Macro Economic Snap Shot of Brazil

Brazil has seen a period of great macro-economic volatility in the last few years. This report explores key factors behind the underperformance of the Brazilian economy including Real Gross Domestic Product, Unemployment Rate, and Inflation. It also covers GDP growth rate forecast, political instability, inequality, and investment opportunities in Brazil.

Macro Ecomic Snap Shot of Brazil
Executive Summary
Brazil has seen a period of great macro-economic volatility in the last few years. It has gone
from years of economic expansion to a long period of unprecedented economic recession. In
the past, was being touted one of the most exciting countries and was apart of a special group
of countries that were witnessing high growth i.e. Brazil, Russia, India, China . This led to the
formation of the nomenclature of BRIC countries while India and China have sustained
economic expansion, Brazilian economy has disappointed, to some extent. This reports
explores few of the key factors to unndertans the underperformance of the Brazilian economy
Part A...................................................................................................................................... 3
Real Gross Domestic Product.............................................................................................3
Unemployment Rate...........................................................................................................3
Inflation............................................................................................................................... 4
PART B................................................................................................................................... 5
PART C................................................................................................................................... 6
Question 2................................................................................................................................... 6
Part A...................................................................................................................................... 6
Part B...................................................................................................................................... 7
Question 3................................................................................................................................... 8
Part A...................................................................................................................................... 8
Part B.................................................................................................................................... 10
Appendix.................................................................................................................................... 10
References................................................................................................................................ 11

Part A
Real Gross Domestic Product
Brazil experienced a sustained period of GDP expansion prior to 2012, a trend that continued
until 2012 (Organisation for Economic Co-operation and Development, 2018)/ However, this
trend began to change in 2013. (Please refer to Table 1 in Appendix) In 2013, the GDP growth
rate of Brazil, at 2.86 was higher than the world average. However, following 2013, Brazil
started to slip in a recession. According to Organization of Economic Co-operation and
Development “a combination of rising fiscal imbalances, increasingly interventionist economic
policies and unaddressed structural weaknesses have led to a sharp erosion of confidence, which
ultimately led into the economy's strongest recession on record.” (Organisation for Economic
Co-operation and Development, 2018)
This period was characterised by rising budget deficit and high government borrowing.
However, the economy picked up in 2017 owing to a strong harvest, among other factors.
Graph 1.1 GDP Growth Rate. Source: (OECD, 2018) Prepared by Author
Unemployment Rate
Unemployment Rate has climbed steadily since 2013. (Please refer to Table 2 in Appendix).The
unemployment rate should be on a downtrend in 2018 given the economic expansion since, in

the past the high unemployment Brazil was in a recession for 2014, 2015 and 2016. (OECD,
2018) High unemployment leads to a vicious circle of low employment- low aggregate demand -
low employment. (Samuelson and Nordhaus, 2010)
Graph 1.2 Unemployment Rate. Source: (OECD, 2018) Prepared by Author
Inflation
Inflation has not followed the same trend as unemployment. (Please refer to Table 3 in
Appendix) The inflation numbers have not dropped during the period of 2012-2017 in spite of a
decline in real GDP growth. This indicates there are structural problems within the
economy.This may imply that the interest rates were too high in Brazil or the Real GDP growth
was too low. (Samuelson and Nordhaus, 2010)

Graph 1.3 Inflation Rate. Source: (OECD, 2018) Prepared by Author
PART B
GDP Growth Rate Forecast:
The Real GDP is expected to grow at the rate of 1.15% in 2018, 2.13% in 2019 and 2.4% in
2020. These are the current forecast number according to Organization for Economic Co-
operation and Development(OECD, 2018). However, the OECD, had earlier presented a forecast
that expected the Brazilian economy to grow by 2.2% in 2018 and 2.4% in 2019. It is possible
that the forecast has been changed keep with the changing circumstances.
Some of the factors that may affect the economy are:
a) Political Instability
Brazil has seen political instability in the recent times and this may affect the economic
performance in the future. The current elected head of the state Mr. Jair Bolsanaro has promised
to change very basic institutions of the country including the democratic way of governance on
the country. Uncertainty regarding Mr. Bolsaro’s policies may affect all economic institutions
such as trade, capital markets etc. Land reforms could also, be expected as a result of the policy
changes. (The Economist, 2018) (Organisation for Economic Co-operation and Development,
2018)
Political instability may derail any efforts to lower the budget deficit. There uncertainty
regarding policies on labour market reforms, government expenditure, demarcation of land in the
Amazonian rainforest and policies regarding indigenous population and ownership of natural
resources, in general (The Economist, 2018). Uncertainty in policies in Brazil coupled with
uncertainty in the global markets may affect growth and economic environment, in general.
b) Inequality
Inequality is a big cause of concern in Brazil. Approximately 50 percent of the population shares

