The University of Tampa

Country Risk Analysis - Brazil

Othman Alolah
Speros Margetis, Ph.D.
April 21 - 2016

Overview:
After more than three centuries under Portuguese rule, Brazil gained its independence in 1822,
maintaining a monarchical system of government until the abolition of slavery in 1888 and the
subsequent proclamation of a republic by the military in 1889. In 1985, the military regime
peacefully ceded power to civilian rulers. Federative Republic of Brazil, the conventional long
form, is a federal republic type of government with Brasilia as the capital. Brazil is by far the
largest and most populous country in South America, as well as the largest economy there and
considered as a regional leader. Brazil is also a member of the group of twenty (G-20). Pressing
problems include high-income inequality, crime, inflation, rising unemployment, and corruption.
Location and major cities:
With a Total area of 8,515,770 sq., which represents 47.3% of South Americas total size, Brazil
is the largest country in South America and the 5th largest in the World. Brazil is located in the
Eastern part of South America and shares borders with all South Americas countries expect
Ecuador and Chile. Brazil is bordered by Uruguay to the south, Argentina, Paraguay, and
Bolivia to the southwest, Peru to the west, Colombia to the northwest, and Venezuela,
Guyana, Suriname, and French Guiana to the north. Also, Brazil is bordering the Atlantic Ocean
form the East side with a coastlines length of 7,491 km. The federal capital Brasilia rises at
some 3,500 feet (1,1000 meters) in the central plateau of Brazil with a population of 2,800,000
people (Est. 2015). Brasilia is a governmental center and a major hub for businesses such as
communication, banking, food production, and legal services with many companies
headquarters located in the city. Despite all that, Brasilia is neither the largest nor the most
famous city in Brazil. So Paulo, the city with an area of 1,523,2 Km and a location of about 43
miles away from the Atlantic Ocean coast in the southeastern region of Brazil, is considered both
the largest and the economically most important city in Brazil. So Paulo is the name of the state
as well as its capital city. The population of the So Paulo the state is around 44,396,484 million
(Est. 2015), with a population of So Paulo the city amounting to 11,860,240 million (Est. 2015).
These figures place So Paulo as the largest city in both Brazil and South America, and among
the largest in the World. The average elevation in So Paulo is around 2.621 feet above see level,
with the highest point being the Jaragua Peak with 3,724 feet high. The second largest city in
Brazil is Rio de Janeiro, or as people nickname it the marvelous city. Rio is the capital city of

Rio de Janeiro state that is located in the southeastern part of the country. Rio is located in
Atlantic Ocean with an area of 1,200,2 Km, and it used to be the national capital until 1960.
Now, Rio is considered the cultural capital of Brazil, with a total state population of 16.5 million
(Est. 2015), and almost 6.5 million (Est. 2015) living in Rio the city. Rio is well known of being
one of the most beautiful and interesting urban places in the world. For instance, the Rio
Carnival attracts hundred of thousands of visitors every year to the widely cited the worlds
largest party. According to Times magazine last year, approximately a million tourists witness
the Carnival and spend nearly US$782 million, which profit hotel, restaurants, and other
businesses. In 2014, Rio hosted the World Cup, and in 2016 summer will become the 1st South
American city to host the Olympics.
Population:
Based on the the World Factbook, the population of Brazil is around 204,259,812 people (Jul
2015 est.). The official and most widely spoken language is Portuguese. Other common
languages include Spanish that is common in places such as border areas and schools, German,
Italian, Japanese, English, and many Amerindian languages. Brazils Ethnic groups are white
47.7%, mulatto (mixed white and black) 43.1%, black 7.6%, Asian 1.1%, indigenous 0.4% (2010
est.).

In Brazil, 64.6% are considered Roman Catholic, 22.2% Protestant (includes Adventist

6.5%, Assembly of God 2.0%, Christian Congregation of Brazil 1.2%, Universal Kingdom of
God 1.0%, other Protestant 11.5%), Spiritist 2.2%, other 1.4%, none 8%, (2010 est.). Moving to
the age Distribution of the Brazilian population, 23.2% are between (0-14 years), 16.4% are
between (15-24 years), nearly 44% fall between (25-54 years), and 16.4% documented being
between (55-65 years and over). As these figures show, the labor market in Brazil should expect
a wave of job seekers in future years, as the younger population (0-24) amounted nearly 39.6%
of total population. According to the World Factbook, the youth dependency ratio, which is
defined as the ratio of the youth population (ages 0-14) per 100 people of working age (ages 1564), is 33.3%, which means a significant amount of investment in education and training
program is needed in the future. The countrys population growth rate is .77%, placing in as in
142 among 233 other countries.

