Brazil Country Brief -
June 2008
The Bilateral Relationship
Australia and Brazil celebrated 60 years of diplomatic relations in 2005. The event marked the opening of Australia’s first diplomatic mission in Latin America, established in Brazil’s former capital, Rio de Janeiro, in 1945. Today, Australian and Brazilian foreign and trade policy interests coincide in several important areas, and the two countries cooperate multilaterally on issues of mutual interest. Australia and Brazil hold senior officials' meetings every 1-2 years to exchange views on key bilateral, regional and multilateral issues. The most recent meeting was held in Canberra in May 2008. Science, technology and innovation cooperation are among the areas nominated for increased cooperation in the future.
Former Minister for Foreign Affairs, Mr Downer, visited Brazil in January 2006. Australia and Brazil completed negotiations on an Air Services Agreement in 2006. In April 2005, during a visit to Brazil by the former Minister for Education, Science and Training, Dr Brendan Nelson, Australia and Brazil signed a Memorandum of Understanding (MOU) on Education Cooperation. This followed an MOU on Science and Technology, signed in 2001, which established a joint cooperation program. In April 1998, an MOU on Sanitary Matters was signed by the Agriculture Ministers of Australia and Brazil to facilitate bilateral trade in agricultural products.
We also participate in the CER-Mercosur Dialogue, bringing together Australia, New Zealand, Brazil, Argentina, Paraguay, Uruguay and Venezuela. The dialogue was established in 1996 as a mechanism to strengthen cooperation on global trade policy issues and to promote inter-regional trade and investment. The most recent of these meetings was hosted by Brazil in November 2004. Both Australia and Brazil are members of the Forum for East Asia-Latin America Cooperation (FEALAC), which aims to increase and improve mutual understanding, political dialogue and cooperation among member states of East Asia and Latin America. Brazil hosted the Third FEALAC Ministerial Meeting (FMM III) in August 2007.
Australia and Brazil work closely together on a range of multilateral issues, including climate change, agricultural trade reform in the World Trade Organization (WTO) through the Cairns Group, and as members of the 'five interested parties' coalition (FIPs - with the US, European Community and India). Australia also recognises the importance of Brazil’s role as Chair of the G20 group of developing countries in the WTO, and in shaping views among developing countries on the current Doha Round.
Political Overview
Background
Brazil achieved independence from Portugal in 1822. It is a federal republic composed of 26 states and a federal district, with three tiers of government. Each state has its own government structure mirroring that at the federal level, and there are over 5500 municipal councils. Voting is universal and compulsory for all literate citizens from 18-70, and optional for those aged 16-17 and over 70, or who are illiterate. Under Brazil’s Constitution, the president and vice president are elected on the same ticket by popular vote for four-year terms. The National Congress consists of the Federal Senate with 81 members serving eight year terms, and the Chamber of Deputies consisting of 513 members elected by proportional representation to serve four-year terms.
Brazil has traditionally been an inward-looking country, both politically and economically. However, throughout the 1990s, Brazilian foreign policy reflected a more internationalist approach under former Presidents Collor and Cardoso. Priority was given to relations with other Latin American countries. Former President Cardoso worked to promote Brazil's image as an important international player and regional power, and commenced a campaign to win a permanent seat for Brazil on the United Nations Security Council.
Brazil’s outward-looking focus in foreign policy has accelerated under current President Luiz Inacio Lula da Silva, who has projected Brazil as a leader in Latin America and emphasised the importance of Mercosur (Mercosul in Portuguese). The President has championed the rights of developing countries, and worked consistently to strengthen Brazil's ties with other major developing powers including China, India and South Africa. As a leader in the developing world, Brazil has become a regular participant in global forums such as the World Economic Forum and the G8 Summit.
The Lula government retained the confidence of the market in its first term through its policies to promote economic growth and rein in inflation. The Government has placed increased emphasis on reciprocity in trade negotiations. It has asserted that progress in the World Trade Organization and Doha Round negotiations will be contingent on concessions being offered by developed countries on agricultural subsidies. Brazil also pursues this agenda through the G20 forum.
President Lula has promised to improve living conditions for Brazil's poor, while continuing the economic discipline of his predecessors. After taking office in 2003, he launched the Bolsa Família (Family Fund Program) which consolidated five income transfer programs to poor families. This program, which is managed by the Brazilian Ministry of Social Development, provides a stipend of up to 95 reals a month to parents to feed and clothe their children, provided they keep them at school and take them for medical check-ups. The fund now reaches the poorest quarter of Brazil's population. According to Fundação Getulio Vargas, a prominent Brazilian think tank, the program has been effective in reducing poverty.