10% of the total household incomes, while other half holds 90%. Inequality also, persists in the
form of gender gap in wages. Gender Pay disparity is higher than the OECD average with male
workers being paid approximately, 50% more than female counterparts (in the formal sector), a
gap that is 10 percentage points higher than the OECD average. (Organisation for Economic Co-
operation and Development, 2018)
One of the reasons for the recent recession in Brazil has been cited as structural inefficiencies in
Brazil. (Organisation for Economic Co-operation and Development, 2018) In order to go remove
structural problems, Brazil must address the problem of inequality.
PART C
The following are some strong suggestions, in order to revive the economic expansion of Brazil
in the near term.
1) Implementation of mildly contractionary Fiscal and Monetary Policy measures:
Economic Expansion is expected in Brazil.(Organisation for Economic Co-operation and
Development, 2018)
Hence, raising taxes on the wealthiest class (to be defined) will help reduce the budget
deficit. Inflation would also, be expected to rise, given the expected rise in the real GDP
of the country. Hence, there is no need to increase interest rates. Increasing interest rates
marginally will allow further savings. Further, increasing interest rates may indirectly
help in raising the value of Brazilian Real. It is important to note here that the
recommendation is to increase the interest rates and taxes, only marginally, in order to
ensure that the economic expansion is not arrested.
2) Lower Government Spending: In the last couple of years, lowering government spending
was not possible due to the recession. (Organisation for Economic Co-operation and
Development, 2018), However, the economy is out of the recession. Hence, efforts must
be made of lower government spending, in order to reduce budget deficit and service
government debt.
Question 2
Part A
The highest NEER was 1067.61 is Jan 1994 while the lowest NEER was in October 2002.
In general, Effective exchange rate presents an average value of a currency calculated in
relation with a basket of other countries. This number is not inflation adjusted and
represents the competitiveness of the currency in international markets and the total dollar
value of goods and services the currency can buy. REER or Real effective exchange rate is
calculated by accounting for inflation using a deflator. It provides an understanding of the
actual increase in the Relative Purchasing Power Parity of the country as it traces the
increase or decrease in Real Value

Graph 1: Nominal and Real Effective Exchange Rates. Source: (Bank of International
Settlements, 2018) . Prepared by author
Part B
The month of June 1997 was taken as Base. The BIS composite index is already adjusted for
various weights and the REER, already takes into account the inflation diffference between home
country and countries abroad. Hence, the month where REER was equal to 100, is the month
where the Brazilian Real was neither undervalued nor overalued as compared to the composite
currencies of the index. Hence, the NEER has been scaled accordingly.

Graph 2: Rescaled Nominal and Effective Exchange Rate against Bank of International
Settlements (composite) Index Source: (Bank of International Settlements, 2018) . Prepared by
author
The rescaled NEER is thebest way to understand the relative purchasing power parity since
inflation difference is zero.
Question 3
Part A
The bonds issued by the Federal Government of Brazil through the Sistema Especial de
Liquidação e de Custódia - Selic are the national debt securities of Brazil.(Banco Central Do
Brasil, 2018) The Selic issues one year government bills or 12 month or 52 government bills
which are comparable to it’s US counterparts, the United States Treasury Bills or 12 month
Federal Government Bonds issued by The Treasury Department of the United States of
America.
The United States Treasury Bills are a often considered to be safe or relatively risk free bonds,
given the strong economic position of the United States of America. Debt Securities issued by
the Federal Government of Brazilian government are riskier, considering the instability of the
economy.(Reuters, 2018) However, the riskier the bond, the greater is the risk premium offered
by the bond. The analysis presented below helps understand whether the risk premium is worth

the investment:
The Consensus Rate or CDI rate or Selic rate for 52 weeks Selic debt security is currently over
6% per annum (6.50 pcpa on December 1, 2018). Conversely, the US Treasury bills have
remained between 2% per annum and 2.5 % per annum. (‘Board of Governors of the Federal
Reserve System (USA)’, 2018) in the secondary market.
Some of the factors that influence the investment decision are as follows:
a) Credit Risk Ratings: Credit risks directly indicate the risk of default of payment by the
issuer of the debt security. Credit Risk ratings published by various financial firms such
as Standard and Poor’s Inc, Moody’s Investor Service, often calculate the risks and
provide ratings to such securities. Poor ratings suggest higher default risks. Hence, these
ratings are important in assessment of investment. (Moody’s Investor Services, 2018)
b) Real GDP growth rate forecast of Brazil and USA for the next 12 months: The
Real GDP forecast will determine all other factors such as inflation, government debt, fiscal and
monetary policy etc. All of these factors affect the yield of the security. Hence, the projected
GDP for 2019 is a major factor. (OECD, 2018)
c) Political and Economic Uncertainty: Certainty regarding policies, especially those related to
economics, help decide the direction of thee economy. In the absence of an understanding of
which direction the economy will take investment decisions. (Organisation for Economic Co-
operation and Development, 2018)
d) Effective Exchange Rate: The projected forward curve of the exchange rates for the
Brazilian Real i.e the forecast of Nominal Effective Exchange Rate and real Effective Exchange
Rate(International Monetary Fund, 2018) The forecasted exchange rates, especially, against the
US Dollar will help determine the investment, even though this is a minor factor. Exchange rates
help determine the total Dollar bill of exports and imports to a great extent. For example, coffee
is one of the key exports of Brazil. Apart from coffee prices, the exchange rate of Brazil may
affect the export bill. This is turn, affects budget deficit of Brazil which in turn affects
government spending in the economy. This will directly affect the Aggregate Demand, inflation,
interest rates and government debt. (Organisation for Economic Co-operation and Development,
2018)
Favourable Factors:
a) GDP forecast: The project GDP growth rate for Brazil is 1.15 in 2018 and 2.13 in 2019.
The projected growth rate for United States in 2019 is 2.1%.(OECD, 2018) The
forecasted real growth rates for both countries are more or less similar. Hence, it is
difficult to favour investment in Brazil based on this factor alone.
Unfavourable Factors:
a) Credit Risk: Standard and Poor awarded the debt securities of the Federal Government
of Brazil, especial the short term Selic securities a rating of “BB” in January 2018
indicating high default risk.(Reuters, 2018) The credit risk ratings also factor in the

