On the night of March 31, 2017, Brazilian President Michel Temer passed a controversial law. It granted Brazilian companies the right to outsource employees for any job and authorized temporary contracts of up to nine months. For Brazil, this was the start of a revolution in redefining a rigid and costly labor market that offers strong protections to formally employed workers. But the Brazilian revolution is not limited to labor laws: it includes far-reaching shifts such as upcoming pension reforms and a more outward-facing approach to trade. The goal is to create a leaner, more efficient model of government. The question now is: how can Brazil redesign its state without jeopardizing recent social gains? It all starts with steady growth. Over the past 20 years, more jobs and higher wages reduced poverty.
According to the Atlantic Council, Brazil will need to grow an estimated three percent per year just to keep its gains intact due to the country’s worst ever recession that led to the economy contracting eight percent since 2014. The Central Bank expects growth rates of 0.5 percent in 2017 and 2.5 percent in 2018. That said, the government will also have to make some tough cuts. Massive public debt leaves little room for spending the way the country did in the past.
The present reality was unthinkable just a few years earlier. Today, more than 13 million Brazilians are unemployed. Almost four million people who had recently joined the middle class are again living in poverty. Although about 113 million people make up Brazil’s middle class—up 40 percent since 2003—almost five million are deemed vulnerable. If a family crisis hits, they lack the resources to provide for themselves. Cutting costs and reforms go hand-in-hand with strong support for the middle and financially insecure classes. The phenomenon of the Brazilian middle class—and the example its social policies set for the region—is at a critical junction. Can the country sustain recent gains? What will it take? In this two-part look at Brazil’s economy, we will argue that the answer to preserving middle class social gains lies in addressing three fundamental areas: more modern labor force, flexible labor market standards, and quality.
And to cast more shadow into doubt, Brazil’s Bovespa stock market was briefly halted as investors reacted to corruption allegations against Brazilian president Michel Temer.
President Temer has denied a newspaper report that he gave consent to paying off a witness in a huge corruption scandal. Investors are concerned that Mr Temer’s reform plans could be derailed. The O Globo newspaper reported that Mr Temer was recorded discussing payments to former House Speaker Eduardo Cunha. Mr Cunha is serving a jail sentence in connection with the corruption scandal that engulfed the Brazilian oil giant Petrobras. Mr Cunha was jailed for 15 years in March for corruption, money laundering and tax evasion, after a major investigation – dubbed Operation Car Wash – into corruption at the state oil company. Almost a third of the cabinet is under investigation for alleged corruption.
Even with the economic struggles, new investors are flocking to Brazil to take advantage of the stock plummet, and for good reason: according to The Information Company, besides being the 7th ranked economy in the world per GDP, Brazil plays a key role in fair trade with its agreements with the World Trade Organization. Brazil continues to impress as an economic hub in Latin America, having the world’s most modern electronic voting system, 50% of the entire Latin American market, 22% of the world’s arable land surface, 3rd largest highway system in the world, along with 66 airports, 81 air traffic support units, and 32 air cargo terminals that store and palletize 1.3 million tons of cargo every year.
Greenfield Advisors hosted a meeting with Pedro Augusto Leite Costa, honorary consul of Brazil in Seattle and president of the Consular Association of Washington. According to Costa, Brazil is the top producer of regional jets and has 10.6 billion barrels of proven oil reserves. Brazil is the largest producer of coffee, orange juice, sugar, electric power, and ethanol. Furthermore, 80% of the companies on the Fortune 500 have subsidiaries in Brazil.
Costa is the founder of The Information Company, one of the leading media relations companies in Seattle, Washington, and São Paulo, Brazil. He is one of the foremost specialists in business communication and business development, especially in the Brazilian retail, education, and finance industries. In the United States, he has led important business missions between the two countries, especially in the automotive and aerospace sectors.
Background on Brazil
According to the Brazilian Investment Information Network, Brazil has consolidated its position as a strong global player by high degree of economic diversification. The country is a vigorous democracy, with free multi-party elections and strong institutions.
The economic development of past years resulted in an expanded mass consumer market and increased social equality, an environment of institutional stability and increased social cohesion. Nearly 40 million Brazilians experienced significant improvements in their life conditions. In addition, Brazil has a large and fast growing consumer market, comprising 205 million people (IBGE).
Its democratic government, stable financial system, and huge domestic market make Brazil a safe place for investment and gives it the strength to weather international crises. The increased purchasing power and the investment opportunities in sectors like oil and natural gas, the generation and transmission of electrical power, and real estate and agribusiness industries showcases Brazil as an attractive choice on investment. The country is currently the sixth biggest FDI recipient in the world (UNCTAD).
It has a privileged location in the east-central part of South America, where it borders almost all other South American countries, allowing companies to easily access Latin American and African markets.
Modern, efficient, and competitive, the Brazilian agribusiness sector is a prosperous, safe, and profitable activity. The strength of Brazilian agribusiness is a result of scientific and technological development in modernizing farming and expanding the industry of agricultural machinery and equipment. The science and technology agenda encourages research in areas that are strategic for economic development, such as energy, aviation, agribusiness, IT, and biotechnology.
Some of the Country’s main competitive advantages are:
- Leading regional economy
- Solid investment framework
- Huge domestic market
- Global player
- Innovative hotbed
- Major infrastructure projects
- Energy and Agricultural powerhouse
- Gateway to Latin America
- Biggest and most diversified science, technology and innovation system of Latin America
- One of the largest producers and exporters of agricultural products
- Competitive differential in the sector of aircraft building
- Competitive differential in the sector of oil exploration in depth water and large offshore oil fields.
The country is also actively working to face the challenges imposed by shocks that affected its economy in recent years, such as monitored prices, hydropower resource constraints, and exchange rates (which have been hurt by hyperinflation), among others. The Brazilian economy is going through an extensive adjustment process, aiming to create the conditions for a new cycle of sustainable growth, while seeking to ensure the social achievements of recent years, with sharp reductions in poverty and inequality, factors of great importance to promoting competitiveness gains.
Fiscal adjustment and fiscal reform will be the cornerstones of the current macroeconomic realignment, ensuring predictability and sustainability of the public sector accounts and debt dynamics, improving spending effectiveness, and improving confidence conditions, both in the investor and consumer side.
Additionally, changes in pension laws are to be addressed in the short- to medium-run.
Brazil is also working to improve its competitiveness and productivity, adopting measures to improve business conditions.
The external sector of the Brazilian economy has enjoyed a comfortable position for several years, and the current adjustments improved its sustainability. The accumulation of a robust cushion of international reserves allows companies and investors to cope with the external volatility with confidence. On top of that, the current adjustment of the real currency value triggered the trade balance recovery and made Brazilian assets financially attractive when measured in US dollars. In 2015 there was a reduction of more than 40% in the current account deficit, while FDI remained robust, allowing it to finance the whole current account deficit.
We’ll have more about Brazil’s economy in our next blog post.