Source: The World Factbook.

Land and Natural Resources:

Brazils geography varies greatly. One demonstration of that is the common believe that one fifth
of the world species are found there. The land is generally flat to rolling lowlands in the north
with some mountains, hills, and plains. The breakdown of Brazils land is as follows; 32.9% is
allocated to agricultural activates, while 61.9% is occupied by forests. Brazil contains many
rivers and streams, most notably is the Amazon River that is the heart of the most extensive river
system in the world. The Amazon River rises from a point in the Peruvian Andes within 100
miles (160 km) of the Pacific Ocean, whence its course meanders some 4,000 miles (6,400 km)
to the Atlantic. There it contributes as much as 1/5 of all of the Earths surface runoff from the
continents to the sea. Other noteworthy rivers includes Araguaia River that rises on the Brazilian
highlands near Alto Araguaia town in eastern Mato Grosso state and flows north-northeast for
1,632 miles (2,627 km) to its junction with the Tocantins River, which is another major river.
Another river is Paraguay River, with 1,584 miles in length, is the fifth largest river in South
America that rises in the west region of Brazil at 980 feet above sea level. Also, Paran
River, which rises on the plateau of southeast-central Brazil and flowing generally south for a
course of 3,032 miles, is considered the second longest after the Amazon. Lastly, So Francisco
River, which is a major river of eastern South America with a length of 1,811 miles, placing it as
the largest river wholly within Brazil and the 4th largest river system in the continent. Other
natural resources in Brazil include bauxite, gold, iron ore, manganese, nickel, phosphates,
platinum, tin, rare earth elements, uranium, petroleum, hydropower, timber. Also, with the
agricultural environment Brazil has, goods such as Coffee, sugar, and soya beans are among the
countrys main exports. A recent discovery of oil fields that is estimated to hold 9 billion barrels
is another future resource that could benefit the country.

Climate:
Except for a drier part in the Northeast, Brazil has a humid tropical and subtropical
climate. Talking about precipitation, mostly Brazil receives 4070 inches (1,0001,800 mm)
annually, but parts of the Amazon basin and the sea-facing rim of the Serra do mar receive much
heavier rain. Regions in the center of the Brazilian Highlands receive their greatest precipitation
in the summer months (November to April). At that time, the Northeast part is exposed to storms
and floods, depending on weather conditions, but that part may also experience a lengthy
drought. These unstable weather conditions in the Serto, the backlands of the Northeast, makes
living there very difficult.
Brazils temperatures are mostly the same during the summer in all parts. Most of the lowlands
average approximately 79 F (26 C) in January, with the highlands a few degrees cooler,
depending on elevation. The coast of Rio Grande do Sul is also somewhat cooler, averaging
around 73 F (23 C). The hottest region of the country is the Northeast backlands drought
quadrilateral, with temperatures averaging 84 F (29 C) and daytime temperatures exceeding
100 F (38 C). However, because of the low humidity in the Northeast, the heat is less cruel
than in Rio de Janeiro. In the winter season (May to October), Brazilian Highlands are dry with
snow falling in only few parts of the southernmost states. Frosts accompany winter air patterns
from the south, with almost freezing temperatures reaching as far north as So Paulo. Along the
coast the weather is rainy and cool. Winter temperatures in the Amazon lowlands remain
virtually unchanged from those of the summer months, but temperatures in the drought
quadrilateral drop to about 79 F (26 C). Temperatures in the central and northern regions of
Brazilian Highlands average about 68 F (20 C), and are cooler near the south. Curitiba, with an
altitude of 3,000 feet (900 meters), averages 57 F (14 C) in June and July. In those months Rio
de Janeiro is much hotter with an average temperature of 73 F (23 C).
Infrastructure:
Roads transport system is the most used system in Brazil, with a total roads distance of
1,580,964 km, of which only 212,798 km is paved (2010. fig.). Trans-Amazonian Highway and
the Trans-Brasiliana project are two of the more prominent roads in Brazil. In regard of railroads,
it does not have a heavy weight in Brazil as in another countries. Brazil, with waterways of
50,000 Km, is ranked 5th in the World (the World Factbook). Generally, The infrastructure in

