2 | Economic and commErcial rEport
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Index
Editorial Board
Economic and Commercial Report
Number 01November 2012
Published by Embassy of India
BrasíliaSHIS QL 08 conjunto 08
casa 01 - Lago Sul Brasília-DF
Editor:Raj Srivastava
Texts:Yatin Patel
Layout:Hadassah Levyski
04 Brazilian Economy
12 Focus Story: REal-ity Check
14 2012 at a Glance
4 | Economic and commErcial rEport
The first phase of the auction for some
7,500 Km of federal highways (seven
parcels) for private concessions
(toll roads) will be held on 30th January. Six
competing groups : CCR, Odebrecht, Invepar,
Ecovias, Triunfo and Acciona. Some “new rules”
will be part of this process: 1) if the lines of
vehicles at toll stations exceed 200 meters or
if takes longer than 15 minutes to go through
a toll station – these toll stations would have
to be “opened” (no tolls collected). The seven
parcels are 1) BR101 (Bahia) 772 Km; 2) BR262
(MG/ES) 377 Km; 3) BR50 (MG/GO) 426 Km;
4) BR153 (GO/TO) 814 Km; 5) BR060/153/262
(DF/GO/MG) 1,177 Km; 6) BR163/262/267
(MS) 1,423 Km; and 7) BR163 (MT) 822 Km.
Another auction is planned for April for 5,700
Km of federal highways. This auction will also
have some “new rules” - the bidders must have
net assets of between R$ 40 million and R$ 870
million depending on the parcel – to impede that
mid-sized firms assume several concessions.
The case in point was in 2007 when the Spanish
firm OHL (alone and not in a consortium) won
five of the seven concessions up for bid and
was unable to perform the needed investments
and had to “sell out” to a larger firm - Abertis.
New highway auctions in Brazil
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Brazilian Agency responsible for
auctioning of oil/gas blocks (ANP) now
plans to hold its 11th round of auction
for 172 blocks of oil/gas exploration in mid-May
2012. To this end, a detailed map of these areas
was published on 11th January – 120 days
before the auction is to take place. Of these
blocks, 87 are on-shore and 85 are off-shore.
The last auction was in 2008 and the same “local
content” rules will apply in this 11th round.
11th Round of Oil & Gas Blocks Auctions
6 | Economic and commErcial rEport
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Amazon.comAmazon.com Inc and
Google Inc both opened their digital
bookstores in Brazil on Dec. 6,
hot on the heels of e-book offerings by local
booksellers in a fast-growing online retail market.
The simultaneous introduction of the
two services highlighted the wide-open
nature of Brazil’s US$12 billion e-commerce
market. Low Internet penetration and
a swelling middle class have spurred
bets on strong growth for years to come.
Amazon will begin selling its Kindle
e-book reader in Brazil in coming weeks for
R$299 (US$140), ending months of speculation
that it could arrive by acquiring a major
competitor. Brazil’s biggest bookstore chain,
Saraiva, is trying to sell its online busi¬ness.
In Brazil, the Kindle will take on Samsung
and Apple tablets that often cost as much as
twice their U.S. retail prices due to import tariffs,
steep taxes and inflated local produc¬tion costs..
The rival Google Play service will
offer e-books and movie rentals on
computers and mobile devices running
Google’s Android operating system.
Amazon Starts Brazil Operations
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I The Spanish logistics firm OHL sold its
assets in Brazil and Chile to Spain’s
Abertis and Canada’s Brookfield.
Starting in 2007, OHL has captured
operating concessions for five federal highways
and four state highways in the state of São
Paulo, totaling 3,226 kilometers (2,004 miles).
These will now be controlled by the
Abertis-Brookfield joint venture in which
the Span¬ish firm holds a 51% stake.
Spain’s OHL Sells Brazil Assets
The government released the terms for a
Sept. 19 auction in which a concession
to operate a bullet train running from
Campinas to São Paulo to Rio de Janeiro will be sold.
The winning bidder will capture a
40-year concession to operate the train,
supplying the technology and the equipment.
Total investments have been estimated
at R$7.7 billion (US$3.7 billion) with the
government’s National Development Bank
(BNDES) providing 70% of the financing.
A second auction will be held to choose
the group that will construct the track with costs
estimated at R$27 billion (US$13 billion).
Bullet Train
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8 | Economic and commErcial rEport
President Dilma Rousseff on Dec.
