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Brazil Country Risk Report 2[1].0

Brazil Country Risk Report 2[1].0

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Published by Monique Hogan

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Published by: Monique Hogan on Dec 05, 2009
Copyright:Attribution Non-commercial


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BrazilCountry Risk Analysis
November 1, 2009
Executive Summary
This report applies econometric models to determine what the appropriate policy for acountry is and whether or not the government is engaging the appropriate policy. It thenlooks to financial and political crises indicators. And finally recommends businessstrategy and timing based on the appropriate and current policy.Brazil is following the appropriate expansionary fiscal policy.
Appropriate PolicyCurrent Policy
Policy DescriptionExpansionary Fiscal PolicyExpansionary Fiscal PolicyExporting to BrazilThe appreciating Real willincrease pricecompetitiveness andlikeliness of payment.Same.Directly Investing in Brazil:-- for domestic businessYes. The appreciating Realwill increase purchasingpower. GDP growth willexpand market opportunity.Same.-- for export out of BrazilNo. The appreciating Realwill decrease pricecompetitiveness ofexports.Same.Capital investmentCautious. Yes for theFinancial and Energysectors. No for exportoriented industries. Hedgeagainst governmentregulations on foreigninvestors.Same.Crises WarningsN/ANone
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Basic Information
Population: 198 millionGDP: US$1.5 trillionCurrency: Real
Financial Analysis
Policy and Economic Outlook
The appropriate domestic policy for Brazil is a combination of monetary and fiscal thathave an offsetting effect on domestic interest rates.
Domestic Policy 
The appropriate domestic policy for Brazil is expansionary.The domestic policy analysis examines the relationship between real gross nationalproduct and inflation rates. Using a historical 15 year average, an appropriate target isset. Based on the country
s economic cycle: emerging, transitionary, developed, etc.; arange is around the target. In this case, Brazil is a large emerging market that requiresapproximately 6% inflation to maintain its utilization potential of 6% annual growth. Thetarget range is set at plus or minus 2% as a developing country. When the real GDP andinflation rate fall outside of the target zone, a governmental policy shift is indicated torecover the target. The 6% GDP in this case represents the absolute supply, or capacity,of the country
s economy.Brazil has experienced asignificant slowdown in GDP in2009, with growth dropping belowzero and recovering to about zero.This significant shift has movedannual GDP growth well outside ofthe target Zone. Since utilizationgrowth (0%) is much lower thancapacity (6%), the appropriategovernment policy is anexpansionary policy.
International Policy 
The appropriate international policyfor Brazil is to increase its interest rates and appreciate the Real.The international policy analysis examines the relationship between interest rates andcurrency rates, and looks to the countries balance of payments with all other nations to
070809Domestic PerformanceBrazil
Range +/- 2%Target 6, 6 (15Y avg.)
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determine the appropriateinterest and foreign exchangepolicy.Brazil
s 15 year averagecurrency volatility establishesa target performance range of+/-4%. Brazil
s change inforeign exchange ratescompared to its balance ofpayment account as apercentage of GDP shows itscurrency significantlydepreciated in the latter part of2008, and has appreciatedduring the 2009 recover. Inspite of its recovery, the Real remains depreciated against its target range. In order toappreciate the currency to the target range, Brazil needs to adopt an economic policythat increases interest rates and appreciates its currency.
Appropriate Policy 
The appropriate policy for Brazil is an expansionary fiscal policy.Governments have two primary levers to use in order to influence fitness of theeconomy: monetary and fiscal policy. Monetary policy deals with the expansion orcontraction of the total money supply. Fiscal policy deals with utilizing governmentspending and taxes to stimulate the economy to move in one direction or the other.Each policy has a differing effect on interest rates. Monetary policy has an inverse effecton interest rates, while fiscal policy has a direct effect on interest rates.In order for Brazil to move real GDP towards the 6% growth target, an expansionarypolicy is necessary. However, exchange rates arealso outside of their target range of 4% volatility.Therefore expansionary policy must increaseinterest rates to also appreciate the currency. Toaccomplish this the government should engage inexpansionary fiscal policy that will raise interestrates. This can be accomplished by increasinggovernment expenditures and reducing taxes.
Actual Policy
Brazil has adopted a neutral monitory policy to holdmoney supply, and an expansionary fiscal policy toexpand the economy and raise interest rates.
5-5-4-3-2-112347-20-15-10-55BP %GDP
      F     x
070809 BrazilInternational Performance
Target Range +/- 4%
Expansionary Policy
Monetary: M
=> i
Fiscal: G
=> (E
) => i
Contractionary Policy
Monetary: M
=> i
Fiscal: G
=> (E
) => i
E = gov
t expenditures, t = taxes, i = interest
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