Brazil

Politics:

• Analysis

  Brazil politics: Quick View - Dilma highlights need for unity in ruling coa

  Event

  The main presidential front-runners have continued to busily prepare their bids ahead of next year's general election. The president, Dilma Rousseff, recently visited the state of Pernambuco, which is governed by an ally but potential rival, Eduardo Campos, of the Partido Socialista Brasileiro (PSB). In the opposition camp, Aécio Neves, the virtual candidate of the Partido da Social Democracia Brasileira (PSDB), received the support of the São Paulo governor, Geraldo Alckmin.

  Analysis

  Ms Rousseff continued her tour of the northeast, where she insists that all the governing coalition's partners will be needed for the electoral battle next year. This includes the PSB, a junior partner in the coalition which is particularly strong in the northeast. The message was directed at Mr Campos, the governor of Pernambuco and the party president--who has been laying the groundwork for a possible presidential bid against Ms Rousseff. The implication is that if he decides to go his own way, he will be treated like an opposition candidate. Mr Campos continues indeed to play an ambiguous game. Although grateful for the president's support in Pernambuco, he also met with the PSDB's former presidential candidate, José Serra, who was full of praise for him.

  Various PSDB leaders are trying to boost the presidential chances of the former governor of Minas Gerais and current senator, Mr Neves. He has received the formal support of party leaders in São Paulo, notably Mr Alckmin (although not that of Mr Serra). If Mr Neves's presidential bid is confirmed, it will be the first time that the PSDB candidate will not come from São Paulo. So far, the party seems to lack unity, and Mr Neves will have to build considerable momentum if he wants to stand a chance in 2014. At present, a large gap separates him and Ms Rousseff in opinion polls, with the president garnering 58% of the total voters' intentions against only 10% for Mr Neves, according to the latest Datafolha poll. Marina Silva, the former candidate of the Partido Verde, now in the process of setting up a new party, comes second after Ms Rousseff, with 16% of voters' intentions. The still little known Mr Campos gets 6%.

  March 27, 2013

• Background

  Brazil: Political forces at a glance

  Political outlook: Political forces at a glance

  Government: Brazil is a federal republic, composed of 26 states and the capital district of Brasilia, each with its own legislature and administration. The president, Dilma Rousseff of the left-wing Partido dos Trabalhadores (PT), began a four-year term in January 2011. She heads an unwieldy coalition that accounts for around 70% of seats in Congress and ranges across the political spectrum, including the centrist Partido do Movimento Democrático Brasileiro (PMDB), the largest party and the PT's main ally.

  The opposition is in disarray: the centre-left Partido da Social Democracia Brasileira (PSDB) presidential candidate was defeated at the last election, and its main ally, the centre-right Democratas (DEM) has internal problems.

  Next elections: Municipal elections (held every four years) are next due in October 2012; presidential, congressional and state elections (every four years) were last held in October 2010.

  Composition of Congress, 2012
  (no. of seats)
  	Chamber of Deputies	Senate
  Partido do Movimento Democratico Brasileiro (PMDB)	79	19
  Partido dos Trabalhadores (PT)	88	13
  Partido da Social Democracia Brasileira (PSDB)	53	11
  Democratas (DEM)	43	7
  Partido Progressista (PP)	41	5
  Partido da Republica (PR)	41	4
  Partido Socialista Brasileiro (PSB)	34	4
  Partido Democratico Trabalhista (PDT)	28	4
  Partido Trabalhista Brasileiro (PTB)	21	6
  Partido Social Cristão (PSC)	17	1
  Partido Popular Socialista (PPS)	12	1
  Partido Verde (PV)	15	0
  Partido Comunista do Brasil (PCdoB)	15	2
  Partido Socialismo e Liberdade (PSOL)	3	2
  Others	23	2
  Total	513	81
  Source: National Congress.

