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Brazil's emerging economy has proved to be resilient in the face of world recession, and Irish companies would do well to examine business opportunities there.

As the consequences of the global financial crisis are felt throughout Ireland, new business opportunities seem scarcer than ever. Since the domestic economy is currently struggling to recover from the worst recession in Ireland's economic history, entrepreneurs need to turn their attention overseas.

In particular there has been widespread attention given to the number of profitable opportunities that are increasingly available in the emerging markets. The BRICs especially - that is, Brazil, Russia, India and China - stand out as high-growth potential countries, not only because of their fast-growing economies but also as a result of their large domestic markets, abundant human capital and vast natural resources. As the most advanced economies are facing a slow and difficult recovery, global demand will need to rise in the rest of the world. However, the future need not seem so bleak, for it is increasingly expected that the BRICs are prepared to face up to the challenge. After all, the numbers do not lie. And despite the cloud of financial despair that still hovers over much of the world, in 2010, China is expected to grow by 9%, India 6.6% and Brazil 5%.

Specifically in the case of Brazil, macroeconomic indicators show how the country will be one of the first to emerge from the worst recession the world has faced in eight decades. Brazil's economy has proved resilient to downturns in the international economy, largely because its economic growth hinges on a fast-growing domestic market, a dynamic and diversified trade sector, a strong banking system, a less exposed housing sector, an effective set of anti-cycle measures, growing international reserves ($250 billion) and a declining interest rate (8.75%). Moreover, as a result of recent tax breaks as well as the monetary and fiscal stimulus package, credit lending to households has rebounded, auto sales have picked up markedly and retail sales have recovered substantially.

Economic expansion in Brazil

All in all, Brazil has demonstrated that it is a nation not only known for its natural beauty and talented soccer teams, but also as a country currently undergoing a strong level of economic expansion. Moreover, not only has the country been able to secure positive GDP increases, but this has been matched by a decrease in the level of poverty and a better distribution of wealth. Since economic development is supported by a large urban population, an increasing minimum wage and an expanding professional middle-class (52% of total population), the stage appears set for Brazil to beat many records.

In fact, some sectors are already showing signs of what Brazil's economy can look like in its full-fledged maturity in years to come. Already in 2007, Brazil was the world's second largest market for floor and wall tiles; the third in cosmetics; the fourth in chocolate; the fifth in computers, soft drinks and alcoholic beverages and the eighth in automobiles. An important trend behind these numbers is the growing income of the lower-middle class. Specifically, the Government housing programme called "Minha Casa, Minha Vida" - "My Home, My Life"- and the programme "Luz para Todos" - "Light for All" - have been important drivers of this growth. So far it has provided around $20bn to low-income households in order to finance the construction of over 1 million homes. And more is sure to come, as there is still a shortfall of 7 million homes at present. In fact, international consultants estimate that over 35 million families will be looking to purchase their first home by 2030.

In many ways Brazil really does stand in a league of its own. Its economy is the ninth largest in the world, the GDP (PPP) reached $ 1.99 trillion in 2008 which accounts for more than half of South America's total GDP and in 2009 Brazil attracted $25.9bn in FDI and the estimate for 2010 is $35bn.

The road to this kind of success has not been easy however. In order to achieve such economic development, Brazil has had to face and overcome a number of challenges over the last 60 years. After experiencing a long period of economic underperformance, the 1990s saw the introduction of a variety of measures intended to stimulate sustainable economic growth. Since the early ‘90s, the government has enacted a number of reforms that have fostered macroeconomic stability, secured price control and stimulated employment. In spite of a number of external shocks, Brazil's economy has been able to rapidly improve its performance as result of the continuity in these policies over the last 15 years.

A diversified trading partner

Consequently, even though Brazil has not yet had the spectacular economic growth of either China or India, there have been significant improvements in the country that merit the attention it is now being given. Trade especially has played an important role in the country's transition into a large player in the world economy. Its trade partners have diversified significantly over the past decade and trade is now twice as important as it was only a few years ago. Indeed the degree of openness to foreign trade has grown from 14% of GDP in 1988 to 23.58% in 2008 - and is increasing at a rapid pace. However, despite the performance of the trade sector over the last few years, there is still much room for improvement. After all, Brazil constitutes a good opportunity because its economy is still in transition towards a higher level of economic development.

