Brazil WT/TPR/S/21
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I. THE ECONOMIC ENVIRONMENT
(1) Introduction
1. Since theprevious Trade Policy Review (TPR) ofBrazil in1992, themost important
macroeconomic development hasbeenthereduction ofinflation fromover40percentamonth inthe
firsthalfof1994, toanannual rateofsome 22percentin1995(asmeasured bytheNational Consumer
Price Index -NCPI). RealGDPgrowth hasalsorecovered, peaking at5.8percentin1994, although
initial datasuggest aslowdown inearly 1996 asaresult, inpart,oftheGovernment 'stightmonetary
policy. GDP percapita wasestimated atjustoverR$4,000 in1995(equivalent toabout US$4,400),
which represents arealincrease ofabout 10percentoverthesituation atthetimeoftheprevious review
(Table I.1).
Table I.1
Major features oftheeconomy, 1992-95
1992 1993 1994 1995
Gross Domestic Product (US$ billion) 446.6 482.3 528.3 560.4
Population (million) 149.4 151.6 153.7 155.8
Growth ofpopulation (annual percentage change) 1.6 1.5 1.4 1.4
GDP percapita (R$,constant 1995 prices)a3,687 3,786 3,947 4,054
Share ofGDP (percent, atfactor cost)
Agriculture, forestry andfishing 11.1 11.3 13.1 13.3
Mining 1.6 1.6 1.1 ...
Manufacturing 23.1 22.6 21.0 ...
Construction 6.4 6.7 7.1 ...
Public industrial services 3.6 3.8 5.1 ...
Services 54.2 54.0 52.7 52.3
(ofwhich imputed financial services) 9.8 10.1 8.8 7.7
Employment byactivity (percent, 1990)
Agriculture 22.8 27.4 ... ...
Manufacturing 15.2 12.8 ... ...
Construction 6.2 6.4 ... ...
Other industries 1.4 1.4 ... ...
Commerce 12.8 12.7 ... ...
Services 17.9 17.8 ... ...
Transport/communications 3.9 3.4 ... ...
Social services 8.7 8.4 ... ...
Public administration 5.0 4.6 ... ...
Other 2.8 5.0 ... ...
... Notavailable.
a Average exchange ratein1995, R$0.916/US$.
Source: Brazilian authorities.
(2) Recent Economic Performance
(i) ThePlano Real
2. Brazil'slateststabilizationprogramme,thePlanoReal,wasintroducedin1994.Theprogramme
comprised tightcredit targets, thestrengthening ofpublic finance, price liberalization, privatization,
tradeliberalization,variousadjustmentstotheexchangeratepoliciesandmodificationstowageindexing.
Themain objective ofthe1994 programme wasthesharp reduction ofinflation, which hadreached
about 42percentpermonth inthefirsthalfof1994.WT/TPR/S/21
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3. Theprogramme 'smaincomponents included strictmonetary andfiscal policies combined with
measures toreduce the"inertial" element ofinflation resulting fromindexation. Theprogramme implied
afurther reform ofpublic finances, anexpansion oftheprivatization programme andreductions in
import tariffs. Furthermore, anewcurrency -thereal-introduced on1July1994wasinitially linked
totheU.S.dollar tohelpcontrol inflation. Inkeeping withthemore market oriented approach, the
useofprice freezes andcontract indexation (including forwages andleases) wasexcluded, although
atthebeginning oftheprogramme theGovernment usedtariff cutting policy toexert pressure on
companies planning large price increases.
(ii) Output, prices andemployment
4. Following stagnation in1991 andrecession in1992, theeconomy began torecover in1993
when growth of4.2percentinrealGDP wasregistered (Table I.2). In1993, therecovery was
stimulated bydomestic demand, induced bystrong growth ofrealwages anddeclining realinterest
ratesinthefirstthree quarters; realinterest ratesdropped to7.1percentfrom about 30percentin
1992. There wasastrong recovery inmanufacturing, construction, commerce andtransportation.
Table I.2
Recent economic performance, 1992-95
1992 1993 1994 1995
Percentage change
RealGDPa-0.8 4.2 5.8 4.1
Private consumption -4.1 5.4 5.7 ...
Gross capital formation -7.7 7.5 12.9 ...
Exports ofgoods andnon-factor services 23.1 12.4 10.8 ...
Imports ofgoods andnon-factor
services2.0 33.0 21.2 ...
Percent
Implicit GDP deflator 995 2,072 2,295
National consumer price indexb1,149 2,489 929 22
Nominal interest ratesc1,549 3,060 1,154 53
Realinterest ratesd30.2 7.1 24.8 33.5
Money supply (M2)e1,639 2,769 970 48
Unemploymentf4.5 4.4 3.4 4.4
Share ofGDP (percent)
Central Government budgetg
Revenue 11.9 13.1 14.7 14.9
Expenditure 11.8 15.7 14.6 1.5
Balance 0.1 -2.6 0.1 -1.3
... Notavailable.
a Allitems based oncurrent CR$values adjusted using theimplicit GDP deflator.
b End-of-year
c Accumulated inyear, Federal securities.
d Accumulated inyear, Federal securities deflated bythegeneral price index -domestic supply.
e National definition; changes between endsofperiod.
f Average rate,obtained astheratioofpersons seeking employment orawaiting theresult ofjobproposals tothenumber of
economically active persons 15years ofageormore.
g National Treasury, cashbasis.