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  August 22, 2012

• Structure

  Brazil: Political structure

  Official name

  Federative Republic of Brazil

  Form of state

  Federative republic

  The executive

  The president, elected for a term of four years, chooses a cabinet, which he or she heads

  Head of state

  Elected president, who controls the budget

  National legislature

  Bicameral national Congress: 81-seat Senate (the upper house) with representatives of 26 states, plus the federal district of Brasília; 513-member directly elected Chamber of Deputies (the lower house). Each state and the district of Brasília has a legislature

  Legal system

  Each state has its own judicial system; the country has a system of courts for dealing with disputes between states and matters outside the jurisdiction of state courts

  National elections

  Municipal elections every four years; presidential, congressional and state elections every four years-last held on October 3rd 2010. A presidential run-off election was held on October 31st 2010, concurrently with run-off elections for some state governorships. Next presidential, congressional and state elections, October 2014

  National government

  Dilma Rousseff of the Partido dos Trabalhadores (PT) won the October 2010 presidential run-off election, giving the PT a third successive term, and took office on January 1st 2011

  Main political organisations

  Partido dos Trabalhadores (PT); Partido do Movimento Democrático Brasileiro (PMDB); Partido da Social Democracia Brasileira (PSDB); Partido Social Democrático (PSD); Democratas (DEM); Partido Progressista (PP); Partido Socialista Brasileiro (PSB); Partido Democrático Trabalhista (PDT); Partido da República (PR); Partido Comunista do Brasil (PC do B); Partido Socialismo e Liberdade (PSOL); Partido Verde (PV); Partido Trabalhista Brasileiro (PTB)

  Key ministers

  President: Dilma Rousseff

  Vice-president: Michel Temer

  Agriculture: Mendes Ribeiro

  Civil chief of staff: Gleisi Hoffman

  Communications: Paulo Bernardo Silva

  Defence: Celso Amorim

  Development, industry & trade: Fernando Pimentel

  Education: Aloizio Mercadante

  Environment: Izabella Vieira Teixeira

  Finance: Guido Mantega

  Foreign affairs: Antonio Patriota

  Health: Alexandre Padilha

  Justice: José Eduardo Cardozo

  Labour & employment: Paulo Roberto dos Santos Pinto

  Mines & energy: Edison Lobão

  Planning, budget & management: Míriam Belchior

  Science, technology & innovation: Marco Antonio Raupp

  Social development: Tereza Campelo

  Social security: Garibaldi Alves

  Sports: Aldo Rebelo

  Tourism: Gastão Vieira

  Transport: Paulo Sergio Passos

  Central Bank president

  AlexandreTombini

  January 10, 2013

• Outlook

  Brazil: Key developments

  Outlook for 2013-17

  • A weaker economy may erode the record high popularity of the president, Dilma Rousseff, but, despite recent political woes, she is still currently in a good position to win a second term in October 2014.
  • Although the risks of rupture in the Euro zone have receded, the still-weak global economic outlook is unlikely to boost local business confidence much in 2013, despite a pick-up in Chinese growth to 8.5%.
  • After a protracted slowdown, GDP growth is forecast to pick up to 3.5% in 2013, assuming private investment recovers and the global economy proves more supportive than in 2012.
  • The 2014 elections and World Cup will boost growth, but, more generally, economic expansion will hinge more on productivity gains than in the past, as the contribution from credit growth and labour force dynamics weaken.
  • The Selic policy rate will be kept on hold at 7.25% in 2013, rising thereafter to more neutral levels (8-9%), as the economy picks up.
  • Structural factors, sticky services price inflation and accommodative monetary policy will keep inflation above the Central Bank's target of 4.5%.
  • The current-account deficit will average 3.3% of GDP in 2013-17, as import growth exceeds that of exports. Foreign capital inflows will finance the deficit.

  Review

  • Top officials from the opposition Partido da Social Democracia Brasileira (PSDB) are lining up Aécio Neves as the party's 2014 presidential contender, but there is some resistance from the powerful São Paulo-based faction.
  • Ms Rousseff has vetoed parts of the oil royalties bill approved by Congress that penalised oil-producing states, but now faces opposition from non-oil-producing states, which are trying to overturn the veto.
  • Political appointments to regulatory agencies by successive PT governments have eroded capacity and hit investment.
  • The public sector registered a deficit in the primary balance (before interest payments) of R5.5bn (US$2.7bn) in November, reducing the 12-month primary fiscal surplus to R82.7bn (1.9% of GDP)-down from 2.1% in October.
  • Output grew by 0.4% in October month on month, but IP fell by 0.6% in November-tax breaks continue to cause volatility in manufacturing, particularly in the key automotives sector.
  • The cumulative current-account deficit year to November stood at US$51.8bn (2.3% of GDP), while total FDI amounted to US$59.9bn, more than offsetting it.