20 announced that airports in Rio
de Janeiro and Belo Horizonte will
be privatized at a September 2013 auction.
“International experience shows that
airports are good business,” Rousseff
said, recall¬ing that last February, 20-year
concessions were granted to manage three
airports, two in São Paulo and one in Brasília.
Rousseff said Thursday that any private
entities participating in the September auctions
will have to include at least one international
partner “with experience in running an airport
handling at least 35 million passengers a year.”
This operator must have “at least a
25% stake” in the consortium. Companies
with majority stakes in the operations of the
three airports already privatized will not be
allowed to take part in next year’s auction.
State company Infraero will have a 49%
stake in the new airport operators, the same
condition that was established for the February
privatizations despite Infraero’s poor reputa¬tion
as the current operator of Brazil’s largest airports.
Civil Aviation Minister Wagner Bittencourt
said the new operators will have to invest US$5.7
billion through the life of their concessions: US$3.3
billion for Rio’s Tom Jobim airport and US$2.4
billion for Belo Horizonte’s Confins airport. The
rules for the public tender will be announced in April.
Bittencourt also announced that the
government is creating a new state company,
Infraero Serviços, whose function will be to develop
regional airports. In an initial phase, the government
plans to invest US$3.6 billion to modernize
270 small airports. The longer term objective
is to upgrade 689 public airports, he added.
Airports of Rio and Belo Horizonte to be Privatized
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Taiwan, South Korea, Saudi Arabia
and Egypt joined Japan, China
and South Africa who had already
an¬nounced suspensions of imports after
it was learned that a cow in the southern
state of Paraná in 2010 had died with the
protein believed to cause mad cow disease.
Government officials on Dec. 21
warned these countries that they have until
March to lift their bans or else Brazil will file a
complaint at the World Trade Organization.
According to Agriculture Ministry officials,
these countries have no grounds for their bans.
“March is the deadline,” said Enio Marques
Pereira, Secretary for Animal and Plant Health,
after a meeting at the World Organization for Animal
Health (OIE) headquarters in Paris on Friday.
Brazilian officials have insisted that the
disease never appeared in the cow but the country’s
delay in reporting the case has raised suspicions.
The seven countries that have suspended
imports account for 15% of Brazil’s beef exports
but in the case of Egypt, the suspension applied
only to beef from Paraná, responsible for a small
portion of Egypt’s beef imports from Brazil.
Seven Countries Now Ban Brazil Beef
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10 | Economic and commErcial rEport
According to a survey conducted
by the Federal University of Minas
Gerais, only 39% of Brazilians
have financial investments of any kind.
For the higher income classes A and B,
the total reached 52% but for classes C and
D it dropped to 29%. Among persons with
investments, the preferred investment was savings
accounts, accounting for 27% of the total.
Only 39% of Brazilians Have Financial Investments
Transparency International on Dec.
5 released its annual perception of
corruption among 176 countries.
Brazil was ranked 69th, an apparent
improvement from its 73rd position in 2011. But
this year TI altered its methodology, making it
impossible to compare the results with past years.
Among Latin American nations, Brail trailed
Chile, Uruguay, Puerto Rico, Costa Rica and
Cuba. Among the BRICS nations, Brazil and
South Africa were tied with the best rankings.
Brazil Ranks 69th in Corruption Survey
According to the Ministry of Education,
the public sector in 2011 invested an
amount equal to 5.3% of gross domestic
product in education. This was up from 5.1% in 2010.
The government, however, is far from
its goal of investments equal to 10% of
GDP by 2022 set by the National Education
Plan. At the current pace, investments
in ten years will total only 8% of GDP.
Education Investments Were 5.3% of GDP in 2011
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Agri-Gulliver in Lilliput
In the era of building the economic strength
on the pillar of Industrial production, Brazil´s
agricultural muscles bring quite an impressive
diversity which is as pleasant as the one in the
Amazon jungle. Brazil ranks third among the
world’s major agricultural exporters and fourth
for food products. By cultivating agricultural
and oil resources, Brazil also ranks second
worldwide for bioethanol production.
This quasi-miracle has few important
factors in its base. Brazil has largest arable but
yet to be utilized land reserve, strong exporting
agricultural activities, radical economic reforms
and an aggressive trade and influence policy.
Because of this, agriculture is still a driving
force of the Brazilian economy with 5.8 percent
of GDP (against 2 percent in France), and with
the agribusiness share reaching 23 percent. In
2009, agriculture accounted for 19.3 percent
of the labor force, or 19 million people, thus
strongly contributing to poverty reduction.