The share of exports as a percentage of total Brazilian GDP still only accounted for 12.5% in 2008 and 1.25% in relation to total world exports. Nevertheless, because of the improvements we have seen so far, it is safe to say that the Brazilian economy should continue growing at a rate of 5-6% over the next few years. The flow of trade is also expected to continue to grow at the rate of two digits, just as it was before the financial crisis affected exports and imports last year. A good example of a company that believes on the potential of the country is Royal Dutch Shell. Shell has agreed to set up a 50:50 joint-venture with Brazil's Cosan, the world's biggest ethanol-from sugarcane producer, which the companies value at $12bn. According to Rubens Ometto, Cosan's chairman, this joint-venture has provided "the step forward that was lacking, in spite of all our efforts, to make ethanol a global commodity".  At the same time, the US Environmental Protection Agency (EPA) has confirmed that ethanol from sugarcane is a low carbon renewable fuel, which can contribute to the reduction of greenhouse gas (GHG) emissions by more than 50%.

One of the most interesting aspects surrounding this transformation in the Brazilian economy and certainly one of the circumstances forming the backbone of its recent trade performance is an important network of multilateral, regional and bilateral trade preferential agreements and efficient mechanisms of trade promotion.

BrazilTradeNet (www.braziltradenet.com), the trade-promotion website of The Brazilian Ministry of External Relations, has played an important role in promoting trade and investments. It has been extremely successful in providing those interested in either importing to or doing business with Brazil with an efficient network of contacts and a variety of publications, economic indicators, information on Brazilian companies, export offers, legal framework, trade fairs, seminars and much more. It is an extremely useful source of information for those interested in taping into the Brazilian market.

Initiatives such as this have made a significant impact on the diversification of trade partners. After all, since the country is increasingly able to trade not only in a diverse range of products but also with different markets, it becomes better equipped to protect itself in the event of external economic disturbances. As a result of diversification, even major economic distress in one of its major trade partners is less and less likely to significantly impact Brazil's entire trade sector. And it appears that this trend towards diversification is only getting stronger. For example, in 2009, the most important markets for Brazilian exports were Asia (26.8%) and the EU (22.4%), followed by Latin America (21.7%), the US (10.2%), Africa (5.7%), the Middle East (4.9%) and eastern Europe (2.2%). On the other hand, its most important import partners were Asia (27.9%) and the EU(22.9%), followed by Latin America (17.7%), the US (16.4%), Africa (6.6%), Middle East (2.5%) and eastern Europe (1.5%). That is, Brazil's commitment to diversifying trade is evidenced by the country's increase in trade flow with Asia, Africa and the Middle East and its relative decrease in trade flow with the United States and the European Union, which have historically dominated trade with the country. In fact, in April of 2009, China finally replaced the United States as Brazil's largest trading partner; trade turnover between Brazil and China reached $3.2bn compared to $2.8bn between Brazil and the United States over the same period.

As Brazil expands its global outlook as a top world economic player, it still continues to look inwards for many of its growth opportunities. As a founding member of MERCOSUR, Brazil worked to secure preferential trade agreements with various countries in Latin America, such as Bolivia, Chile, Colombia, Cuba, Ecuador, Mexico, Peru and Venezuela, among others. It is currently seeking to extend these agreements even farther beyond the region. Bilateral and other preferential trade agreements are currently being negotiated, signed and/or ratified with partners such as Egypt, India, Israel, Morocco, the Andean Community, the Centro American Common Market and the EU. Venezuela has also applied for membership in MERCOSUR. As a key player in the area of natural resources, especially natural gas and oil, its entry has already been ratified by Argentina, Brazil and Uruguay. Paraguay is therefore the only full member that has not yet ratified Venezuela's application for membership.

Consequently, anyone considering setting up a joint-venture in Brazil should bear in mind that Brazil's vast territory can certainly be used as a platform to the greater South American market. The country's leaders have reiterated time and time again that it remains committed to fostering South American integration. Not only have there been many initiatives aimed at improving transcontinental infrastructure, transportation systems and energy distribution, but there have also been many initiatives intent on furthering business ties with the larger Latin American community.

In addition to a strong process of integration with neighboring countries, Brazil has also pursued an interesting "south-south" policy of encouraging trade between developing countries. Under the umbrella of UNCTAD, Brazil has played an important role in the Global System of Trade Preferences Among Developing Countries (GSTP). One of the tenants of Brazilian Government has been the promotion of increasingly stronger ties to other emerging economies and developing countries in general. In the last eight years, Brazil has opened 45 new embassies, primarily in Africa and the Caribbean. This is certainly a good illustrator of the country's intentions to encourage technical cooperation, trade and investment among developing countries.

