Economic Analysis
Brazil

Brazil

Population 208.5 million
GDP per capita 8,959 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 1.3 1.3 1.1 -5.5
Inflation (yearly average, %) 3.5 3.7 3.7 3.0
Budget balance (% GDP) -7.8 -7.1 -5.9 -16.4
Current account balance (% GDP) -0.7 -2.2 -2.7 0.1
Public debt (% GDP) 73.7 76.5 75.8 94.8

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Varied mineral resources and agricultural harvests
  • Large population (estimated at 211.9 million)
  • Well-diversified industry
  • Strong foreign exchange reserves (import coverage of roughly 26 months)
  • Net creditor in foreign currency

WEAKNESSES

  • Sensitive fiscal position
  • Infrastructure bottlenecks
  • Low level of investment (roughly 15% of GDP)
  • Relatively closed to foreign trade (exports + imports represent only 22% of GDP)
  • High cost of production (wages, energy, logistics, credit) harming competitiveness
  • Shortage of qualified labour, inadequate education system

Risk assessment

COVID-19 hits an already lackluster economy

Economic growth was already faltering when Brazil was hit by the COVID-19 outbreak. The virus has spread fast since the first case was reported in the country, on 26 February 2020. The poor coordination between the federal and state levels contributed in placing Brazil as the second most hit country in terms of deaths, only behind the United States. Despite the still uncontrolled spread, Brazil started to reopen the economy in May 2020, due to the strong social and economic consequences of a prolonged lockdown. In end-August 2020, the number of new COVID-19 cases and deaths finally started to show stabilization, but at high levels. Regarding the economic consequences, Brazil suffered a relatively more modest downturn in Q2 compared to other economies in Latin America. This was majorly underpinned by the large fiscal stimulus that was implemented. The economy bottomed in April and has gradually improved since then. In Q2 2020, GDP contracted by 9.7% quarter-on-quarter (-2.5% in Q1) and 11.4% year-on-year (-0.3% in Q1). Industry fell by 12.3% QoQ, services shrunk by 9.7% QoQ (the worst performers being transport, storage and mail), while agriculture expanded slightly. Overall, despite the gradual improvement of activity, risks to the recovery scenario are still relevant. These are strongly underpinned by the high uncertainty related to the evolution of the pandemic, the need to dismantle the large fiscal stimulus and a strong deterioration in the job market.

 

Strong external position vs. worrying fiscal account

The current account deficit reached 2% of GDP in July 2020, from 2.7% in 2019. The improvement was bolstered by a stronger trade balance, as imports contracted much faster than exports, leading to a trade surplus of 3.2% of GDP in the same period (from 2.6% in 2019). The current account deficit continues to be financed by large-scale foreign direct investments (stable at 3.9% of GDP in July 2020). Nonetheless, portfolio investment strongly deteriorated, as the local capital market registered outflows of USD 52 billion in 12 months until July 2020 (3.3% of GDP), because of higher risk aversion driven by the COVID-19 crisis. Despite this, the country can count on strong foreign exchange reserves of USD 355 billion (covering roughly 26 months of imports), which work as a buffer to external shocks. Looking ahead, the current account deficit should continue to shrink, mainly due to the weak economic activity and strong exchange rate depreciation, which will favor a stronger trade balance, as well as narrower international travel and profit & dividends deficits. On the fiscal front, the challenges imposed by COVID-19 have further aggravated the already ailing fiscal account. The main support measure is the emergency aid to informal workers, which will remain until December 2020 at a fiscal cost of 4.8% of GDP. As a result, the nominal fiscal deficit in 12 months escalated to 12.2% of GDP (from 6% in February 2020) and gross public debt reached 87% of GDP (from 77% of GDP in February 2020). Furthermore, in end-August, the government unveiled its budget proposal for 2021, estimating the primary deficit for the consolidated public sector, which excludes interest payments, at 3% of GDP in 2021.

