay for the first 15 days of a documented illness.

Female employees receive mandatory maternity leave of four months and male employees receive paternity leave of five days. A mandatory bonus of one month’s pay (called the 13th salary) must be 50%‐paid until November of each year. The remaining balance is traditionally paid at year‐end.

» A transport subsidy for workers is mandatory for all employers. Companies must provide their employees with transport to and from work or subsidize their mass‐transit expenses by paying all such costs exceeding 6% of an employee’s gross salary.

» Companies must pay into a national subsidized savings program for workers (PIS), administered by the national savings‐bank system.

Such payments are deductible for purposes of corporate income tax and the social contribution on net profit.


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Social Issues: Distribution of Wealth and Industry

» Brazil’s population is unevenly distributed across the regions.

» The wealthiest region, encompassing the states of São Paulo, Rio de

Janeiro, Minas Gerais and Espírito Santo, accounts for over one‐half of

Brazil’s GDP.

» Manufacturing is concentrated in the state of São Paulo.

Fourteen cities have a population of over 1 million citizens.

Although income inequality is a problem, increases in the minimum wage

have had a significant effect in distribution of wealth.


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Crime» The level of crime in Brazil’s major cities is high.

» Deficiencies in the security forces underpin concerns about the ability to contain the problem.

Sporadic clashes between security forces and armed gangs spread panic among the population.

A 3,000‐strong federal security force has been deployed in Rio de Janeiro since January 2007.

Organized criminal groups are involved in robbing cargo from shipments, concentrating in São Paulo and Rio de Janeiro states.


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Social Issues: The Environment» Brazil is a world leader in renewable energy, namely hydroelectricity and

ethanol. Nonetheless, rapid urbanization has contributed to high levels of pollution in major cities.

» The Amazon forest and Brazil’s temperate forests are under threat from the expansion of forestry, farming and mining.

» Over the last 30 years of the 20th century one seventh of the Amazon’s forested area was lost.

» The rate of deforestation has declined in Brazil in recent years.


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Social Issues: Labor Unions» The power of Labor Unions has declined with economic liberalization and

deregulation. » They maintain influence in the government and resist labor reform.

Businesses argue that Brazil’s employment protection hampers employment creation.

» The two main organizations : Central Única dos Trabalhadores (CUT) and Força Sindical.

» The Movimento dos Sem Terra for short (MST, the Landless Workers’ Movement) has emerged as a new political force.

It has close ties with the PT, but has criticized Lula’s government for its slow push in land reform.

» Businesses have a relatively powerful voice in politics. » Business organizations have worked alongside the PT government on

reducing tax and administrative procedures. » They have objected to the government’s tight monetary policy and called for

a reduction in the corporate tax.


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Social Issues: Education» Until the 20th century, Brazil was an underdeveloped nation with economic activity based on the

primary sector, possessing an unskilled workforce.

» With post‐war expansion, government focused on strengthening Brazil's University, while neglecting

primary and secondary education.

» Today, Brazil struggles to improve public education.

» Despite its shortcomings, Brazil has progressed substantially in the last two decades.

» School enrollment for children (7‐14) rose from 80.9% in 1980 to 96.4% in 2000. » In the same time period, 15‐17 age enrollment rose from 49.7% to 83%. Literacy rates went up from 75%

to 86.4%.» As of 2002:

Literacy rates for people aged 15 or older is 88.2%6.2 years of formal education, on average. (Compare with 12 years in the U.S., 11 in South Korea and 8 in Argentina) 8.4 years for white people, 6.1 years for black people

» As of 2006:The nation invests 4.3% of GDP on Education ‐ the federal government aims to increase gradually this number to 7%.


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Technology: Transportation» Brazil’s transportation infrastructure is below the curve:

Only 12.5% of existing roads are paved.

Even though roads are the most common means of transportation.

Rail or waterway transportation is underdeveloped, even though it is significantly cheaper.

Airline deregulations have brought price reductions in Air Cargo and now more than 150 cities have direct access; it is still comparatively expensive.


