Brazil: Finance

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Brazil Finance Profile 2012

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Market-based competition

Market competition has a strong institutional framework, but the informal sector still generates more than a third of Brazil’s GDP. Pricing is largely unrestricted. The use and transfer of profits is not regulated. The convertibility of the national currency, the real, is guaranteed, and there has been a floating exchange rate since January 1999. An ambitious law regulating private-public partnerships was established in 2004. The country’s recent macroeconomic development has been impressive. The fiscal outlook, debt situation and financial sector’s health are much better than they were five years ago. The government has consolidated the country’s commitment to fiscal responsibility. In April 2008, Brazil was awarded an investment grade rating by one of the two main U.S. credit rating agencies. This opened the door for a massive inflow of foreign investment into Brazil, because certain investment and pension funds were subsequently legally allowed to invest in Brazil and in Brazilian bonds. A commitment to maintaining a primary surplus, to improvement of debt management and to reduction of the debt-to-GDP ratio has helped significantly reduce the vulnerability of public finances to adverse shocks. Exports and reserves are at their highest historic levels and inflation and country risk at their lowest. Critical areas where reforms are needed to ensure future sustainable economic growth include the high level of taxation, the low quality of public spending, relatively inflexible labor institutions and legislation, and high interest rates.

Anti-monopoly policy

The main statute governing antitrust issues in Brazil is the Competition Act of 1994. The governmental agency responsible for the enforcement of anti-cartel policy is the Administrative Council for Economic Defense (CADE), an independent federal agency linked to the Ministry of Justice. Three agencies – CADE, the Secretariat of Economic Law (SDE) from the Ministry of Justice and the Secretariat of Economic Surveillance (SEAE) from the Ministry of Finance – together constitute the Brazilian System of Economic Defense (SBDC). While the three agencies possess independence and technical skills, the Brazilian antitrust system has some deficiencies (including uncertainty concerning the date merger notifications must be made, and slow handling of cases under analysis). However, in recent years many practical improvements have been made.

Liberalization of foreign trade

Since the 1990s, Brazil has implemented a number of important trade policy changes. It carried out unilateral liberalization and also engaged in regional economic integration (through Mercosur). Even so, the country has retained significant vestiges of the foreign-trade policy paradigm inherited from the period of protectionist industrialization. Special exemptions and complicated registration formalities persist. Customs duties for imported goods change frequently, and imports from countries outside Mercosur member states are constrained by high tariff and non-tariff barriers. On various trade negotiation fronts, Brazil has adopted a rather defensive stance. Structural changes that have occurred during the last decade in the Brazilian economy, especially the consolidation of a highly competitive agribusiness, are pressuring the government to revise its trade policies and to deepen its integration with the international economy.

The banking system and capital markets are well-differentiated, internationally competitive and aligned with international standards. There is also a functioning system of banking supervision. Capital markets are open to domestic and foreign capital. The financial sector is sophisticated and systemic risk is low. Access to banking services for the poor has increased and the granting of loans for private households has been substantially extended in recent years, but credit is still very expensive, especially for individuals and small enterprises. The ratio of bank lending to GDP remains low (25% of GDP) compared to other countries. A significant portion of financial activities are dedicated to financing the public sector through bonds. While Brazil today has a dynamic and growing financial sector, the challenge is to develop still greater competitiveness, efficiency and effective risk management practices, while maintaining stability.