Agribusiness employment accounted for 2.7
percent of the labor force.
It is no surprise that Brazil is today the
world’s largest producer and exporter of a
wide range of products: soybean, coffee, cane
sugar, orange juice, meat and tobacco. In spite
of weak governmental support to producers as
compared with OECD countries, and a domestic
consumption that captures 79 percent of
agricultural production, agribusiness accounts
for over 38 percent of Brazil’s exports, and a
$77.5 billion trade surplus in 2011, while the
country was still a net importer of agricultural
goods in the 1970s. In fact, agriculture has been
Agriculture in Brazil
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a strong factor in the country’s macroeconomic
stability through currency flows on one hand,
and on the other, its contribution to energy
security with bioethanol development.
A significant expansion of credit and the
simplification of the tax system, combined with
a social policy for the underprivileged sections
of the population under the Lula presidency
(2003-10) strongly helped companies, spurred
investment and boosted domestic consumption.
Still impacted by financial crises,
agriculture’s growth has accelerated starting
in 2003, partly thanks to a productivity model
based on high mechanization, improved
concentration and significant labor force
reserves. Encouraged to move away from
social conflicts linked to land overcrowding
and colonization of new production areas,
investment in agricultural research boosted
crop productivity by over 151 percent in 30
years.
In the framework of the ambitious
Growth Acceleration Program (PAC) launched
in 2007, followed by a second program
phase, investments in infrastructure should
also advance agriculture, which has been
long penalized in terms of logistics in the
country’s inland regions. The specialization
and development of single-crop farming,
together with man-made enhancement of soils
through pastureland expansion and irrigation,
have bolstered economic growth. Today, five
commodities (soybean, sugar, meat, corn and
milk) account for 68 percent of the total national
agricultural production value, with soybean and
related products making up 38.7 percent of
Brazilian agribusiness exports. It is interesting
to note the factors which is turning Brazil into
Gulliver when rest of the world is Lilliput as it is
struggling to gain agri-productivity.
Policy changesAgricultural policy goals and programs
in Brazil have changed significantly. The
period between the mid 1960s to early 1980s
was characterized by massive government
intervention in agricultural commodity markets
primarily by means of subsidized rural credit
and price support mechanisms, including
government purchases and storage of excess
supply. At that time, the agricultural sector in
Brazil was in general not competitive (except
in tropical products such as coffee and sugar),
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and was characterized by highly skewed
distributions of farm income and land ownership
with large, unproductive landholdings known
as “latifundios.” It was in the 1960s and 1970s
that the country started to urbanize as many
rural poor migrated to large cities. During this
period, agricultural policy had the objective
of promoting food security of an increasingly
urban population, while compensating the
agricultural sector for the anti-export bias of the
import substitution model that was common in
developing countries at the time.
The debt crisis of the late 1980s forced
the Brazilian government to decrease
support to farmers. But significant changes
in agricultural policy goals were introduced in
1995, which shifted priority to land reform and
family farming in an attempt to alleviate rural
poverty. This shift in agricultural policy goals is
reflected in government expenditures in a new
focus area called the “agrarian organization”.
Agrarian organization programs are primarily
related to land reform. Approximately 500,000
new family farms were settled in expropriated
land. In addition to land reform, the government
adopted a set of policies targeted to “family
agriculture” in 1995 - known as PRONAF -
including subsidized credit lines, capacity
building, research, and extension services.
Interestingly enough, the Brazilian
government created a new ministry in 2000 to
run programs targeted to family farms and land
reform - the Ministry of Agrarian Development
(MDA). Brazil is probably the only country in
the world with two ministries of agriculture.
This reflects a supposed duality of farming in
the country - related to the skewed distribution
of rural income and land ownership - and
the misleading perception that agribusiness
development necessarily leads to small farmer
exclusion. According to the 1995 Census of
Agriculture, farms with less than 10 hectares
(24.7 acres) represent 49.7% of all farms in the
country and hold 2.2% of all landholdings. With
more than 500 hectares (1,235 acres), the
largest farms represent only 2.2% of all farms,
but own 56.5% of all landholdings.
Federal government expenditures on
agrarian organization programs increased
from 6% in the Sarney administration to 45%
of total expenditures on farm programs in the
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The Brazilian government created
a new ministry in 2000 to run
programs targeted to family farms and
land reform - the Ministry of Agrarian
Development (MDA).