Source: Brazilian authorities.
5. In1994, growth accelerated toanestimated 5.8percent,stimulated byafurther strong increase
inrealwages andasharp fallininflation. In1995, GDP growth continued, driven mostly byan
expansion ingrain production andlivestock farming aswellasinservices, butslowed to4.1percent.
According totheauthorities, theincreased demand foragricultural products wasinturnrelated totheBrazil WT/TPR/S/21
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higherpurchasingpoweroflower-incomegroups,resultingfromthestabilizationprogramme.Economic
indicators for1995pointed toanacceleration inthefirstsixthmonths, butaslow-down inthesecond
half,duemainly tofalling industrial production. Inthefirstfourmonths of1996, industrial production
andcommerce tended tostabilize compared tothelastmonths of1995.
6. Thedomestic recovery in1993-94 brought some improvement inthelabour market, although
thishassince weakened. Therecession oftheearly 1990s hadresulted insubstantial displacement
oflabour andinrising unemployment between 1990 andmid-1993, withthemanufacturing sector
seriously affected. Thissituation wasreversed astherecovery ofproduction increased demand for
labour; asaresult, theunemployment ratedeclined in1993 and1994, reaching about 3.4percent
attheendof1994 (Table I.2). In1995, employment indicators deteriorated significantly, initially
affecting theindustrial sector butsubsequently extending toother areas; theaverage unemployment
rateincreased to4.4percentin1995andreached 5.9percentinMay1996. Industrial employment
was8.8percentlower inNovember 1995 relative tothesame month in1994 andfell6.5percent
inApril 1996 compared toApril 1995.
7. Thestabilization measures adopted under thePlano Realledtoareduction ofinflation, as
measured bytheNCPI, from about 2,500 percentin1993 to929percentin1994 and22percent
in1995(Table I.2).Inflationary pressures resumed inearly1996asaresult ofincreases infoodprices,
seasonal expenditures oneducation andtheeffects ofadjustments inpublic utility rates. Assuch
pressures eased during thefirsthalfof1996, accumulated inflation declined to5-7percent.
(iii) Public finance
8. Oneoftheprincipal sources ofinflationary pressures inBrazil hasbeenthepublic sector deficit.
Thishasbeenaddressed ontherevenue sidebyreforms oftaxation anditsadministration, which are
stillcontinuing. Ontheexpenditure side,efforts aredirected atreforming public administration and
social security, balancing Federal-State finances, andthereform ofStateenterprises (including stricter
controlsandprivatization).Someofthesereformsfacecertainlegalandconstitutionalobstacles(Chapter
II);incertain cases, notably banking, restructuring itself hasimposed aburder onmonetary po,icy
(Chapter VII(3)).
9. Thereforms havealready achieved considerable success; atpresent, financial pressures remain
notsomuch from thecurrent operational activities ofGovernment andpublic sector enterprises, but
rather from thehighdebtcontracted bythese entities inthepast. Thepublic sector borrowing
requirement (PSBR) increased dramatically between 1991and1992, mainly duetothesharp acceleration
ofinflation inmid-1991 which ledtoalarge increase innominal interest payments. Thegrowth in
PSBR continued in1993 butslowed considerably in1994 inallmajor areas ofthepublic sector; a
further andmore significant reduction occurred in1995 (Table I.3).WT/TPR/S/21
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Table I.3
Public Sector Borrowing Requirement, 1992-95
(Inpercent ofGDP)
1992 1993 1994 1995
Public Sector Borrowing Requirement (PSBR) (Deficit -) -44.1 -58.4 -44.4 -7.4
Federal Government -14.9 -20.5 -17.4 -2.3
State andmunicipal governments -16.4 -24.6 -18.9 -3.7
Public sector enterprises -12.9 -13.3 -8.1 -1.3
Primary Balance (Deficit -)a2.3 2.6 5.2 0.4
Federal Government 1.3 1.4 3.1 0.6
State andmunicipal governments 0.4 0.5 0.9 -0.2
Public sector enterprises 0.7 0.7 1.2 0.0
Memorandum item
Operational Balance (Deficit -)a-2.2 0.2 1.3 -5.0
Federal Government -0.8 0.0 1.6 -1.7
State andmunicipal governments -0.8 0.2 -0.6 -2.4
Public sector enterprises -0.6 0.0 0.3 -0.9
a Primary balance excludes andoperational balance includes netinterest payments. Bothexclude proceeds from privatization.
Source: Central Bank ofBrazil, Boletim doBanco Central doBrasil .
10. Theprimary balance oftheFederal Government hasshown asurplus inrecent years. The
surplus, measured asshare ofGDP, rosebetween 1992 and1994 asaresult ofrevenue measures
introduced in1993, economic expansion, strengthening oftaxadministration andvarious measures
tolimitspending. Thesurplus fellsharply in1995asoutlays, inparticular wages andbenefits, grew
faster thanrevenue.