The rise of the BRICs

Brazil's history as a peaceful and friendly nation is most certainly reflected in its recent economic trajectory and flowering diplomatic ties. And governmental and business leaders from around the world are increasingly taking notice of the country's potential. In March last year, US President Barack Obama declared himself "a great admirer of Brazil and a great admirer of the progressive, forward-looking leadership that President Lula has shown throughout Latin America and throughout the world." President Obama's comment sent a signal to the rest of the world about the ongoing changes occurring not only in Brazil but also to the entire structure of the international community as a whole. And this future very well indicates that the BRICs will be assuming a much more prominent role in the global economy.

A recent report by the Centre for Economics and Business Research estimates that by 2010 the economies of the United States, Europe and Canada will represent only 49,4% of world GDP, down from 60% and 64% of the world's GDP in 1995 and 2004 respectively. In the meantime, the BRICs share of world GDP has risen from approximately 15% in 1993 to 21% in 2007 and a recent economic report by financial giant Goldman Sachs predicts that if the trend continues as present that in less than 40 years, the BRICs economies together could be larger than the G7 in US dollar terms. This transformation, coupled with the International Monetary Fund's forecast that developing countries would grow by 3.3% in 2009 while advanced economies would shrink by 2%, clearly shows that the international tide is turning in favour of the developing world.

As we have seen, one of the drivers of Brazil's recent success is its diverse domestic market. Especially benefiting from the recent push for diversification, Brazil's economy has evolved to a much more mature level than its primary natural resource base from years back. Exports and imports are now part of a complex network of production and consumption that is mingled with the country's own growing domestic demand. This sophisticated balance between the primary, manufacturing and services sectors is a pillar of Brazil's increasing resilient and dynamic economy. In 2009, intermediate goods accounted for 47% of total imports; equipment and other capital goods 23.7%; consumption goods 16.3%. In the same year, in terms of exports, the share of manufactured goods was 42.8%; semi-manufactured goods 12.8%; and primary products 42.4%. As these figures show, Brazil exported more manufactured and semi-manufactured goods overseas than it did primary products - an important break with the past.

Moreover, the share of capital goods is larger than that of consumption goods in overall imports. Indeed, experts say that future economic growth will be largely supported by growing imports in the areas of equipment and other capital goods. As a result, Brazil is expected to become an even larger exporter of value-added products. This trend is already beginning to show. For example, the exports of metallurgic products grew by 7.3%, chemical products by 6.9%, machines and equipment by 3.2% and transport material by 10.3% in 2009 alone. Although the export of soy and its byproducts witnessed a tremendous performance over the last 12 months - an increase of 14% - it definitely appears to be the exception that makes the rule.

In terms of markets, there have been some interesting trends to emerge in the past decade that has substantially impacted the business landscape of the country. In particular, Brazil has especially increased its exports of manufactured and semi-manufactured goods to the rest of Latin America. This increased demand has been matched or even surpassed by growing domestic demand for these products. Especially over the last decade, rising incomes have enabled Brazilians of lower socioeconomic status to consume more household appliances, computers and other products of higher value than ever before. For example, in the first half of 2007 alone, the sales of refrigerators grew by 24.56%, washing machines by 11.93% and dishwashers by 44.83%, when compared to the first half of 2005. This kind of tremendous growth can also be observed in auto and durable goods markets. Interestingly, the country has even become the world's third largest market for Coca Cola products, only behind the United States and Mexico.

A changing country

There have been many changes which have significantly impacted daily life in Brazil. Despite growing domestic production, however, there is an important caveat to note for foreign investors. The fact that Brazil's foreign trade is still pegged to the US dollar means that as the Real, the country's national currency, appreciates, the level of competitiveness of Brazilian exports is negatively impacted. This means that imports are made relatively cheaper and exports relatively more expensive. Bearing in mind that Brazilian imports are growing, it is in the areas of services, pharmaceuticals, telecommunication, software, food and entertainment that Irish companies stand to profit from the most.

Foreign investors promoting business and other projects with the potential to enhance value-added goods will undoubtedly encounter prime opportunities and strong public and private support. This is good news for the Irish investor looking to do business in Brazil as he is quite likely to reap significant rewards. An interesting opportunity also exists in working in partnership with Brazilian industries. Since domestic products are increasingly manufactured with high quality materials and technological standards Irish companies can certainly benefit from becoming involved in this process and contributing in various areas to the manufacturing process. After all, currency fluctuations withstanding, studies show that Brazilian products as a whole are gradually becoming increasingly accepted and sold in the international market. Often incorporating original designs, they can be as creative and sophisticated as they are functional. The amazing popularity of Brazilian brands such as "Havaianas" flip-flops to Embraer aircrafts have helped pave the way, and now a vast array of products "Made in Brazil" are being successfully launched worldwide.