Brazil has being declining even though the government is trying to improve it. According to a
Bloomberg article in 2015, after the failure of past programs to build railroads and improve
ports, the government is seeking $64 billion to rebuild bad-shaped infrastructure. The 2014
World Cup has helped making some improvements in the hosting cities; yet, many projects got
delayed or canceled. The 2016 Olympics is expected pressure the government to finish some of
these projects.
Culture and People:
Brazil is a very ethnically diversified country, thus, the countrys culture is one of the most
varied in the globe. Historical immigration from Europe and slavery that brought many Africans
helped shaping this diversification of Brazilian culture. Brazilian society is a family oriented one,
with families being large and extended. The general factors that distinct social classes in Brazil is
ones wealth and skin color. Gender inequality is a major people in the nation, as many women
work in low-paid jobs. Education participation among Brazilian people has been increasing
which is shown by an adult literacy rate of 91% (World Bank, 2014). This rate is expected to
increase in the near future, as the government keeps spending heavily on education.
To further draw a better picture of the Brazilian culture, this report uses some of the Geert
Hofstedes cultural dimensions such as power distance, individualism, and uncertainty
avoidance.
Power Distance:
Geert Hofstede defines this factor as the extent to which the less powerful members of
institutions and organizations within a country expect and accept that power is distributed
unequally. Brazil scored 69 in this classification, which mirrors a nation that believes business
hierarchy is respected and peoples inequalities are acceptable. In Brazil, the differences in
power holders distribution explain why power holders are more advantageous than the less
powerful. In Brazilian society, it is important to show respect to the elderly (and children take
care for their elderly parents). In businesses, Brazilians look at the boss as the one who takes
complete responsibility.

Individualism:
Defined as the degree of interdependence a society maintains among its members, this
dimension

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Brazil scored of 38, which support the above-mentioned characteristic of the Brazilian people
being family oriented. In businesses, this orientation means that a senior and connected family
member is expected to assist other members to work in his company. Also, it is crucial in
business settings to establish reliable and long-term relationships. Brazilian meetings commonly
start with general conversations for parties to know one another, with the a context-rich preferred
communication style.
Uncertainty Avoidance:
Uncertainty Avoidance reflects The extent to which the members of a culture feel threatened by
ambiguous or unknown situations and have created beliefs and institutions that try to avoid
these. Brazil scored 76, a high score that is shared among the majority of South American
countries. In these nations, rules and elaborate legal systems are essentials to keep societies
going. Bureaucracy in Brazil is critical for making better living settings. Brazilians like to chat
with others and be relaxed. Also, they are very passionate and demonstrative people, and that is
seen from the use of their body language.

Political Risk Analysis:

Brazil, the conventional short form, is a federal democratic republic type of government that
consists of 26 states and Brasilia as the federal district. The current president Dilma Roussef was
the first female president in Brazil when she won 2011 elections. She also won a second term in
October 2014 by a historically narrow margin. Dilma works both as chief of state and as head of
government. Following the steps of the former president Lula da Silva, Dilma continues
supporting various federal programs in sectors such as education, housing, employment, and
eliminating extreme poverty. Nowadays, scandals such as that of Petrobras, a semi-public
Brazilian multinational energy corporation headquartered in Rio de Janeiro, badly hurt the image
of Roussef and former president Lula.

Corruption and Crime:

Brazils level of corruption is a main factor that can push away any forgiven investment from
coming to the country. According to The World Competiveness Index 2015-2016, Brazil was
placed among the worst three countries in the world on three of the indicators that comprise the
institutions pillar: public trust in politicians, diversion of public funds, and burden of government
regulation that measures the difficulty for firms to comply with public administrations
requirements. Also, the Transparency International gave Brazil a score of 38 points out of 100 on
the 2015 Corruption Perceptions Index, where a score of 100 represents a very clean country and
a score of 0 a very corrupt one. The graph below shows the increased corruption in recent year.
Brazil also suffers from increasing levels of violent crime and corrupt police officers. That is
seen clearly in Rio, where almost a thousand favelas, neighborhoods or slums, are home to the
most mistreated communities of Brazil and to the countries most dangerous drug dealers.