Outlook
President Lula was re-elected in the second round of Presidential elections on 29 October 2006 with 60.83 per cent of votes, defeating the leading opposition candidate, Geraldo Alckmin. The election results underscored a clear north-south division in Brazilian politics: while President Lula retained overwhelming support from the very poor north and north-east regions, Alckmin was the clear front-runner in the agricultural and industrial centre-west and south of the country. Lula’s electoral platform focused on continuing the sound economic management and political and economic reforms achieved during his first term, whilst also increasing controlled social security programs and access to education. Alckmin’s strategy emphasised repeated corruption scandals during President Lula’s first term, perceived shortfalls in economic management and the Lula Government’s approach to government investment.
President Lula began his second term on 1 January 2007 and finalised his new cabinet in March 2007. His cabinet includes Celso Amorim as Minister for External Relations, Miguel Jorge as Minister for Development, Industry and Trade, and Reinhold Stephanes as Minister for Agriculture, Fernando Haddad as Minister for Education and Edison Lobão as Minister for Mines and Energy. President Lula wants to continue political reform to improve governance and legislative effectiveness during his second term. Boosting economic growth, increasing the investment rate and controlling public finances and the social security deficit are also priorities.
President Lula’s government faced a number of corruption allegations and a weakening of the ruling coalition, which may cause delays in the implementation of its tax reform agenda. Minister for the Environment, Marina Silva, resigned from the cabinet in May 2008 over the approach of the Government to combating illegal logging. Deforestation rates were higher than expected in the second half of 2007. Municipal elections are scheduled for October 2008, and presidential elections are due in 2010.
Economic Overview
At a glance
For the latest economic data refer to the Brazil country fact sheet.
Policy directions
Brazil, Argentina, Paraguay and Uruguay formed the Southern Cone Common Market known as Mercosur in 1991. Brazil is the largest economy in the Mercosur group. In July 2006, Venezuela officially announced that it would seek to become a full member of Mercosur. Venezuela’s accession has been approved by Argentina and Uruguay, but is yet to be approved by the Brazilian Senate and Paraguay. Under the Mercosur treaty, tariffs between members are lowered gradually on most products and common external tariffs are applied to non-members. Mercosur represents a market of almost 270 million people with a combined GDP of more than US$1.8 trillion. Brazil is also an active member of the World Trade Organization, and pursues agricultural trade liberalisation through the Cairns Group and the G20.
Economic Outlook
Possessing large and well-developed agricultural, mining, manufacturing and service sectors, Brazil's economy (ranked by the International Monetary Fund in 2007 as the world’s tenth largest economy with a GDP of $US1,314 billion) outweighs that of all other South American countries and is expanding its presence in world markets (Australia was the world’s 14th largest economy in 2007 at $US908 billion).
The Brazilian economy has recovered from economic setbacks earlier this decade, including an internal energy crisis in 2001, increased international investor risk aversion following the 2001 terrorist attacks in the United States, and the flow-on effects of the economic crises in some South American countries in 2001-02. IMF support since August 2002, combined with prudent economic management by the Lula Government, has helped to restore confidence in the Brazilian economy. At the end of 2005, President Lula was able to repay the outstanding US$15.5 billion owed to the IMF ahead of time. Brazil has also repaid US$2.6 billion to creditors of the Paris Club.
Brazil's GDP grew by around 5.4 per cent in 2007 and is forecast to grow by 4.8 per cent in 2008. Industry has expanded strongly after recovering from an economic downturn in 2003. Inflation registered 3.6 per cent in 2007 (within the Central Bank's target range of between 3 and 8 per cent). Inflation is estimated to rise to 4.8 per cent in 2008. Recent IMF and OECD assessments of the Brazilian economy reflect positively on current economic policies. In April 2008, the rating agency Standard and Poors increased Brazil’s sovereign rating to investment grade (BBB-), reflecting Brazil’s status as a net creditor nation. Interest repayments on sovereign debt are projected to decline from 6 per cent of GDP in 2006 to 3.6 per cent of GDP in 2008.
