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Country Commercial Guides for FY 2000: Brazil Report prepared by U.S. Embassy Brasilia, released July 1999 Note*

CHAPTER I.   EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Brazil's commercial environment using economic, political and market analysis.

The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. Embassies throughout the world through the combined efforts of several U.S. government agencies.

The past year has been a tumultuous period for Brazil as the country has had to deal with the aftermath of the Russian devaluation and debt default in August 1998 and was finally forced to undertake a difficult devaluation of its own in January 1999. Nonetheless, with the largest economy and population in Latin America, Brazil presents considerable long term export opportunities, particularly so now that it has begun addressing longstanding structural problems and is currently practicing increased budget stringency. Even so, Brazilian import demand was suppressed by the recession that emerged in 1998 and then plunged following this year's devaluation of the domestic currency, the Real. According to U.S. Customs statistics, the U.S. trade surplus with Brazil was US $5 billion in 1998, down 20% from 1997. U.S. exports to Brazil fell 4.7% to US$ 15.2 billion and imports rose 5.1% to US$ 10.1 billion. Brazil remained the United States' 11th largest export market in 1998. Since 1994, U.S. exports to Brazil have risen almost 90%.

Demand for U.S. imports has been fueled by generally lower tariffs, reduced non-tariff barriers, efforts to modernize Brazil's productive base, and by the strength of the Brazilian currency relative to the dollar prior to the recent devaluation. The "Real Plan" stabilization program launched in mid-1994 succeeded in dramatically reducing chronically high inflation rates and the threat of a return to double-digit inflation in 1999 appears to have receded. The “Real Plan“, which featured a new currency (the "Real") initially pegged to the dollar, a degree of budget stringency, and high real interest rates, proved Brazil's most successful stabilization effort in the past 15 years. Nationwide, consumer price inflation was only 2.5% in 1998 compared with nearly 2,500% in the peak inflation year of 1993.

The Real Plan initially created more buying power for many Brazilian consumers due to disappearance of the so-called "inflation tax" which hit the poor hardest and to a 40 percent increase in the minimum wage in 1995. While price stabilization undeniably benefited the poor, lifting an estimated 13 million people above the official poverty line, Brazil still has one of the most unequal income distributions in the world. A consumption-led boom that began in 1994 due to higher real incomes and improved access to consumer credit, ended in mid-1997.

Following the onset of the Asian financial crisis in mid-1997, Brazil responded by doubling interest rates and passing a tight fiscal package. As a result, growth slowed to only 0.12% for 1998. Spurred by the crisis, the Brazilian Congress approved a long-awaited civil service reform in February 1998. However, lack of progress on other key fiscal reforms left the country vulnerable to the emerging markets crisis that followed the Russian default in August 1998. By September 1998, Brazil again found itself forced to react quickly to a rapidly deteriorating financial situation as capital began to flee the country, expectations of a devaluation rose, and investor confidence evaporated. The government reacted with a series of measures designed to encourage capital inflow including another sharp increase in domestic interest rates. However, by this time, the increased proportion of floating rate debt in the domestic federal debt stock led many to question the government's continuing ability to service its debt.

The government adopted a three-year fiscal stabilization program in November of last year that featured numerical targets for the primary budget result aside from debt servicing costs and negotiated a US$ 41.5 billion assistance program with the IMF and other lenders. Also, the Brazilian Congress began to make progress on long-delayed fiscal reforms. However, already shaky investor confidence was battered by Congressional defeat of a public pension reform in early December and by a key state governor's declaration of a moratorium in early January on debt service payments to the federal government. As a result, pressure for devaluation grew and reserves plummeted in the first half of January. Brazil lost US$ 23 billion in reserves from the end of August 1998 to the end of December and over US$ 8 billion in the first half of January.

In order to prevent an unacceptable loss of reserves, the government first announced a move to a foreign exchange "wide band" on January 13 that effectively devalued the real by over 8%. However, continuing reserve losses persuaded the authorities to end support for the currency on January 15 and to announce a change to a floating rate system as of January 18, 1999. The currency fell swiftly in the initial "overshooting" period but began to stabilize in mid-March with a feared surge in inflation failing to materialize. Even so, Brazil will continue to be vulnerable to economic shocks so long as the work of fiscal adjustment and systemic reform remains incomplete. While the government has been successful thus far in 1999 in its efforts to impose budgetary stringency, implementation of the civil service reform, further social security reform, and tax reform are yet to be realized.

The Government has been emphasizing increased economic opportunities for the private sector through privatization, deregulation, and the removal of impediments to competition. U.S. exporters have been able to expand their sales here and to benefit from new business opportunities that are making Brazil one of the strongest commercial partners of the United States. U.S. companies interested in doing business with Brazil should focus on maximizing long-term partnerships by establishing local representatives or through joint venture projects with Brazilian companies or international consortium groups.

The complexities of the Brazilian business environment create formidable obstacles for U.S. exporters. Doing business in Brazil can be a challenge and requires intimate knowledge of local regulations and procedures.

Country Commercial Guides and other valuable market reports are available for U.S. exporters from the National Trade Data Bank's CD-ROM or via the Internet. Please contact STAT-USA AT 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.stat-usa.gov; www.state.gov and www.mac.doc.gov. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country specific commercial information should contact the U.S. Department of Commerce, Trade Information Center, by phone at 1-800-USA-TRAD (E) or by fax at (202) 482-4473".