government debt crisis of Brazil.
b) Political and Economic Uncertainty: As explained earlier, there is considerable
uncertainty in the Brazilian economy. (The Economist, 2018)
Neutral Factor:
a) Effective Exchange Rate: Export bills may rise as the Brazilian Real appreciates, but so
will the import bill. It is difficult to understand the consequences of the exchange rate
fluctuations in the economy. Moreover, the impact of exchange rate is also subject to the
prices of commodities in the international markets. For example, if the price of oil in
international market decreases, even if the Real has appreciated, the total revenues may
not increase.
Part B
In spite of a favourable consensus rate, there is too much uncertainty in the economy of Brazil.
The project growth rate is not enough incentive to make an investment. There are several factors
that could be considered to make an investment. However, there are better high growth countries
such as India and China, that offer inexpensive debt securities but have higher growth
predictions and hence, higher opportunities for returns. (Timmons, 2015)
Appendix
Table 1: Real GDP Growth Rate Source: (OECD. 2018)
Year Real GDP Growth Rate
2012 1.86
2013 2.86
2014 05
2015 -3.8
2016 - 3.5
2017 1.1
2018 1.15

Table 2: Unemployment Rate (Calculated as Total Percentage of
Labour Force) Source: (OECD. 2018)
Year Unemployment Rate
2012 7.19
2013 6.99
2014 6,67
2015 8.44
2016 11.61
2017 13.32
2018 NA
Table 3: Inflation Rate for Brazil (taken as Consumer Price Index,
calculated annually)(OECD. 2018)
Year Inflation Rate
2012 5.40
2013 6.20
2014 6.33
2015 -9.03
2016 8.74
2017 3.45
2018 NA
References
Bank of International Settlements.(2018) BIS Statistics Explorer: Table D7,
stats.bis.org/#df=BIS:BISWEB_EERDATAFLOW(1.0);dq=.R..BR?startPeriod=1994-01-
01;pv=~4~1,0,0~both.
Banco Central do Brasil. (2018). Homepage Available at: https://www.bcb.gov.br/

Banco Central do Brasil.(2018) Selic - Introduction. Available at: https://www.bcb.gov.br/.
Board of Governors of the Federal Reserve System (USA), 1-Year Treasury Bill: Secondary
Market Rate [TB1YR], retrieved from FRED, Federal Reserve Bank of St. Louis;
https://fred.stlouisfed.org/series/TB1YR, December 2, 2018.
International Monetary Fund (2018) What is real effective exchange rate (REER)? IMF DATA
Help. Available at: http://datahelp.imf.org/knowledgebase/articles/537472-what-is-real-effective-
exchange-rate-reer.
Moody’s Investor Services (2018) Rating Symbols and Definitions. redirecting. Available at:
https://www.moodys.com/Pages/amr0
OECD (2018), Inflation (CPI) (indicator). doi: 10.1787/eee82e6e-en (Accessed on 01 December
2018)
OECD (2018), Real GDP forecast (indicator). doi: 10.1787/1f84150b-en (Accessed on 30
November 2018)
Organization for Economic Co-operation and Development (2018), Economic Survey of Brazil
2018. Estadísticas - OECD. Available at: http://www.oecd.org/eco/surveys/economic-survey-
brazil.htm.
Reuters (2018). S&P cuts Brazil credit rating as pension reform doubts grow. Reuters. Available
at: https://www.reuters.com/article/brazil-sovereign-downgrade/sp-cuts-brazil-credit-rating-as-
pension-reform-doubts-grow-idUSL1N1P628Y.
Samuelson, P.A. & Nordhaus, W.D., 2010. Economics, McGraw-Hill.
The Economist (2018): „Containing Jair Bolsonaro“. The Economist, Print Edition. The
Economist Newspaper Retrieved am from
https://www.economist.com/leaders/2018/10/27/containing-jair-bolsonaro.
Timmons, H., 2015. The BRICs era is over, even at Goldman Sachs. Quartz. Available at:
https://qz.com/544410/the-brics-era-is-over-even-at-goldman-sachs/.