An Introduction to our Emerging Markets Series
As you may know, there are different key characteristics that countries must have to be considered an emerging market. Two examples of those characteristics are having a lower-to-middle per capita income, or having some sort of regulatory body as well as a market exchange for investment and common currency. The Morgan Stanley Capital International Emerging Market Index (MSCI Index) is the governing power that categorizes and reports out on new emerging markets.
The term “emerging markets” is exciting for businesses, as it insinuates higher growth rates and higher opportunity in comparison to developed countries. That being said, emerging markets all see an increased climate for sociopolitical instability and volatility. Every emerging market is plagued by one or more of the following: military unease, social upheaval, natural disasters, price shocks, and other causes that create high volatility.
Now that we have laid out the “science,” we are thrilled to introduce you to our “Emerging Markets” blog series! We will use this series to educate on the strengths, weaknesses, opportunities and threats of the present day emerging markets. We will dive into the year so far, the political climate, risks and rewards and finally - the biggest areas of opportunity.
For our very first in the series we are featuring the largest country in South America, Brazil. Brazil is ranked the eighth largest economy in the world by GDP, and has recently shown strong growth in fixed investment, construction and industrial production in 2019.
An (almost) Year in Review
The year is still young, but so far the real USDBRL, -0.0481% has gained 3.8% against the U.S. dollar, while the popular Bovespa stock index BVSP, -0.04% has rallied more than 9%. In dollar terms, the Bovespa is up 12.4% so far this month, versus a 6.6% rise for the S&P 500 SPX, -0.49%, according to FactSet.
As reported by Reuters, “Gross domestic product (GDP) will grow by 0.6% this year compared to last year, assuming growth remains steady at the second-quarter level for the remainder of the year, according to Economy Ministry estimates in a presentation released on Thursday.”
In the upcoming weeks, Brazil’s pension reform bill will finally be approved by the Senate. This pension reform bill rewrites the rules on how and when public employees can retire. This is a crucial component of Brazil’s continuous status as an emerging market because the Brazilian budget has a heavy investment in public pensions. The move also increases hope for future tax reform, specifically the lessening and unification of taxes in Brazil.
The President: Jair Bolsonaro
Brazil’s recently-elected president, Jair Bolsonaro, despite discourse, has a high approval rating. Bolsonaro is considered a market friendly president, notwithstanding his right-leaning social and environmental policy stances and controversial comments during his campaign. Although, his campaign stances helped boost confidence and foreign direct investment, there is a disconnect between the president and Congress, which could slow initiatives.
Weighing Risks and Rewards
Brazil’s most recent and contentious presidential election sparked worries about the much needed structural reforms to shore up the country’s fiscal health. Specifically, the impeachment of President Dilma Rousseff in 2015, and the conviction of former president, Luiz Inácio Lula da Silva curved potential investor enthusiasm. In recent years, however, President Jair Bolsonaro has taken many important steps towards regaining the economic potential of Brazil. Backlash from Bolsonaro’s efforts come each day, with the most recent caused by his son.
Carlos Bolsonaro, son and close aide to his father and municipal councilor in Rio de Janeiro, tweeted, “The transformation that Brazil wants will not happen at the speed we are aiming for in democratic ways.” This tweet incited outrage that the current presidency is attacking democracy.
In an article on Forbes published by Kenneth Rapoza, a 20-year senior Brazil-based Wall Street Journal report, he explains how Brazil has sustained growth on its own over the past 15 years. “Brazil’s economy is moving in the right direction, on its own. In the last 15 years, Brazil’s economic growth boomed thanks to the external factors of a commodity super cycle. A government-credit bonanza targeting everything from affordable housing to Amazon hydroelectric dams and shipping ports in Cuba also fueled Brazil’s GDP growth.”
In addition, Brazil is continuing to boost infrastructure projects and reduce barriers to foreign investment. This is an important step towards future growth in the country, as many external businesses find it difficult to run a business in Brazil. The economic reform in Brazil comes at a crucial time in global trade history, as the US moves forward with the trade wars in China.
High Barriers to Entry
Brazil, as many US and global companies know, is an incredibly tough market to access. Brazil’s barriers make it difficult for any external brands to build and expand within the country. Brazil wants to promote manufacturing within, which actually opens an opportunity to companies willing to establish their business in Brazil and hire Brazilian employees.
The Brazil Import Requirements and Documentation explains that all US exporters and Brazilian importers must register with the Ministry of Economy. Pending the business line, additional documentation may be necessary. Products that affect the human body (pharmaceuticals, skin care, medical devices, etc.) can “only be imported and sold in Brazil if the foreign company establishes a local Brazilian manufacturing unit or local office, or the foreign company appoints a Brazilian distributor who is authorized by the Brazilian authorities to import and distribute medical products. Such products must be registered with ANVISA.”
Since Brazil is not a member of the World Trade Organization’s Government Procurement Agreement, US importers and exporters may find themselves at a disadvantage if they do not have a significant in-country presence. This presence could be found in established partnerships with Brazilian entities, subsidiaries, or financial resources.
Industries for expansion into Brazil
Although there are many industries that can find opportunity in Brazil’s economy, there are a couple that stand out.
“Agrobusiness” or “Agrotech”
According to Establish Brazil, “Brazil is the second biggest food producer in the world (behind the USA). Approximately, 60% of the country’s territory is used to farm, 77% of the production is exported and the government incentives for agricultural production reached, in 2017, USD $175.5 billions. It's a great option for investment.”
As agriculture is a core pillar for Brazil’s economy, there is always a need for improvement. Innovative solutions that can offer consistency and sustainability, whilst still offering jobs to the Brazilian people are welcomed.
With Brazil holding a population of over 200 million people, there is always going to be a need for new goods/services. Keeping the difficult barriers, Brazil isn’t the easiest for a foreign company to make way in. However, Brazil is a huge promoter of Brazilians. It is highly encouraged for Brazilian citizens to start their own businesses.
With this push, there is an influx of investor firms and financial service opportunities where Brazilian startups are finding help to foster their businesses. This offers the perfect climate for finance, brokers, and consulting.
If you are thinking about expanding to the emerging market of Brazil, we are here to help. As addressed above, there are many opportunities available in the largest South American country, but it can be hard to find them and successfully act.
We will be highlighting a new emerging market every month and we challenge you to think big for your business. If you’re interested in expanding globally or learning more about potential opportunities, please reach out to us via our contact page or email us at email@example.com.