 

Political temperature has soared in 2020, but the government´s popularity has shown resilience

The political temperature soared in April 2020, when the then Justice Minister Sergio Moro resigned and accused President Bolsonaro of attempting to interfere in the federal police’s investigations. After Moro´s accusation, the Supreme Court (STF) opened an inquiry. Nevertheless, the political environment has improved somewhat since then, as J. Bolsonaro has worked on improving his allied base at the congress (the legislative can impeach a president by a two-third majority in both houses). As a result, the presidential mandate’s interruption risk is currently low (the presidential mandate finishes in January 2023). This is also underpinned by the aid to informal workers, which has shadowed positively on the government´s approval rating.

 

Last updater: September 2020

Payment

 

Bills of exchange (letra de câmbio) and, to a lesser extent, promissory notes (nota promissória) are the most common form of credit note used in local commercial transactions. The validity of either instrument requires a certain degree of formalism in their issuance. The most commonly payment method used in Brasil is “Boleto bancário” which is an official Brazilian payment method regulated by the Central Bank of Brazil. It is a push payment system, which was launched in 1993 and today generates 3.7 billion transactions per year.  The payment process for “Boleto bancário” transactions is similar to that of wire transfer or cash payment methods. Customers are provided with a prefilled boleto bancário payment slip. At this point, the customer has the option of printing the form and paying it physically at any bank branch or at authorized processors such as drugstores, supermarkets, lottery agencies and post offices. Additionally, it can also be paid electronically at any of the more than 48,000 ATMs in Brazil, as well as through internet banking or mobile banking apps, which are widely used in the country. Although the use of the above credit payment instruments for international settlements is not advisable, they nonetheless represent, an effective means of pressure in case of default, constituting an extra-legal enforcement title that provides creditors with privileged access to enforcement proceedings.

The duplicata mercantil, a specific payment instrument, is a copy of the original invoice presented by the supplier to the customer within 30 days for acceptance and signature. It can then circulate as an enforceable credit instrument.

Bank transfers, sometimes guaranteed by a standby letter of credit, are also commonly used for payments in domestic and foreign transactions. They offer relatively flexible settlement processing, particularly via the SWIFT electronic network, to which most major Brazilian banks are connected. For transfers of large sums, various highly automated interbank transfer systems are available, e.g. the STR real time Interbank Fund Transfer System (sistema de transferência de reservas) or the National Financial System Network (rede do sistema financeiro nacional, RSFN).

 

Debt collection

Amicable Phase

Creditors begin this phase by attempting to contact their debtors via telephone and email. If unsuccessful, creditors must then make a final demand by a registered letter with recorded delivery, requesting that the debtor pay the outstanding principal increased by past-due interest as stipulated in the transaction agreement. In the absence of an interest-rate clause, the civil code stipulates use of the penalty interest rate imposed on tax payments, which is 1% per month past due. When creditors are unable to reach their debtors by phone and/or email, a search of the company’s contacts, partner businesses, and owners is conducted. If there is still no contact, this leads to an investigation of assets, an on-site visit, and an analysis of the debtor’s financial situation so as to ascertain the feasibility of taking legal action. Considering the slow pace and the cost of legal proceedings, it is always advisable to negotiate directly with defaulting debtors where possible, and attempt to settle on an amicable basis, taking into consideration that a repayment plan may last for up to two years.

 

Legal proceedings

The legal system comprises two types of jurisdiction. The first of these is at the state level. Each Brazilian state (26 states, plus the Distrito Federal of Brasilia), notably including a Court of Justice (Tribunal de Justiça) whose judgments can be appealed at the state level. Legal costs vary from state to state. The second type of jurisdiction involves the Federal Courts. There are five regional Federal Courts (Tribunais Regionais Federais, TRF), each with its own geographic competence encompassing several states. For recourse on non-constitutional questions, TRF judgments can be appealed to the highest court of law, the Superior Tribunal de Justiça (STJ) located in Brasilia.

