Economic Analysis: Brazil

Introduction

Currently, the Brazilian economy is going through a severe recession with a declining growth rate. The country is faced with an economic crisis due to the fall in commodity prices and its inability to make necessary policy adjustments amid a political crisis. These events have undermined consumer and investor confidence in the country’s economy. The risk rating of this country is unfavorable. The economy’s huge population occasioned by vast income inequality makes the situation worse. Although Brazil has made significant steps towards pulling the population through microfinance initiatives, it is yet to reap big from them. Unemployment is slowly becoming a problem in the country occasioned by several factors including the inadequate education system. This study attempts to explore the economic implication of Brazil’s risk ratings, the state of employment, microfinance and saving, population, and education.

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Microfinance and Saving

The new paradigm of microfinance and saving is based on market principles designed to offer financial assistance services, particularly, to the low-income population, to promote asset creation and poverty alleviation. The rationale behind the model is that the poor have other financial needs beyond credit and are more likely to benefit from greater access to financial services investment-wise. The new design is focused on the creation of cost-efficient microfinance institutions with the potential to inflate the economic frontier considerably.

Despite having an enormous amount of natural resources and being the largest economy in South America, Brazil has one of the world’s worst inequality rates. The country has the largest and most advanced banking sector; it also is the birthplace of modern microcredit systems. Yet, ironically, the microfinance needs are not wholly or adequately met. From a micro-business and entrepreneur’s perspective, the penetration rate of the microfinance sector in Brazil is significantly low. However, since the 2003 implementation of the Brazilian Package of Microcredit, the country has made solid progress in reaching out to the entire population. The package consisted of three fundamental pillars, which included the following: widespread access to financial services, stimulation of credit supply through the institution of a 2% reserve requirement on demand deposits, and the stimulus to create credit cooperatives. Since then, the number of people with access to bank accounts has increased from 84 (2005) to 118 million in 2011 (Serpa). Over the years, Brazil has made considerable efforts in improving the state of microfinance and saving in the country.

The main financing options in Brazil include consumer credit, credit cards, store credit, supplier credit, and loan sharks. Consumer credit constitutes personal loans offered mostly by finance houses and mortgage companies. However, these institutions carry disadvantageous interest rates of about 10% and above. The use of credit cards is on the rise in Brazil with 15% of their use being among the class D income earners. Store credit has proven convenient for retailers who prefer offering installment credit to the consumer.

Education

Education is a fundamental concept as far as economic development is concerned. Substantial investment in education is the key to the realization of sustainable economic development. Individuals’ productivity and creativity levels are directly related to the schooling intensity of those persons. Ultimately, education promotes entrepreneurship and technological progression in any country. For example, if the Brazilian population had greater access to information regarding the country’s microfinance policies, the sector would take root and substantially expand. However, due to low education levels among Brazilians, access to such information is limited. Practically, education exposes the population to the world of business and opportunities therein.

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Brazil has made significant efforts in funding the school sector in an attempt to increase quality education access for all its citizens. Over the years, expenditure on education has increased at a steady rate of up to 5.55% of the country’s GDP by 2012. Although this rate is below the OECD recommended rate of about 6.23% of the GDP, the state’s effort to fund its education sector is commendable. Over the last 15 years, the Brazilian government has made serious steps in realizing its venturesome goals designed to achieve the OECD levels of education standards. The outcome of these efforts was reflected in the 2009 results, which confirmed an overall increase in the national score. Public schools in Brazil are funded and run by the government (OECD).

Despite the increase in government expenditure on public education to approximately 5.5% of the GDP, the country is yet to see a substantial improvement in academic performance among students. It may be attributable to some issues that include lack of schools and resources, non-attendance, low standards of education, and lack of internationalization of higher-learning institutions (OECD). These factors impede the growth of the school sector in Brazil.

Improvement in the quality of education in Brazil constitutes an important step towards bridging the huge income inequality gap synonymous with the country. Quality education is directly related to the skills levels in the labor market. It is a fundamental factor in creativity, innovation, and economic progression, which cannot be ignored in the country’s development agenda.

Risk

The country risk rating is an important aspect of economic analysis (Singh et al). Risk assessment gives an overview of a country’s uncertainties regarding its political and economic outlook as well as the business environment. A stable political, economic, and the business setting is an indicator of certainty in the economic progression and development of any given economy. Risk assessment can be done by evaluating a country’s strengths and weaknesses. In addition, it can be done by turning to independent credit rating agencies and comparing their different scores.

Brazil is the sixth-largest economy in the world with vast natural resources. In response to several corruption scandals, the country has seen a notable improvement in institutional transparency in the recent past. It boasts of an advanced manufacturing industry that consists of such sectors as aeronautical, oil and gas, chemistry and pharmaceutical, and engineering. The country also has an increasingly active population. Furthermore, it is equipped to withstand external shocks because of substantial reserves invested in the outside world.

Despite the economic strengths discussed above, the country has its weaknesses, too. The country suffers from an acute shortage of qualified labor — a factor attributed to its inadequate education system. The Brazilian economy is characterized by infrastructure shortcomings regarding transport, energy, and a low level of investment. Also, synonymous with the Brazilian economy is the high cost of production due to the expenses associated with wages, energy, credit, and logistics. The scale of corruption and economic inequalities experienced in the country impedes the country’s economic development agenda. Lastly, the country suffers high public expenditure marred with inefficiencies.

