News

Offshore reforms, trade relations and environment risks setting the scene for investors – Maplecroft Brazil report

14/07/2010

Rising inward investments, trade agreements with China and new laws giving Brazil a larger stake in offshore oil and gas fields are all contributing to a positive economic outlook for the country. However, according to a new report released by Maplecroft, environmental and security risks still need to be carefully navigated by investors.

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 and the IMF World Economic Outlook in 2009 forecasted GDP to return to 3.5% growth in 2010.

Although Brazil's medium to long term outlook is promising, Maplecroft's country report underlines a need for careful, broad-based risk intelligence to mitigate operational and strategic risks to investors.

Brazil's international trade relations remain complicated with the US due to unresolved import and export tariff disputes, which remain unresolved. In February 2010, Brazil announced trade sanctions against selected US imports following a WTO ruling that US subsidies to its cotton farmers were discriminatory. Brazil has since shown its ability to move in new directions by signing a four-year (2010-2014) Joint Action Plan with China. This broadens bilateral ties still further across many sectors, including industry and agriculture, beyond those already covered by cooperation in strategic sectors such as mining and energy. The European Union will be holding talks in July with Latin American countries (Mercosur) with similar goals in mind.

The new oil laws raise some concerns that the state may be intent on taking large stakes across all key economic sectors. The risks of this appear to be limited even though there is an upcoming election; President Luiz Inacio Lula da Silva and his preferred successor, the centre-leftist Workers Party candidate Dilma Roussef, are generally seen as safe economic hands, along with the main opposition candidate Josè Serra. The decision by Brazilian legislators to pass an oil production-sharing bill does however signal that Brazil is better-placed to set investment terms and to develop its own resources - if it does not like the terms on offer from outsiders.

Brazil's commitment to biofuels appears to be unaffected by the state's intention to raise oil as well as bio-ethanol production and exports. Milling group Copersucar, one of Brazil's largest sugarcane groups, expects its associated mills to crush 105 million tonnes of cane this 2010/11 season, up 25 percent from the season before.

Localised human security risk

However, agribusinesses may need to consider the impacts of recently proposed changes to the Forestry Code, which NGOs fear will lead to renewed Amazon deforestation and Cerrado savannah clearance for soy, sugar and other extensive farming. Recent academic research and NGO reports already link land-use change for agriculture, notably for biofuels, to such trends. Such claims, along with background concerns over labour conditions on farms, are largely rejected by the Brazilian government. However, both issues remain areas of real and potential concerns that extend to potential large biofuel markets such as the EU.

Security also remains an issue, with potential risks to staff and assets. Brazil is rated high risk in both Maplecroft's Human Security Risk Index and Kidnapping Risk Index and the latest country 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 meteoric emergence as a new economic powerhouse will continue to help the world pull out of recession in 2010/11 but several operational and strategic milestones still lie ahead for investors. These include trade disputes and oil sector investment terms, but also environmental and labour risks in agribusiness. A planned approach to navigating risks will help investors benefit from Brazil's demonstrated openness to foreign direct investment."

The 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.