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Technology: Communication and Energy» Privatizations in the 1990s attracted major private investment into

telecommunications sector;

» Mobile‐phone penetration overtook fixed lines in 2003;

» Since 1975 Brazil has used multiple sources of fuel for its transportation: petroleum, ethanol, and liquid gas;

» Diversification was a result of high petroleum prices, and it is unique in the region;

» The share of gas in the energy grid has increased to over 9%.

Lula’s government has tried to reduce dependency on Bolivia’s gas and has announced plans to set up at least two plants in Brazil.


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Doing Business in Brazil» Opening a new corporation in Brazil takes 18 different procedures and last 152 days

on average;

» In the Doing Business Report 2008, which appraises 182 different countries, Brazil ranked 172 in ease of opening a new company;

India was 181

» Environmental licensing: No predictability to when the environmental license will be issued, or what the cost of environmental compensation will be;

» Brazil is one of the few countries in the world that taxes investment.

Historic figures ‐ starting a business 2006 2007 2008

Macroeconomic stability [rank worldwide] 122 122

Procedures [number] 17 17 18

Duration [days] 152 152 152

Cost [% GNI per capita] 10.1 9.9 10.4

Paid in Min. Capital [% GNI per capita] 0 0 0


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Brazil’s competitiveness Assessed by the GCI 2008–2009

Pillar Rank

Macroeconomic stability 122

Goods market efficiency 101

Labor market efficiency 91

Institutions 91

Health and primary education 79

Infrastructure 78

Financial market sophistication 64

Higher education and training 58

Technological readiness 56

Innovation 43

Business sophistication 35

Market size 10


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Starting a business in Brazil - Summary

No Procedure Time to complete Cost to complete

1 Check company name with State Commercial Registry Office

1 day (1 hour) R$ 9

2 Pay registration fees 1 day See following procedures

3 Register with Commercial Board of the state where the main office is located. Obtain ID number ‐ NIRE

1 day R$59.06 registration + $100 expediting fee)

4 Register for federal and state tax (Secretaria daReceita Federal do Ministerio da Fazenda –SRF/MF), obtain the CNP J number, which also registers employees with the National Institute of Social Security (Instituto Nacional da SeguridadeSocial – INSS)

About 1 month (including inspection visit)

No charge

This table summarizes the procedures and costs associated with setting up a business in Brazil


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Starting a Business in Brazil - SummaryNo Procedure Time to complete Cost to complete

5 Confirm INSS enrollment 1 day simultaneous with previous enrollment

No charge

6 Receive state tax inspection 1 day (sim with previous procedure)

No charge

7 Get the authorization to print receipts/invoices from Secretaria da Fazenda Estadual

5 days No charge

8 Register with the Municipal Taxpayers’ Registry (Secretaria de Financas e DesenvolvimentoEconomico) of the City of Sao Paulo

5 days No charge

9 Pay TFE to the Municipal Taxpayers’ Registry 1 day (sim with procedure 5

R$ 300 (may vary for type of company)

10 Get authorisation to print receipts/invoices from the Secretaria de Financas e DesenvolvimentoEconomico

1 day No charge

11 Order receipts/invoices (notas fiscais) with CNPJ numbers from authorized printing companies

3 days R$ 600


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Starting a Business in Brazil - SummaryNo Procedure Time to complete Cost to complete

12 Obtain Fire Brigade Licence from state Procedure 11‐13 take 120 days

No charge

13 Inspection from fire brigade Included in previous No charge

14 Apply with the Municipality for an operations permit (alvara de Funcionamento)

Included in previous No charge

15 Register the employees in the social integrationprogram (Programa de Integracao Social, PIS)

1 day, sim with proc 13 No charge

16 Open a FGTS (special fund for unemployment) account in bank

1 day sim with proc 13 No charge

17 Notify the Ministry of Labor (“Cadastro Geral de empregados e desempregados” – CEGED)

1 day sim with proc 13 No charge

18 Registration with the Patronal Union and with Employees Union

5 days, sim with proc 13

Annual fee to be paid depending on Union


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Doing Business in Brazil: Establishing a Legal Entity

» Foreign investors may organize as a Corporation, a limited liability company or other kinds of companies provided by the Civil Code.