Lula administration which started showing
results.
ModernizationFostered by rising incomes, urbanization,
economic liberalization, and access to
competitive raw materials, multinational food
processors and retailers entered or increased
their investments in the Brazilian market during
the 1990s. Increased foreign direct investment
(FDI) by large, private agribusinesses in Brazil
displaced domestic competitors, increased
industry concentration, and eliminated many
medium and small companies. As a result,
the market share of multinational corporations
in the domestic food market increased. For
instance, Brazilian affiliates of multinational
agri-food companies generated 137,000 jobs,
almost US$5 billion in exports, and sales of
US$17 billion in 2000. Given the total value
of food industry shipments in Brazil of US$58
billion, the aggregate market share of foreign
companies reached 30% in 2000. Among the
top ten food processors in the country, eight are
multinational firms with foreign headquarters.
Recent official data show that FDI inflow in the
Brazilian agri-food processing industry totaled
US$8.2 billion between 2001 and 2004. The
top-three food retailers in the country are now
controlled by two French supermarket chains
(Casino and Carrefour) and one US-based
company (Wal-Mart), with a combined market
share of 39%.
Concomitant to these structural changes
in the post-farm gate stages of the agri-
food system, agricultural production also
modernized and became increasingly capital
intensive and integrated with upstream and
downstream supply chain participants. Tightly
coordinated agri-food supply chains have been
developed by the private sector - in particular,
large multinational food processors, fast-food
restaurant chains and retailers - to cater to
increasingly differentiated domestic and export
markets. It must be noted that farmers in Brazil
are increasingly exposed to markets that are
much more demanding in terms of food quality
and safety, more concentrated and vertically
coordinated, and more open to international
competition.
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16 | Economic and commErcial rEport
Research in full throttle
Agricultural research is not new in Brazil.
It began to take shape in the mid-1970s, when
government launched Embrapa, a research
institute that now exports its expertise in tropical
agriculture to countries in Africa and Asia. Over
the last 10 years the arrival of the genetically
modified grains and growing investment in
farm mechanisation laid the groundwork for
the current boom.
Brazil’s agriculture fulfils the country’s
needs in almost all sectors - with wheat being
the only significant import.
“The research in tropical agriculture in
Brazil is really impressive. Productivity has been
increasing a lot and the country is diversifying
its output,” Says Dr Guilherme Dias, professor
of rural economy in the University of Sao
Paulo.But with domestic markets growing at a
slower pace than the output, the only way for
producers is to look abroad.
Rise of MachinesA growing number of farms in Brazil
are becoming mechanised. According to
industry data, sales of farm machines in Brazil
increased 52% in the first four months this
year compared with the same period of 2009.
The government has some programmes to
boost the sales of tractors to small farmers
and it seems to be going well. But lack of skill
is still one issue to be solved. Cheap labour
has played a great part in the development of
Brazilian agriculture, but on the other side, a
lack of qualified workers is hindering further
growth. “The machinery we sell has quite a lot
of technology on board. Sometimes it’s hard
to find people with qualification to operate
them,” says Walter van Halst, a reseller of farm
machines in the town Ponta Grossa.
Tudo BemBrazil shows a different way of striking a
balance between farming and the environment.
The country is accused of promoting agriculture
by razing the Amazon forest. And it is true that
there has been too much destructive farming
there. But most of the revolution of the past 40
years has taken place in the cerrado, (Tropical
savanna eco-region of Brazil) hundreds of miles
away. Norman Borlaug, who is often called the
father of the Green Revolution, said the best
way to save the world’s imperiled ecosystems
would be to grow so much food elsewhere
that nobody would need to touch the natural
wonders. Brazil shows that can be done.
18 | Economic and commErcial rEport
Renuka do Brasil is one of the 10 largest
sugar/ethanol producing groups in Brazil,
in business for more than 30 years. In the
middle of 2010, Shree Renuka Sugars Limited
acquired the controlling stake of the company.
The installed milling capacity is of 10.5
million tons divided between Mill Madhu, in
Promissao, and Mill Revati, in Brejo Alegre,
both cities located in the state of Sao Paulo,
the largest sugarcane producing region in the
world.
Renuka do Brasil
Among its principal products are: sugar,
ethanol, bioelectricity, and yeast. Renuka
do Brasil has an amply integrated structure,
controlling not just all the industrial processes,
but also all the agricultural processes, such
as planting, cultivation, harvesting, and cane
transport.