  January 10, 2013

Economy:

• Background

  Brazil: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	192.8	Population growth	1.1
  GDP (US$ bn; market exchange rate)	2,473.5b	Real GDP growth	4.2
  GDP (US$ bn; purchasing power parity)	2,295	Real domestic demand growth	5.7
  GDP per head (US$; market exchange rate)	12,831	Inflation	5.2
  GDP per head (US$; purchasing power parity)	11,905	Current-account balance (% of GDP)	-1.5
  Exchange rate (av) R:US$	1.67b	FDI inflows (% of GDP)	2.4
  a Economist Intelligence Unit estimates. b Actual.

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  Background: A new constitution was ratified in 1988 after more than 20 years of military rule. The government of Fernando Henrique Cardoso (1995-2002) ended hyperinflation and advanced reforms to liberalise the economy, but public debt indicators deteriorated amid low economic growth. The government of Dilma Rousseff is continuing the policies of Luiz Inácio Lula da Silva (2003-10), who was successful in consolidating macroeconomic stability, but made little progress on reforms. Weak political appetite in Congress precludes an ambitious reform agenda.

  Political structure: The president executes policy approved by the 513-seat Chamber of Deputies (the lower house) and the 81-seat Senate (the upper house). Constitutional review is by an independent judiciary. Although the president can resort to temporary decrees to push through legislation, the 1988 constitution gives Congress ample capacity to frustrate the executive. A total of 21 political parties are represented in the lower house and party discipline has traditionally been weak.

  Policy issues: After an aggressive easing cycle, the monetary authorities will hold the Selic policy rate at 7.25% until the end of 2013. Fiscal policy has also become more expansionary to support economic recovery amid a tepid global environment. Public debt is still high and political appetite for more conservative spending policies is lacking. Some progress is expected on streamlining the complex tax system, strengthening the regulatory framework and tackling labour informality. Her government will offer private concessions to help infrastructure upgrade. Exchange rate management has become more politicised, as policymakers curb the Real's strength to protect manufacturing.

  Taxation: Brazil has a poorly structured revenue system characterised by a heavy tax burden, a narrow taxable base, complicated levies and widespread tax evasion. Companies, both foreign and domestic, employ tax professionals and devote considerable resources to managing their tax affairs. The corporate and indirect taxation systems are particularly complex, porous and unwieldy; the income tax system is considered to be relatively efficient, with a top rate of 27.5%.

  Foreign trade: Strong external demand (from China) and a more active export policy have contributed to booming export earnings in recent years, swelling the trade surplus and transforming the current account from annual deficits into surpluses in 2003-07. Thereafter and despite favourable terms of trade, Brazil's trade surplus fell from US$46.5bn in 2006 to US$30bn in 2011, as imports surged owing to a strong currency. This also lifted the current-account deficit, to 2.1% of GDP in 2011.

  Major exports 2011	% of total	Major imports 2011	% of total
  Primary products	47.8	Intermediate products and raw materials	43.1
  Manufactured products	36.0	Capital goods	20.2
  Semimanufactured products	14.1	Consumer goods	16.9
  Special operations	2.1	Fuels and lubricants	15.3
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  China	17.3	US	15.9
  US	10.1	China	15.2
  Argentina	8.9	Argentina	7.8
  Netherlands	5.3	Germany	7.1

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  February 26, 2013

• Structure

  Brazil: Economic structure

  Data and charts: Annual trends charts

  
  

  