A Corporation must deposit 10% of its capital in a bank. It must allocate 5% of its annual profits to a legal reserve until the reserve reaches 20% of the capital stock. The directors must be Brazilian residents and the shareholders, if they are not residents, must have legal representatives in Brazil.


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Doing Business in Brazil: Corporate Law» Other regulations:

Bank Accounts: Brazilian resident companies and individuals are not allowed

to maintain Brazilian bank accounts denominated in a foreign currency.

They may maintain these accounts in banks abroad if the funds are declared

on the individual’s income tax return.


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Foreign Investments» Investments: There are no restriction regarding investments. The

repatriation of share capital is not restricted if the investor registers the investment with the Brazilian Central Bank (BACEN).

» A foreign investor’s capital gain on a sale to a local resident is the excess of the sale price over the foreign capital registered at BACEN.

» Repatriated funds in excess of the amount of foreign capital registered with the BACEN are subject to the 15% withholding tax.

» The Brazilian Central Bank registers all investments.

The registration process of foreign investments, whether in the form of capital or loan, is relatively simple and straightforward.

The main advantage of securing registration of the foreign investment is to acquire the right to remit dividends abroad, as well as to repatriate the FRC.


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Funding and Profits» FIRCE (Foreign Capital Control and Registration) – a department of the

BACEN ‐ is responsible for the registration of foreign capital. The following transactions are subject to registration:

Direct investments;

Loans in cash or in assets;

Repatriation of capital and remittances of profits or capital gains abroad;

Remittances abroad of loan interest and repayments of loan principal;

Royalties and technical assistance contracts;

Any operation involving transfers of earnings abroad;

Reinvestment of profits;


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Competitiveness: Taxes» Municipal, State and Federal Government collect taxes, and have no

hierarchy. Municipalities, States and the Federal Government will battle for the right to tax transactions.

» Brazil’s tax structure affects its competitiveness. » The average ratio of investment to GDP in Brazil has been even lower than

previously estimated (16.4% in 2000‐06 against 17‐19%). » Other factors contributing to the high business costs, known as “Custo

Brasil”, are a burdensome tax regime, restrictive labor laws, a costly and slow judicial system.


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Public organizations dealing with private investments in BrazilThe Brazilian Agency for the Promotion of Exports and Investment(APEX) was created in1997 and operated as a special department ofthe Brazilian Support Service to Micro and Small Enterprises (SEBRAE )until 2003, when it was renamed APEXBrasil and began to act as anautonomous agency working in association with the Ministry ofDevelopment, Industry and Foreign Trade. Under its new status,APEX‐Brasil took on the role of coordinating and implementing tradepromotion policies endorsed by the federal government. Its mainfunction is promoting the insertion of national companies into theworld market, diversifying and raising exports, consolidating existingmarkets, and opening up new ones.

The Brazilian Agency for Industrial Development (ABDI), created in2004, operated as part of the Ministry of Development with themission of promoting the implementation of the Ministry’s industrialpolicy, in accordance with external trade and science and technologypolicies.

The Brazilian Chamber of External Commerce (CAMEX) belongs to thestructure of the Government Council. It is in charge of theformulation, adoption, implementation, and coordination of policiesand activities related to external trade of goods and services,including tourism. Among its functions are the coordination of theorganizations related to external trade; the regulation of certificationof companies for the practice of external trade; the classification ofproducts and rules of origin of goods; the formulation of directives ontariffs; and directives for bilateral and multilateral negotiations, forbad practices in external trade, and for export financing.

The Secretariat of the Federal Revenues (SRF), subordinate to theMinistry of Finance, is responsible for administering federal taxes. Atthe same time, it assists the executive branch of the government informulating Brazilian tax policy and is responsible for preventing andcombating tax evasion, contraband, smuggling, counterfeiting, andtrade fraud, along with other international trade‐related illicit acts.The SRF is also in charge of managing and executing customsadministration, inspection, and control.The Brazilian Development Bank (BNDES) was established with the

goal of supporting projects that contribute to the development of thecountry. Since its creation in 1952, the Bank has financed importantpublic and private works in industry, agriculture, public transport, andinfrastructure. It also contributesto the strengthening of the capital structure of private companies andthe development of financial markets.