International Relations:
Brazil is a usual participant in the global scene, with many memberships of the world and region
major organizations. Brazil is a leader in f fighting for developing countries rights. The fast
recovery from the 2008 crises Brazil showed, along the hosting of the world Cup in 2014, has
placed the global spotlight even more on Brazil. Brazil as an exporter has major partners such as
China that represented 19.1% of total experts, while US, Argentina, and Netherlands accounted
for 12.6%, 6.8%, 5.3%, respectfully (World. Factbook, 2014). Also according to the World
Factbook, Brazil was ranked 13th globally in foreign direct investment, with $755.5 and 820.5$
of direct investments in years 2014, 2015, respectfully. Lastly, Brazil has an independent
approach towards its foreign policy that made it have some disagreements with some countries in
the past such as the US.
Wages and Unemployment Rates:
The Wages average in Brazil between 2002 and 2015 was 1854.20 BRL/Month. The highest
average of all times was in December 2015, as wages averaged 2789.55 BRL/Month, while the
lowest average 1476.83 BRL/Month was registered in September 2003. These numbers reflect
the economical growth Brazil has been having since 2003. This is also seen in the historical trend
of unemployment rates. Unemployment rates that averaged 8.34 percent from 2001 until 2016,
reached it highest in August of 2003 reordering 13.10%, while its lowest was 4.30% in
December of 2013. The trendy decline in unemployment rates is shown by the below chart.
However, the trend direction has reversed as from 2015, with unemployment rates persisting in
the 6.5 - 7.8% levels.

Labor Regulations:
Brazilian labor force is estimated to be around 109.2 million (Word Factbook 2015 est.).
Brazilian labor market is governed by the consolidation of Labor law (CLT) that was established
in 1948. In Brazil, working hours are restricted to 44 hours a week, with 8 hours being the
maximum per day. In practice, many employees work an extra 48 min daily for them to take
Saturday off, as opposed to work 4 hours on Saturday. It is common in Brazil for the working
hours rule to be broken, as supervisor on those rules are not firm. The labor rules in Brazil stats
that in every month, 20% of the workers wage goes to the FGTS, a fund set of resources
collected from the private sector and managed by Caixa Econmica Federal, a Brazilian bank.
The contribution of the percentage paid by the workers varies (8% to 11%) based on their wage
level, with the rest is paid by the employer. The Fund function is to support employees when
they are terminated. Based on the CLT guidelines, each worker has the right of a 30-day vacation
every 12 months. Also, in Brazil companies pay the 13th salary, equivalent to a month salary, to
their workers in November and December.
Taxes and Property Rights:
The Brazilian personal Income tax ranges from 0-27%. Brazilians are tax on their worldwide
earnings and assets profits. Brazils sales tax is changed at a state level, with intrastate sales taxes
between 17% and 19%, and interstate once at 7% or 12%. Also, sales tax rate between 18 - 25%
are applied on majority of imported goods to support domestic goods. Also as a fiscal support for
building factories, states offer rate cuts or later payment arrangements. Moving to the Brazils
corporate income tax rate, which is comprised of 15 % base rate, 10% surtax on year income
exceeding BRL 240,000, and 9% social contribution on pre-tax profits. Corporate income tax
rate used to at 27% before the year 2000, and then it increased to 37% in 2000. Tax settled at
34% afterwards, with the government believing is a moderate tax rate to help boosting the
economy. From the World Factbook, Brazilian Tax revenue represented some 35.1% of GDP
(2015 est.). In regard of property rights and intellectual property protection in Brazil, The World
Competiveness Index 2015-2016 ranked Brazil as 89th out of 140 other countries. This is very
problematic for MNCs establishing businesses there, unless precautious steps in regard of
registering their trademark, patents, and other property rights practices is taken.