However, Brazil faces considerable difficulties in implementing economic reforms, particularly in tax and business regulation. Poverty continues to be a pressing issue, with official data indicating that unemployment rates remained high at around nine per cent in 2007. The President's focus on fiscal discipline has also deprived the Government of some of its traditional support base. Judicial reform, improving education and fighting crime and corruption remain key challenges for the Government. Brazil will also need to invest heavily in infrastructure to sustain growth. Investments in roads (privatisation/modernisation of roads has been initiated), railways (railway privatisation has been resumed), ports and the energy sector are required. Continued increases in production levels are dependent on an expansion of industry capacity, particularly in the steel sector. Exports continue to perform strongly, contributing to trade surpluses.
In February 2007, the Brazilian Government launched the Growth Acceleration Program (PAC) 2007-2010 which is an initiative to accelerate economic activity through increased public sector investment, particularly in infrastructure and social programs.
Bilateral Economic and Trade Relationship
Australian economic engagement with Brazil has grown steadily since the mid-1990s, most notably in the mining, agribusiness and services sectors. Two-way merchandise trade between Australia and Brazil was A$1.7 billion in 2007 comprising exports of A$856 million to Brazil and imports of A$859 million from Brazil (refer Brazil country fact sheet). Major exports to Brazil included coal, nickel ores and medicaments. Major imports from Brazil included animal feed, pulp and waste paper, fruit juices and pig iron.
Opportunities exist for increased Australian trade and investment in areas such as information technology, biotechnology, transportation (rail and marine), telecommunications, banking and insurance, mining, water and waste water management, oil and gas, power, education, agribusiness, tourism and infrastructure. A growing number of Australian companies are now operating in Brazil, though a lack of mutual awareness remains an obstacle to expanding commercial ties.
Brazil is the world’s largest ethanol producer and views Australia as a natural partner in the development of a global ethanol market. Brazilian interlocutors have held discussions on bio-fuels with previous Australian government ministers, the Queensland Government and Australian sugar industry representatives. President Lula used his address to the 62nd UN General Assembly on 25 September 2007 to promote ethanol and bio-diesel as part of the global climate change solution and announced that Brazil would host an international conference on bio-fuels in November 2008.
The Australian education system is an increasingly attractive option for Brazilians. In 2007, around 12,500 Brazilian students were enrolled at Australian institutions (in schools, English language courses, TAFE and tertiary institutions).
Australia and Brazil cooperate in the Cairns Group and through the G20 to promote agricultural trade liberalisation.
Qantas operates services to South America via a code sharing agreement with Chile’s Lan Airlines and has operated an office in São Paulo since 1999. Brazil and Australia initiated an Air Services Agreement in 2007, the first of its kind between the two countries.
In 2001, the Australian Government announced the establishment of a Council on Australia Latin America Relations (COALAR). Since its inception, the Council has been active in promoting Latin America as a market for Australian exporters. It has supported a range of activities in Brazil, including cultural and trade promotion events.
Major Australian Investment Activity
Mining and Mining Services
BHP- Billiton owns 50 per cent of the Samarco iron ore mine, and also conducts bauxite, oil and gas exploration in Brazil.
Troy Resources has 70 per cent ownership of the Sertão gold mine.
Mincom & Maptek provide information technology services - technical support for the mining sector.
GRD Minproc was awarded a $1.6 billion contract for engineering, procurement and construction management in the mining sector. This has prompted them to open corporate and project offices in Belo Horizonte in the state of Minas Gerais. It is expected that more contracts will eventuate.
Rio Tinto has 100 per cent ownership of the Corumba iron ore mine.
Orica has an industrial explosives plant in Brazil.
Eleven other Australian mining juniors have operations of various sizes and stages of development.
Agribusiness
Agrichem has a fertilizer production and distribution facility in Riberão Preto, Sao Paulo.
Nufarm has invested over A$360 million in Agripec, a leading Brazilian crop protection company.
AWB has expanded its business in Brazil, and has recently opened production facilities in the states of Goiás, Bahia and Espírito Santo.
Document Management
Recall (Brambles) provides storage of documents in paper or electronic format.
Insurance Services
QBE Brazil provides life and accident insurance.
Export Opportunities
Business and Financial Services
Expo Australia 2008 will be held in Sao Paulo in October 2008. The expo is designed to showcase Australian tourism, food and beverage (with a special emphasis on wine), services, investment and outdoor goods and fashion. The event will gain exposure for businesses by uniting government allies and industry players, including the Council on Australian and Latin American Relations (COALAR), Tourism Australia, Australian Education International (AEI) and Qantas.