The Secretariat of Agriculture Defense (SDAA), part of the Ministry ofAgriculture, coordinates the country’s system of agricultural defense,including its international agricultural surveillance program.


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Public organizations dealing with private investments in Brazil (2)The Administrative Council of Economic Defense (CADE) is theantitrust agency within the Ministry of Justice. It has the role oforienting, auditing, and investigating, as well as preventing abusivebehavior by a firm dominating a market and anti‐competitivepractices that tend to lead to such a dominant position.

The Brazilian Institute of Environment and Renewable Resources(IBAMA), a federal agency that is within the Ministry of Environment,is responsible for implementing the national environment policy,including the control and investigation of the use of natural resourcesand the licensing for investment that might have an environmentimpact.

There are other regulatory agencies for specific sectors— such asANATEL for telecommunications, ANAfor water and sanitation, ANEEL for utilities, ANP for oil and gas, ANTTfor road and train transports, and ANVISA for sanitary surveillance.

The Ministry of Development, Industry and External Trade (MDIC) isresponsible for different aspects of industry, trade, and servicespromotion such as intellectual property and technology transfer,measures, norms and industrial quality, as well as external tradepolicies. MDIC also takes care of regulating external trade andimplementing programs and safeguard mechanisms in the area,participating in international negotiations, and supporting small andmedium enterprises and activities of the registry of commerce. This isdone through the Secretariats of External Trade, IndustrialDevelopment, Commerce and Services and Industrial Technology.

INPI, discussed above, is responsible for the registry of brands, patents,and contracts of technology transfers and company franchising, as wellas the registry of software, industrial design, and geographicindications.

The National Institute of Metrology, Normalization and IndustrialQuality (INMETRO) acts as the Executive Secretariat of the NationalCouncil of Metrology, Normalization and Industrial Quality, and isresponsible for enforcing the technical and legal rules related tomeasurement of industrial processes. It is also in charge ofharmonizing measurements with international patterns and ofaccreditation activities for laboratories of calibration andorganizations of certification, inspection, and training necessary forthe development of the infrastructure of technological services in thecountry.


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Chapter 3 – Macroeconomic SituationIII


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Brazil key indicatorsPopulation (millions), 2008........................................................................... 194.2

GDP (US$ billions), 2007............................................................................... 1,313.6

GDP (PPP) per capita (int'l $), 2007.............................................................. 9,703.2

GDP (PPP) as share (%) of world total, 2007................................................ 2.8

Current account balance (% GDP), 2007 ..................................................... 0.1

Foreign reserves (months of imports), 2008 ............................................... 10.6

Unemployment (% labor force), 2008 ......................................................... 7.9

Human Development Index, 2006................................................................ 0.81


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Global Competitiveness Index


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The most problematic factors for doing business


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Brazil's current performance is poor against competitiveness indexes

Brazil's rank (out of total)

Institution Index 2005 2006 2007 2008Relative

performance

World Economic Forum Global Competitiveness Index 65 (117) 66 (122) 72 (131) 64 (134) ‐IMD Quality of Life Index 39 (111) n/a n/a n/a =

World BankOverall Competitiveness Ranking

42 (51) 44 (53) 49 (55) 43 (55) ‐Economist Intelligence Unit

Ease of Doing Business Index n/a n/a 122 (178) 125 (181) ‐

Heritage Index of Economic Freedom 63 (155) 69 (157) 97 (157) 97 (157) ‐Transparency International

Corruption Perception Index 62 (158) 70 (163) 72 (179) 80 (180) =United Nations Development Programme

Human Development Index 70 (177) n/a n/a n/a =

MastercardWorldwide Centers of Commerce Index

n/a n/a 48 (63) 56 (75) ‐

Source: World Economic Forum; World Bank; Economist Intelligence Unit; IMD; Heritage Foundation, Transparency International; United Nations Development Programme; Mastercard; Organisation for Economic Co‐operation and Development; McKinsey analysis.

There is a + sign if the most recent ranking is in the top 20 percent, = if it is between 20 percent and 45 percent, and – if it is below 45 percent (Brazil ranks in the 45th percentile in GDP per capita among countries in the GCI 2008–2009).

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