SRSL acquired RdB from Grupo Equipav
on July 7, 2010 and holds currently 59.4%
equity stake.
RdB is one of the largest sugar/ethanol
companies in Sao Paulo state in Southeast
Brazil. Facilities include two modern mills and
integrated co-generation capacity- Madhu
(Equipav, erstwhile) and Revati (Biopav,
erstwhile).
RdB has a crushing capacity of 44,400
TCD or 10.5 million tons/yr to produce sugar
which is sold in domestic as well as export
markets. Distillery has a capacity of 4,000
klpd to produce both hydrous and anhydrous
ethanol for Flex-fuel cars as well as industrial
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needs. RdB generates 221 MW of exportable
power. Owned cane plantations at RdB cover
78,000 hectares of land.
SRSL acquired 100% of Renuka Vale do
Ivai on 19th March, 2010.
RVdI has two mills – São Pedro do Ivaí
(PR) and Cambuí (PR) – in the state of Parana
with surrounding own cane plantations on
28,000 hectares of land.
Proximity to ethanol distributors and the
port of Paranagua (551 km) along with the
stake in logistics companies and a port terminal
ensures lower logistics and export costs.
RVdI has a crushing capacity of 15,120
TCD or 3.1 million tons/yr to produce sugar for
domestic as well as export markets. Distillery
has a capacity of 1,310 klpd to produce both
hydrous and anhydrous ethanol.
20 | Economic and commErcial rEport
The year that has just gone started with
some bright promises for currency speculators in
Brasil as they were buying Brazilian real at 1.833
against USD and were thinking that happy days
are to be here forever. Unfortunately for them no
story gets finished in January. On 27th December,
2012 Real was at 2.04 against USD and those
speculators lost their banquet, if we believe
Mr. Guido Mantega, finance minister of Brasil.
Extremely cheap borrowing rates in USA
and Europe enabled speculators to borrow money
at dirt cheap rate and they used to pump it into
Brazil into government bonds which generally
had really high rates. From sky-high rate, it was
impossible for the government to pump money
in the market to stimulate the flagging economy.
This brought sky-fall for those who earned their
bread-butter and Ferraris from speculation.
Brazil responded by implementing targeted
capital controls, while the Brazilian Central
Bank moved to slash interest rates--from an
August 2011 high of 12.5% to a record-low
7.25% in October 2012 which triggered outflow
of US dollars from the country. Government
was not in mode of intervention as long as
rates prevailed in the range of 2.0 to 2.10.
“We will continue working for a weak real
to boost competitiveness of Brazilian firms,”
Mantega told a group of business people in an
event on 29th August, which was also attended
by President Dilma Rousseff. Tough talk from
government officials and currency-market
intervention by the central bank then kept the real
trading between BRL2.00 and BRL2.10, a range
that the market perceived as being “comfortable”
for the government, from July through November.
But when Brazil reported weaker-than-
expected economic growth in the third quarter,
chatter that the government would consider a
weaker informal trading band between BRL2.10
and BRL2.15 caused the market to test the
central bank’s resolve amid a pickup in dollar
outflows. The bank remained on the sidelines
until the currency approached BRL2.14, when
the bank sold dollars into the spot market
Some traders, however, said they believe the
Real-ity Ch eck
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real’s year-end weakness raised concerns at the
central bank about a spillover of inflation into 2013.
Inflation is expected to end 2012 at 5.7%, above the
government’s 4.5% target but within the tolerance
band of plus or minus two percentage points.
“In 2013, monetary policy should remain
stable,” said Reginaldo Galhardo, foreign-
exchange manager at Sao Paulo’s Treviso.
“But the foreign-exchange rate has turned into
a way to lower inflation, not increase economic
activity.” Mr. Galhardo said he expects the real
to trade between BRL2.00 and BRL2.10 to start
2013, but warned that the market shouldn’t be
surprised if the currency trades below BRL2.00.
Theory of relativity seems cakewalk in
comparison of predicting currency market of
Brazil. So if we take a leaf from book of Mr.
Mantega, we have heard this from him. “The
currency war is not over, but I can say that we
are better positioned and we reversed a trend
that was bad for Brazil, avoiding the inflow of
speculative capital.” 2013 will be all rock and roll.
“In 2013, monetary policy should remain stable”
Reginaldo Galhardo