  January 10, 2013

• Outlook

  Brazil: Country outlook

  Brazil: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Owing to low unemployment and her firm stance on corruption, the president, Dilma Rousseff of the leftist Partido dos Trabalhadores (PT), has enjoyed record-high popularity ratings in her first two years in office. However, despite efforts since mid-2011 to stimulate the economy, Brazil's recovery has not responded as strongly as envisaged--third-quarter GDP results were surprisingly weak. Should the pick-up fail to materialise and the jobs market unexpectedly weaken, her government would risk looking ineffectual. Meanwhile, although the severe sentences that the Supreme Court has delivered (including to José Dirceu de Oliveira e Silva, civil chief-of-staff to the former president, Luiz Inácio Lula da Silva) in the mensalão corruption scandal that erupted in 2005 did not initially seem to have tarnished the popularity of the PT or Ms Rousseff herself (also considering she was not personally implicated in the scandal), the president suffered from some fallout from another corruption scandal that emerged in late November 2012, involving the cabinet chief in the presidential office in São Paulo, Rosemary Noronha, a close personal ally of Lula. Ms Rousseff is also facing growing political opposition to her veto of parts of an oil royalties bill approved by Congress in November.

  ELECTION WATCH: The victory of the PT candidate, Fernando Haddad, over José Serra of the Partido da Social Democracia Brasileira (PSDB) at the key municipal election in São Paulo (home to 20% of voters nationwide) boosted the PT, and Ms Rousseff remains well placed to win a second term in October 2014, barring a sharp rise in unemployment or a major split within her coalition (neither being part of the Economist Intelligence Unit's baseline scenario). If the president does encounter difficulties in 2013 (such as an unexpected, sharp rise in unemployment), we do not rule out a return by Lula, who remains highly active in politics behind the scenes. In the opposition camp, Aécio Neves (PSDB), a senator from Minas Gerais, has emerged as Ms Rousseff's main rival; not only did he manage to secure re-election of one of his allies in Belo Horizonte, but the defeat in São Paulo of his main rival within the party, Mr Serra, plays to his advantage. His success will depend on his ability to breathe new life into the PSDB, which has lost the last three presidential races. The PT and the PSDB have held the presidency for nearly two decades, but a successful bid by a candidate from a third party--such as Eduardo Campos, the charismatic Partido Socialista Brasileiro (PSB) governor of Pernambuco state, whose presidential credentials have been strengthened by the municipal elections--is possible in 2014 or (more probably) 2018.

  INTERNATIONAL RELATIONS: The president will continue to seek a growing international role for Brazil. This will include pursuing the long-standing aspiration to gain a permanent seat on an expanded UN Security Council and to strengthen the influence of emerging markets in global policymaking institutions. The president will adopt a generally pragmatic stance in Brazil's dealings with Western nations, as well as with regional neighbours (as seen in the aftermath of the impeachment of the Paraguayan former president, Fernando Lugo, in June 2012, when Ms Rousseff pushed for political sanctions, rather than the tougher economic sanctions for which some more leftist governments were calling). She will also refrain from adopting controversial policies, such as the ill-judged efforts of her predecessor to broker a deal over Iran's nuclear enrichment programme. This, in particular, has improved bilateral relations with the US, even if Ms Rousseff's overseas speeches highlight persistent differences (such as her repeated attacks on the "currency war"). The re-election of the incumbent US president, Barack Obama, will bring continuity in bilateral relations, but, with no major new bilateral trade-liberalisation initiative. Brazil's growing dependence on China as an export market will reduce the risk of radical protectionism against it, although some measures against surging imports from China have been taken and more can be expected. In general terms, in an effort to support its manufacturing sector, Brazil has increasingly been adopting a more protectionist stance.

  POLICY TRENDS: Gradual changes in Brazil's macroeconomic policy framework will become more evident in the medium term. Inflation-targeting has become more flexible, allowing policy interest rates to fall to historically low levels, and the floating exchange-rate regime has become increasingly heavily managed. This has reflected the government's concerns over the excess liquidity created by the major central banks of the developed world, as well as worries over competitiveness, particularly in the manufacturing sector. On the fiscal side, the authorities seem to be preparing a shift from targeting the primary surplus (the balance before debt interest payments), towards targeting the overall balance. The changes in the policy framework appear to be designed to support the government's newfound focus on competitiveness. To this end, the government has adopted measures aimed at removing infrastructure bottlenecks by announcing private concessions for road, railways, ports and airports, lowering energy tariffs, reducing the tax burden on certain "strategic" manufacturing sectors and fostering innovation (with Inovar Auto, a new autos regime for 2013-17).