Standard and Poor’s credit rating for the country stands at BB with a negative outlook. In the last reports, Brazil’s credit score was set at Ba2 and BB with a negative outlook in Moody’s and Fitch’s credit ratings accordingly. Credit rating is critical as it determines the level of foreign direct investment in the country. Sovereign wealth and pension funds, as well as other investors, use these credit ratings to gauge the worthiness of Brazil. It impacts Brazil’s borrowing costs and investment.

Weighing between the country’s strengths, weaknesses, and credit rating, Brazil is in a better position to do better. With significant spending in the education sector, reduction in public expenditure inefficiencies increased transparency, and investment in infrastructure, the country’s risk rating will improve.

Population

The current population in Brazil stands at approximately 210.6 million people, which constitutes about 2.8% of the world’s total population. The entire Brazilian land area is about 8.3 million square kilometers with a population density of approximately 25 people per square kilometer. However, about 84.3% of the country’s population is urban. The country’s large population is both a strength and a weakness in its economic progression (United Nations).

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The recent economic growth experienced in Brazil was driven by the consumption boom. Between 2008 and 2013, consumer expenditure increased almost thrice the country’s economic growth. The boost in consumer spending was marked by a rise in credit due to significant improvements in the country’s microfinance sector. Apart from the increase in consumer expenditure, the country’s massive population is an important source of labor, a factor that can fuel growth in its robust manufacturing sector. A huge population provides a ready market for the country’s products, which leads to a surge in production. Any slight improvement in the access to education and its quality in the country will result in a measurable upgrade in the country’s workforce productivity and creativity levels. It will, in turn, lead to sustainable economic growth and development.

However, a huge population is a burden to the country. Usually, it causes resource constraints, especially in the provision of social services. Instead of investing in infrastructure, the Brazilian government is forced to spend a huge chunk of its resources on the delivery of social amenities such as healthcare and education. The government has also made a considerable investment in poverty alleviation a factor that fuels the consumption boom. However, consumption increase is a short-term economic growth strategy that is not sustainable. Greater income inequality is also a problem associated with fast population growth that affects the rate of economic development.

However, a huge population can as much be an asset as it impedes economic progression. If Brazil invests in its education system, it stands to reap significant profits through increased productivity and creativity. A skilled workforce will drive the economy to greater heights.

Jobs

By January this year, the recent economic recession had left approximately 13 million unemployed. The decline in the employment rate is attributed to the sharp economic contraction experienced in 2016. Before the recession, the unemployment rate stood at about 9.5%, but over the past year, the figure rose to 12.6%. In the recent three months, up to January this year, the rate of job loss in Brazil had been on the increase at a constant rate of about 12.6% above the market expectation of 12.4%. The unemployment rate has risen by about 7.3% margin since the August-October period last year. However, employment was almost unchanged. Job losses in the public administration, social security, health, education, and the defense sectors were about 4.1% while the domestic services recorded a 1.4% employment contraction (Tradingeconomics.com).

Unemployment in Brazil is attributed to several factors which include the following. First, personal consumption has significantly dropped. Consequently, there is increased limited place to go for recapturing GDP. Secondly, the country is characterized by a considerable decline in investment caused by reduced consumer confidence and skeptical investors. Many Brazilian companies’ credit ratings have been slashed with increased fear of possible poor investment grades. Thirdly, government expenditure has almost leveled off characterized by serious detrimental economic implications. Government spending is not enough to offset the drop in other sectors. Fourth, the country’s currency value has depreciated by a 10% margin against the dollar. Consequently, imports became relatively expensive negatively impacting the manufacturing sector, which depends on imports. Lastly, the looming political crisis creates a tense atmosphere characterized by uncertainties, a factor that is detrimental to investment (Attanasio).

The points listed above contribute to unemployment in the Brazilian economy. However, the adoption of strategies or policies that address the issues stated above may result in a change in the employment rate for the better. For instance, investment in the education sector will promote entrepreneurial culture as more and more people will become aware of the available opportunities. Similarly, investment in infrastructures such as energy and transport will result in a reduced cost of conducting business, which will lead to the creation of jobs. Strengthening the institution of governance will promote accountability and transparency leading to the efficient use of public resources, greater economic stimulation, and job creation. Ultimately, unemployment is a solvable problem in Brazil with the proper use of resources and a greater political will.

Conclusion

Brazil is now in a better position to gain track to a sustainable path of economic growth. However, tough decisions have to be made regarding reforming its education sector and improving quality standards to equip its huge population with the requisite skills essential for economic development. They must take bold steps to make policy adjustments to strengthen the institutions of governance in an attempt to foster accountability and transparency. This will promote the country’s risk rating and encourage prudent resource use. Consequently, the economy will expand creating employment opportunities for over 30 million jobless people. In addition, policy adjustment will enhance the country’s microfinance and save initiatives to bridge the income inequality gaps synonymous with the economy. Furthermore, it will stir the economy and benefit from its enormous population in some ways. Ideally, Brazil needs to make some policy improvements regarding the country’s risk’ rating, community, microfinance and saving, jobs, and education.

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