Financial Risk Analysis:

Macroeconomic Overview
Since 2003, the macroeconomic stability of Brazil has steadily been improving. Signs of those
improvements included building up foreign reserves and reducing the national debt burden. By
2008, Brazils credit had improved greatly, with the major rating agencies giving investment
grade status to its debt. Subsequent to the global financial crisis, Brazil experienced two
consecutive quarters of recession, as global demand for Brazil's commodity-based exports
shrunk. Yet, president Roussef and her team have succeeded to help Brazil recovering, as the
GDP in the following two years grew to reach 7.5%, the highest in the past 25 years. However,
because of overdependence on exports of raw commodities, low productivity, rising operational
costs, and persistently high inflation, the growth pace has slowed. The Brazilian 2015 GDP is
estimated to be $3.166 trillion, lower than the estimated 3.265 trillion in 2014. The current
Brazilian public debt represents 67.3% of GDP (Word Factbook 2015 est.) Income Inequality is
a major problem in Brazil. That is shown by the score Brazil got in Gini index which measures
the extent to which the distribution of income among individuals or households within an
economy deviates from a perfectly equal distribution, with 0 representing perfect equality, and a
reading of 100 suggesting perfect inequality (The World Bank). Brazil score 52.9 and 52.7 for
2013 and 2012, respectfully.

Currency:
The official currency in Brazil is the Brazilian Real. The real depreciated against the dollar in
recent years. The highest was in Sep. 2015 recording 4.18 real/$. In 2016, real appreciated, yet,
its still weak. The Latin focus consensus forecast panelists think that the real is expected to
depreciate Further in 2016 to reach 4.36 BRL/USD. An US firm would benefit from this if they
decided to do business in Brazil.

Inflation:
A major problem in the country as inflation rates are persisting high levels. The rate in Jan 2016
was 10.7%, hitting a 12-yrs high. The Increases in inflation is attributed to increases in food,
transportation, and housing-related costs.

Interest rates:
Brazil has a high interest rates, with the central bank setting the benchmark interest rate at
14.25% in last January. On the other hand, S&P and Moodys have cut Brazil ratings to junk.
The graph below shows the historical interest rates.

Recommendation:
We believe that Language barriers and political risks outweigh the benefits of low-paid workers
and the large financial market in Brazil. Thus, we recommend HOLD investing in Brazil at least
in the near future. Political instability and risk such as corruption can be very distractive for
investments in Brazil. Thus, only if the investor can hedge that risk the investment in Brazil
would be profitable. Our Favorite sectors to invest in Brazil are automobile, as this sector rely
heavily on workers and an US firm can benefit from the low wages in Brazil. Also, agriculture is
an obvious choice, with the variety in products in Brazil and the natural resources the country
has.

References:

http://www.britannica.com/place/Brazil
http://worldpopulationreview.com/countries/brazil-population/
http://culturetown.org/10-interesting-facts-about-the-rio-de-janeiro-carnival/
http://time.com/4209973/carnival-brazil-rio-de-jeneiro/
http://www.citypopulation.de/Brazil.html
http://www.nationsonline.org/oneworld/map/google_map_Sao_Paulo.htm
http://www.landcorpinternational.com/developments/brazil/brazil-facts-and-stats-for-the-potentialinvestor/
http://geert-hofstede.com/brazil.html
http://www.nationsencyclopedia.com/Americas/Brazil.html
http://www.bloomberg.com/news/articles/2015-06-09/brazil-turns-to-61-billion-infrastructure-plan-tospur-growth
http://globalvideoletters.org/context-rio-de-janeiro-%E2%80%93-the-favelas-of-rio-de-janeiro/
https://www.hrw.org/world-report/2011/country-chapters/brazil
http://www.tradingeconomics.com/brazil/indicators
http://dfat.gov.au/geo/brazil/pages/brazil-country-brief.aspx
http://thebrazilbusiness.com/article/brazilian-employment-law-in-a-nutshell
http://www.coha.org/income-inequality-and-poverty-a-comparison-of-brazil-and-honduras/
https://www.focus-economics.com/country-indicator/brazil/exchange-rate

The Brazilian Institute of Geography and Statistics, http://www.ibge.gov.br/english/