  ECONOMIC GROWTH: After weaker third-quarter GDP results (with output expanding by only 0.6% quarter on quarter), output grew by 0.4% in October 2012, but industrial production fell by 0.6% in November (tax breaks since June have caused volatility in car production, a key industry). We now consider that this has limited the upturn in output growth to an estimated 0.8% for the fourth quarter of the year, assuming that, after several consecutive quarters of decline, investment has picked up slightly in the fourth quarter. Even so, GDP is estimated to have grown by only 1% in 2012. Our forecast that GDP growth will reach 3.5% in 2013 assumes private investment will accelerate owing to lower electricity tariffs, cuts in payroll costs and an improvement in global conditions. Otherwise GDP growth will underperform again. An electoral cycle and Brazil's staging of the World Cup in 2014 should boost the economy, before it moderates thereafter. Hence, our forecasts for 2013-17 are materially weaker than in Brazil's 2004-10 growth spurt (when GDP growth averaged 4.5% per year), as several factors will be less supportive, including a deceleration in labour force growth and a tighter labour market, weaker Chinese growth (dampening the terms-of-trade gains Brazil has enjoyed in recent years), and slower credit growth. This leaves growth to be driven more by productivity gains, which Brazil will continue to struggle to generate, despite some progress.

  INFLATION: Disinflationary local and global conditions eased Brazil's annual inflation rate below 5% in June 2012, but it has since picked up to 5.6% in November, despite a tepid economy. We expect inflation to remain around these levels in 2013 as stimulus measures boost demand and aggregate prices, although electricity tariff cuts will provide some respite. Owing to high indexation (including minimum wage rises linked to nominal GDP), a tight labour market, infrastructure bottlenecks and sticky services price inflation, overall consumer price inflation will remain above the 4.5% central target in 2014-17. Inflation will remain vulnerable to food supply shocks (food prices make up around one-quarter of the price basket) related to climatic conditions and fuel prices.

  EXCHANGE RATES: In a context of exceptionally low interest rates in major economies, Brazil's exchange rate will continue to be heavily managed, through operations in the currency futures market and adjustments in taxes on capital inflows. These had to be eased however after the Real weakened beyond R2.1:US$1 in late November as the surprisingly weaker third-quarter GDP results rattled confidence. These steps signal that the Banco Central do Brasil (BCB, the Central Bank) wants the Real to trade between R2-R2.1:US$1 for the time being. After weakening from R1.7:US$1 at the end of February, policymakers are worried about the pass-through to inflation. Our forecasts assume that policymakers will seek to weaken the Real in nominal terms over the medium term to prevent higher relative inflation rates from eroding the exchange rate in real terms.

  EXTERNAL SECTOR: We forecast the current-account deficit to average 3.3% of GDP in 2013-17, with import growth outpacing that of exports, and a consequent erosion of the large trade surplus registered for most of the previous decade. The trend will be accentuated by a still-strong currency, which will boost imports and impair export competitiveness, particularly of manufactured goods. The income deficit will amount to an annual average of 2.2% of GDP in 2013-17, while rising imports and net outward tourism (mitigated by visitors for the football World Cup in 2014 and the Rio 2016 Olympic Games) will lead to a widening services deficit. Attracting sufficient foreign capital should not prove problematic, as foreign investors will retain a positive view on Brazil's market opportunities, with foreign direct investment (FDI) forecast to average 2.9% of GDP (excluding reinvested earnings) annually in 2013-17. Reserves (US$378bn in early January, nearly double the levels before the 2009 financial crisis) will remain more than sufficient to cover Brazil's gross external financing requirement.