 

Monitory Action

The ação monitória is a special procedure that can be filed by any creditor who holds either a non-enforceable written proof, or any proof that is considered as an extrajudicial instrument recognized by the law as enforceable (even if it does not comply with all the legal requirements). If the debtor’s obligation is deemed certain, liquid and eligible, the Municipal Courts usually render payment orders within fifteen days. If the debtor fails to comply within three days, the order becomes enforceable. In cases of appeal, the creditor has to commence formal ordinary legal action. The difference between this procedure and the Enforcement Proceeding lies in the legal requirements and in the possibility of questioning the merit of the obligational relationship by the debtor over the course of the suit. The ação monitória is slower than a regular Enforcement Proceeding: if the debtor presents an objection in the court, the merits of the commercial relation will be thoroughly discussed in the same fashion as a Standard Lawsuit. The estimated period of this lawsuit is on average two years.

 

Ordinary proceedings

Ordinary proceedings are presided over by an interrogating judge (inquisitorial procedure), and require examination of evidence submitted by each party in conjunction with study of any expert testimony. The creditor must serve the debtor with a registered Writ of Summons, which the debtor must answer within 15 days of receipt. The initial proceedings encompass an investigation phase and an examination phase. The final step of the process is the main hearing, during which the respective parties are heard. After this, a judgement is made by the court. The tribunal may render a default judgment if a duly served writ is left unanswered. It takes two to three years to obtain an enforceable judgment in first instance.

Enforcement Proceeding

On average and within the main states, it takes a year for a judgement to be made following the initiation of legal proceedings.

 

Court Decision

A final judgment is normally automatically enforced by Brazilian Courts. Since the reforms in 2005 and 2006, attachment of the debtor’s assets is possible if the latter fails to obey a final order within three days. In practice, execution can prove difficult, as there are very few methods for tracing assets in Brazil.

Foreign awards can be enforced if they meet certain conditions: the homologation has to be concluded by the Superior Court to be enforced in Brazil, the parties have be notified, and the award has to comply with all the requirements for enforcement (such as being translated from Portuguese by a public sworn translator).

 

Extrajudicial Instruments

The enforcement of extrajudicial instruments is a legal type of enforcement granted to the creditor in order to allow him to claim his rights against the debtor. This is the most direct and effective court vehicle to recover credits in Brazil. This lawsuit does not require prior guarantees from foreign creditors (as the bond in the monitory suit for example). Moreover, Brazilian legislation renders some documents enforceable. These are separated in two main categories: Legal enforcement titles (including judgments made by a local Court recognizing the existence of a contractual obligation, and court-approved conciliations and arbitral awards) and extra-legal enforcement titles, which includes bills of exchange, invoices, promissory notes, duplicata mercantil, cheques, official documents signed by the debtor, private agreements signed by debtor, creditor and two witnesses (obligatory)  as an acknowledgement of debt, secured agreements, and so on. It is obligatory to submit the original versions of these documents – copies are not accepted by the court.

 

Insolvency proceedings

Out of Court restructuring

Debtors can negotiate a restructuring plan informally with their creditors. The plan must represent a minimum of 60% of the total debt amount. This plan must be approved by the court.

 

Judicial Restructuring

Debtors make a restructure to the request to the court, or request the conversion of a liquidation request to the court from their creditor(s). If the plan is accepted by the court, debtors typically have 60 days to present a list with all debts from creditors, and a payment plan. A judge then schedules two creditors’ meetings, with the second only occurring if the first one does not take place. During these meetings, the proposed plan must be accepted by a majority of creditors. Once accepted, payments start as decided in the approved plan. The estimated period of this lawsuit is between 5 and 20 years.

 

Liquidation

The principal stages of liquidation are as follows:

  • liquidation can be requested by either debtors (auto-falência), or any of their creditors if the debt totals more than 40 times the minimum wage;
  • the initiating party must prove the existence of a net obligation, overdue and defaulted by presenting protested enforceable title (special protest – personal notice of debtor);
  • upon analysis of a debtor’s financial situation, the judge can decide that the company must be liquidated.

All of the company’s assets have to be sold and the obtained amount is shared equally between creditors, respecting eventual privileges. The estimated period of this lawsuit is between 7 and 20 years.

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