Brazil’s Enigma: Sustaining Long-Term Growth

Richard Bertrand

Professor Harper

BADM 320

10/14/2016

Brazil’s Enigma: Sustaining Long-Term Growth

1. How is Brazil doing? What challenges, internally and externally, is the country facing?

Brazil had experienced many booms and crises since 2000. In 2000 Brazil had experienced expansion under President Ináco, having become a “darling” of international markets. That being said this caused their currency, the real, the appreciate 32% from 2001-2008. That would mean good in many circumstances but this caused challenging competitiveness of domestic manufacturing. This made it very expensive to do business in Brazil, this is also where the phrase “Brazilian cost” comes from, that coupled with a high taxation and low infrastructure. This lead to a currency war, to lower their exchange rates. But a financial crisis hit leading investors to back out of Brazil causing the real to drop 40% and industrial production to drop by 21%. Brazil also lacks a basic education system, which leads to less skilled workers, which is bad when a president invests $66 billion into infrastructure development. Over all Brazil isn’t doing horrible but they aren’t doing well by any standard, they have an infrastructure problem which is where most of the “Brazilian cost” comes from as well as a very high tax rate, and a war or currency exchange.

1. Would you buy a Brazilian bond in July 2011? How would you make your decision? What other information would you like to have? Would you buy a Brazilian bond in August 2012? What has changed?

In 2011 growth in industrial production had come to a screeching halt, growing by only .2% a month. In effort to jump start the economy the government aimed a stimulus package toward reviving industrial production, because this was their biggest problem. This lead to trillions of dollars being put into transportation, sanitation, energy, and logistics. With this being said I would buy a bond in July 2011. I would do this because it has an 11% interest rate even with the IOF tax, which means more return on investment than a lot of other countries. But this is only on their long term bonds. In August of 2011 a second stimulus package came into effect, “Bigger Brazil”. They did this to address the decrease in production, down to 1.6%. This also led to an increased tax on automobile market, this was a 30% point increase. This effectively made the tax 55%. This led to automobile sales to go down by 14.2%. This led analysts to believe this will cause a wider divide in the currency war. In this case I wouldn’t buy a bond in august 2012. The tax on the automobiles would be not beneficial, with automobiles being one of their biggest exports. The decrease in sales is also unsettling, as this being one of their biggest exports they can’t afford to have such a sharp decrease.