News

Trade disputes, environment risks, labour standards and security issues should top concerns for Brazil investors – Maplecroft report

15/04/2010

With presidential elections looming in October 2010, Brazil's positive economic outlook is being tempered for businesses and investors by lingering social and environmental concerns and an ongoing trade dispute with the United States, according to a new Maplecroft report.

Even though Brazil's medium to long term outlook remains promising, the comprehensive country report has underlined a continuing need for careful and broad-based risk intelligence to mitigate operational and strategic risks to investors in the country.

Brazil has been relatively cushioned from the global financial crisis due to more stringent reserve requirements on its banking sector and fiscal stimuli. After a brief recession in 2008/2009, GDP growth is expected to return to pre-crisis levels during 2010. Growth forecasts were revised upwards through 2009. The IMF World Economic Outlook in 2009 forecasted GDP to return to 3.5% growth in 2010.

However, there are risks to be navigated. Brazil's international trade relations have recently become more complex, as an ongoing dispute with the US has revealed Brazil's determination to act with independence on the world stage. In February 2010, Brazil announced trade sanctions against selected US imports following a WTO ruling that US subsidies to its cotton farmers were discriminatory. A list of around 100 US goods worth an estimated US$591m may be subjected to higher import tariffs.

Localised labour rights and protection risk

A failure to make significant progress on resolving this dispute could have an impact on the national elections in October 2010, as opposition candidates are already stating that they would seek more favourable trade terms. President Luiz Inacio Lula da Silva and his preferred successor, the centre-leftist Workers Party candidate Dilma Roussef are launching infrastructure projects in a bid to win public support and help transport agricultural crops to ports. However, recent academic research and NGO reports have linked land-use change for agriculture, notably for biofuels, to clearance of rain forests and other environmentally valuable land. This has been rejected by the Brazilian government, but it remains an area of concern in potentially large export markets, notably the EU.

According to the report, risks in the agricultural sector are not confined to the environment. Concerns for western companies remain over labour conditions and reputational risks relating to supply chains. On March 8th, 2010, the Brazilian government updated its 'Dirty List' of companies convicted of keeping workers in conditions of forced labour. Cosan, Brazil's most powerful ethanol producer, secured a temporary injunction removing it from the 'Dirty List', but the Brazilian Attorney-General's office said he would contest the ruling. According to the report, forced labour poses a major reputational risk for companies with operations, supply chains or investments in the country. Brazil ranks 17/196 countries and is rated as "extreme risk" in Maplecroft's Forced or Involuntary Labour Risk Index.

Security also remains an issue. Brazil's homicide rate is one of the highest in the world (some 23.8 homicides per 100,000 inhabitants - more than four times that of the US), raising the risk of companies losing their employees, notably in the larger urban areas, as a result of violent crime. Official figures released in February showed crime, especially kidnappings and fatal muggings, rose in Brazil's most populous state of Sao Paulo for the first time in a decade. Brazil is rated high risk in both Maplecroft's Human Security Risk Index and Kidnapping Risk Index and the report states that these security risks are compounded by corrupt police and militia groups.

Dr Matthew Bunce, Senior Country Analyst at Maplecroft states: "Brazil's emergence as a new economic powerhouse continues but several milestones lie ahead. Export trade terms, environmental risk, labour standards and climate change concerns surround the expansion of some of Brazil's key agribusiness sectors. These are being addressed by Brazil, but investors need to be aware of them and other operational and strategic risks as foreign direct investment accelerates."

The 97 page report not only provides in-depth analysis, but also features innovative sub-national maps illustrating political, societal and environmental risks, plus stakeholder viewpoints and key recent events. Comprehensive risk analysis is broken down into individual chapters focusing on: government and geopolitics, macroeconomics, emerging powers, energy security, business integrity and corruption, societal and human rights issues, security and climate change and the environment.

In-depth reports are available for all countries, issues and sectors. For more information and pricing details contact - info@maplecroft.com.