Expo Australia 2008 will also be held in Mexico, Colombia, Peru and Chile.
Agribusiness
Brazil applies a range of non-tariff measures (e.g. quarantine) that restrict the entry of agricultural products into its market. Australia continues to seek access improvement to the Brazilian market for agricultural goods including genetic materials, meat and dairy products and plant products.
Education and Training
Brazil is the largest market for Australian education in Latin America. In April 2005, then Australian Minister for Education, Science and Training, Dr Brendan Nelson, and former Brazilian Minister for Education, Mr Tarso Genro, signed a Memorandum of Understanding (MoU) to increase bilateral education cooperation. The MoU provides opportunities for Australian and Brazilian universities, students, teachers and officials to work together over the coming years.
Austrade (São Paulo) is working closely with Australian Education International to promote Australia as a quality provider of education services in Brazil. Education is a major part of the Expo Australia (formerly Australia Festival) program which began in 2001. Education is also featured in the Australia Guide produced by Austrade, now in its fifth edition.
Mining and Minerals
Australian participation in the Brazilian mining industry is increasing. An Australian pavilion was organised by Austrade for the (September) 2007 mining exhibition Exposibram, the biggest of its kind in Brazil. The exhibition was held in Belo Horizonte, the capital of the state of Minas Gerais, and is scheduled to be held again in 2009.
CVRD, Brazil's largest mining company and the second largest in the world following its recent acquisition of Inco of Canada, has recently announced a capital investment program of over US$1 billion: this offers a range of opportunities to Australian firms.
Austrade maintains a virtual office in Belo Horizonte with a primary focus on the mining sector.
Transportation
Opportunities for the supply of vessels exist in the mining and oil industries, and there are further prospects in the leisure boat market.
Textile, Clothing and Footwear
Brazil shares Australia's passion for surf and outdoor activities. Australia's expertise in this regard presents strong opportunities for further trade and investment in alternative brands and innovative equipment. Surf and outdoor wear is part of an ongoing Austrade promotional program.
Changes in Trade and Investment Conditions
Changes in Trade Conditions
Brazil has reduced its average MFN applied tariff from 13.7 per cent to 10.4 per cent, and claims to have simplified its import licensing regime and expedited customs clearance procedures.
Changes in Investment Conditions
Brazil continues to liberalise its services sector, including telecommunications and financial services. The government has a reform agenda for the taxation system, social security, bankruptcy laws and other improvements in financial markets to reduce the cost of finance. President Lula plans to introduce economic policies aimed at increasing Brazil’s investment rate from the current level of 20 per cent of GDP to 25 per cent.
Trade Successes
Agribusiness
In May 2007, Nufarm Limited took 100 per cent ownership of Agripec (Brazil's largest locally owned crop protection company) after acquiring a 49.9 per cent stake in the company in 2004. Nufarm has stated its Agripec investment constitutes a key element of the company's expansion into Latin America.
Australian companies have also been successful in exporting animal genetics to Brazil, creating new opportunities in this market. Goat and sheep genetics are a promising sector with ongoing exports from Australia expected to complement existing shipments of bovine genetics.
Mining
The mining sector continues to generate successes with consulting services, extraction and processing technologies, and software leading the list of exports. Principal amongst these successes is the awarding of a $1.6 billion EPCM (engineering, procurement and construction management) contract to GRD Minproc.
Manufacturing
Australian companies have also been successful in signing licensing agreements with Brazilian companies to offer lower-priced manufactured goods into Brazil and the Mercosur markets. Typical successes are technology products related to packaging or food processing.
Food & Beverage
Australian wine has been successful in growing its base in Brazil with imports worth US$1,059,677 in 2006, up from US$901,226 in 2005. Australia is currently ranked eighth in wine imports with 27 Australian wine brands available in the market. Austrade conducts two wine-related events each year in Brazil. Coopers Beer has also been introduced to Brazil.
TradeWatch Contacts
If you would like more information on the trade and economic conditions in Brazil, please email the Department of Foreign Affairs and Trade at tradewatch@dfat.gov.au or on the Austrade website.
For further assistance please contact the Council on Australia Latin America Relations (COALAR) Secretariat on 02 6261 3334 or the Department's Latin America and Caribbean Section.