  January 09, 2013

• Forecast

  Brazil: Country forecast summary

  Country forecast overview: Highlights

  • A weaker economy and recent political scandals may take a toll on the high popularity of the president, Dilma Rousseff, but she remains in a good position to win a second term in October 2014 and a fourth consecutive term for the Partido dos Trabalhadores (PT). Voters will also be looking for improvements in education, health and public security, as well as in infrastructure, all considered preconditions for more sustained growth in the long term.
  • The PT and its allies have a working majority, but the multiparty alliance is unwieldy, partly owing to a series of corruption scandals that have weakened the coalition, and the president's reluctance to distribute government jobs and political favours. Ms Rousseff's programme will pragmatically focus on minor reforms that are relatively easy to implement without attempting more comprehensive and ambitious pro-business reforms, including a much-needed overhaul of the tax system and flexibilisation of the labour market.
  • Brazil benefits from a solid financial sector and a diversified economy, but a break-up in the euro zone or sudden deceleration in the Chinese economy would dramatically hit GDP growth. Despite monetary policy easing and an increase in lending by the state banks, GDP growth will be limited to 1% in 2012, picking up thereafter. With the global economy set for a period of tepid growth in the medium term, Brazil will struggle to achieve faster growth rates than 3.5-3.8%, barring more rapid progress on structural reforms.
  • A 13-month monetary policy easing cycle appears to have come to an end in October 2012 with the Selic at 7.25% (a historical low), but policy will be tightened in the medium term to more neutral rates (8-9%). Renewed global capital market volatility would affect the Real, but the Economist Intelligence Unit expects the currency to remain close to current levels in 2013-14, weakening slightly thereafter. The current-account deficit will widen to 3.5% of GDP in 2013, as imports pick up. We assume that the deficit will be financed by capital inflows-foreign direct investment (FDI), equity and debt.
  • Brazil is the world's fifth most populous country and the seventh-largest economy. Income inequality will decline thanks to job creation and rises in the minimum wage, but it will remain high. Even so, the gradual expansion of the middle class will enhance the size and attractiveness of Brazil's market.
  • Despite improvements, a burdensome tax regime will remain one of the weakest areas of the business environment. Investment in infrastructure will help ease logistical bottlenecks, but its upgrading and extension will take time.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	1.0	3.5	3.8	3.5	3.7	3.5
  Consumer price inflation (av; %)	5.4	5.7	5.4	5.0	4.8	4.8
  Total public-sector budget balance	-2.5	-2.2	-1.7	-1.4	-1.4	-1.2
  Current-account balance (% of GDP)	-2.6	-3.5	-3.3	-3.2	-3.1	-3.2
  SELIC overnight rate (av; %)	8.5	7.3	8.3	8.5	8.2	7.8
  Exchange rate R:US$ (av)	1.95	2.12	2.17	2.22	2.25	2.29

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  February 26, 2013

View detailed map

Country Briefing

Land area

8,547,400 sq km, of which around 44% is suitable for agriculture

Population

194.7m (2012)

Main cities

Population at last census (2012 official estimate, m):

 São Paulo: 11.4

 Rio de Janeiro: 6.4

 Salvador: 2.7

 Brasília (capital): 2.6

 Fortaleza: 2.5

 Belo Horizonte: 2.4

Climate

Mainly tropical and sub-tropical; mild on the southern coast and in the higher regions

Weather in São Paulo (altitude 760 metres)

Hottest month, December, 23-30°C; coldest month, June, 15-22°C, average monthly minimum and maximum; driest month, August; wettest month, February

Language

Portuguese

Measures

Metric system

Currency

Real (R); average exchange rate in 2011: R1.67:US$1

Time

The states along the coast, and eastern Pará, Brasília-DF, Minas Gerais, Goiás and Tocantins, are three hours behind GMT (official time in Brazil); the states of MatoGrosso do Sul, Mato Grosso, Rondônia, most of Amazonas, Roraima and western Pará are four hours behind GMT; the states of Acre and the south-western part of Amazonas are five hours behind GMT

Public holidays

January 1st; January 20th (Rio de Janeiro city only); January 25th (São Paulo city only); Carnival (unofficial, two days; usually in February, otherwise March); Good Friday; April 21st; April 23rd (Rio de Janeiro city only) ;May 1st; Corpus Christi; July 9th (São Paulo state only); September 7th; October 12th; November 2nd and 15th; November 20th (Rio de Janeiro state only); December 25th

January 10, 2013