Another important symbol of Brazil's recent thrust into the spotlight has most certainly been the discoveries of new oil and gas fields. In November 2007, the state-run oil company Petrobras officially informed the local Oil Agency (ANP) of the commercial feasibility of exploiting a new oil field off the coast of Rio de Janeiro called Tupi. Located deep beneath the pre-salt layer, the Tupi field - as well as other subsequent discoveries (Carioca, Pao de Acucar, Iara, Caramba, among others) - can be seen as making up a new frontier in oil exploration. However, the Tupi field, for example, is located at great distance from the coast, more than 7,000m in depth and its high temperatures are only some of the technical difficulties that will have to be overcome before exploration is truly viable. Nevertheless, the availability of these reserves moves Brazil from the 17th to the eighth or ninth in terms of countries with the largest oil reserves. As of present, Petrobras expects that the commercial exploration of these new fields will begin between 2013 and 2015.

In the aftermath of Petrobras' announcement, a variety of investment opportunities were generated. The Brazilian shipbuilding industry, for example, which had been practically inactive since the mid-‘90s, suddenly boomed again as demand for renovation and construction of new platforms and ships, as well as support vessels for deep water exploration and production propelled demand. This has especially changed the financial landscape of the State of Rio de Janeiro, where most oil production in the country occurs. Many companies in the petrochemical sector are entering or expanding their investments in the region in order to obtain access to raw materials and, consequently, a competitive edge. The total investment forecast by the oil-state company Petrobras for the State of Rio de Janeiro amounts to over $ 36.8bn during the period of 2010-2012. The PAC (Growth Acceleration Programme), launched by Lula administration, involves investments to the order of R$503.9bn in transport, energy, housing, sanitation, and water supply infrastructure between 2007 and 2010.

Furthermore, as the State will also host the World Cup in 2014 and the Olympic Games in 2016, investments in the area of infrastructure are expected to surpass the amount of $13.6bn. After all, in order to host such a large event, investments in ports, renovation and expansion of airports, highways and extensive civil construction will be necessary. In total, the State of Rio de Janeiro plans to invest $60.3bn through the public and private sectors over the next three years towards the project. Brazil is enjoying healthy finances and a promising economic future.

The goals that the Brazilian government has set for its economy over the next coming years is largely summed up in the following manifesto: "to increase general fixed investment; enhance public and private investment in research and development; raise Brazil's participation in world exports; and boost the number of small and medium sized enterprises (SMEs) engaged in international trade." The last consideration is key because, despite the fact that large corporations continue to dominate Brazilian exports, there is currently a strong push to increase the contribution of small and medium sized companies to foreign trade. Behind this push is the fact that the total participation of SMEs in Brazilian exports actually decreased from 2.05% in 2002 to 1.32% in 2007. In this context lies another opportunity for Irish companies and investors. Brazilian businessmen are constantly looking to expand their businesses abroad and small and medium sized companies will certainly need the expertise, technology and networking of foreign entrepreneurs. The same applies to joint-research opportunities. Irish companies are well posed to reap the benefits of this connection.

Consequently, the more one examines the current economic situation in Brazil and abroad, the more reasons there appear to be to look into doing business in Brazil. The country's economy is currently in expansion, the cost of living is low and the national currency, the Real, has significantly appreciated vis-à-vis the US dollar and the Euro. Inflation is under control, minimum wage is still low and the legal framework is transparent and stable. So there are plenty of good reasons to set up a partnership with a Brazilian company and explore the fast-growing market of the giant of South America. 

Speaking from experience

Irish businesses working in Brazil

"I was hugely impressed at the sophistication and dynamism of the Brazil economy. This is underpinned by a palpable ‘can do, will do' attitude to business, which is refreshing and exciting. Culturally, business people are open-minded and willingly participative - welcoming of opportunities. Brazil has all the right ingredients to become a formidable economic powerhouse within the next decade."

Peter Nelson, Valentia Technologies

"We have been in Brazil since Autumn 2009 and are involved in some interesting projects. We have experienced some challenges and invested considerable resources into making our Brazilian venture a success. We now have a structure that allows us meet client and investor needs effectively."

Joe Kennedy, Kompas Internatinal Architects

"We have been involved in the property market in Brazil for over three years and set up a property company in Sao Paulo, the country's economic capital, in September 2008. Business is thriving, mature and deeply rooted, carried out in a controlled and professional manner by established and sophisticated companies. This, coupled with a balanced fiscal policy and strategic monetary injections, has created a business environment that will ensure the continued and stable growth of the economy for the foreseeable future."

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