11. Theoperational budget ofthepublic sector wasindeficit in1992 when interest payments
increased following asharp increase inrates. Theoperational budget turned tosurplus in1993 and
1994, butswung backintoasignificant deficit in1995, mainly duetothereduction inthesurplus in
theprimary balance andthehigher costofservicing public debtasinterest ratesincreases.
(iv) Monetary andexchange ratedevelopments
12. During thefirsthalfof1994, when thestabilzation programme wasintroduced, thegrowth
ofmoney supply wasunder tightcontrol andtheshare ofbroad money (M2) inGDP declined in
comparison totheendof1993. From July1994, however, monetary growth resumed, reflecting a
strong re-monetization process asinflation started tofall.
13. Astrong inflow offoreign investment in1993 and1994 wasattracted byhighinterest rates,
improved economic performance, intensified privatization efforts, andgreater price stability. Strong
capital inflows -including in1994asignificant increase inloanfinance -havecontributed tocontinuing
upwardpressuresontherealeffectiveexchangerate(REER),whichmovedbysome25percentbetween
JuneandNovember 1994 (Chart I.1).1Thissharp appreciation oftheREER coincided withthe
1TheREER ofacountry isthetrade-weighted average oftherealexchange rates withitstrading partners;
therealexchange ratewithanysingle trading partner isthenominal exchange rateadjusted forrelative costof
movements inthecountry anditstrading partner. TheREER inChart I.1wascalculated interms ofthereal
toabasket of13currencies; thusafallinthevalue oftheindex relates toanappreciation ofthereal,oradecrease
incompetitiveness, which isshown inChart I.1asanupward movement. (The currency basket includes the
(continued...)Brazil WT/TPR/S/21
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introduciton oftherealinJuly1994, andtheensuing combination ofBrazil 'sinitially stable nominal
exchange rateandhighinflation relative toitstrading partners. After March 1995, when thenominal
ratewasallowed tofloatwithin abanddefined bytheCentral Bank, theREER edged down, partially
restoring some competitiveness, andhasbeenrelatively stable since late1995 (Annex I.1describes
Brazil 'sforeign exchange system).
14. Thefirsthalfof1995 wasmarked byafurther tightening ofmonetary policy torestrict the
growth ofdomestic demand. Reserve requirements were increased inApril 1995 andadditional
restrictions oncredit wereintroduced. Inthelatter partof1995, themonetary authorities intensified
openmarket operations tosterilize theinflow offoreign capital. Aseries ofmeasures weretaken to
discourage inflows ofshort-term capital, including theintroduction oftheFinancial Transactions Tax
(IOF) oncertain operations andraising other already existing rates.
15. Concerned inpartbythecostsofsterilizing highcapital inflows, during thefirsthalfof1996
monetary policy wasloosened toinduce afallininterest rates. Measures weretaken toallow thebanking
system torenegotiate contracts aswellastoeasecredit andreduce reserve requirements. Nominal
overnight ratesfellfrom 4.3percentamonth inMarch 1995 toabout 2.0percentinJune1996.
1(...continued)
currencies of,bydecreasing weight, theUnited States, Japan, Germany, France, Italy, theNetherlands,
theUnited Kingdom, Switzerland, Argentina, Uruguay, Paraguay, Chile andMexico.)WT/TPR/S/21
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(3) Balance ofPayments
16. Since thelastreview, thelevelofinternational reserves hasdramatically increased, partly as
aconsequence ofthestrong capital inflows noted above. Reserves rosefrom about fivemonths of
merchandise imports attheendof1991, toabout 14months ofimports bytheendof1992, aratio
largely maintained thereafter (Table I.4). Intotal, international reserves stood atsome US$55 billion
inearly 1996.
(i) Current account
17. Thecurrent account showed small deficits in1993and1994, following alargesurplus in1992,
equivalent toabout 1.4percentofGDP (Tables I.1andI.4).2However, thedeficit widened toabout
US$18.8 billion, equivalent to3.2percentofGDPin1995(ofwhich US$11.9 billion wererecorded
inthefirstsixmonths). Asignificant deficit persisted intothefirstquarter of1996.
Table I.4
Balance ofpayments, 1992-95
(US$ million)
1992 1993 1994 1995 1996
(first quarter)
Balance oftrade 15,239 13,307 10,466 -3,157 -435
Exports, f.o.b. 35,793 38,563 43,545 46,506 10,302
Imports, f.o.b. 20,554 25,256 33,079 49,663 10,737
Services -11,339 -15,585 -14,743 -18,600 -3,819
Revenues 5,205 5,273 6,662 9,592 2,539
Expenditures -16,544 -20,858 -21,405 -28,192 -6,358
Unrequited transfers 2,243 1,686 2,588 3,973 855
Current account 6,143 -592 -1,689 -17,784 -3,399
Investment (net) 2,972 6,170 8,131 4,670 4,300
Reinvestment 175 100 83 200 25
Financing 13,258 2,380 1,939 2,641 980
Amortization -8,572 -9,978 -50,411 -11,026 -4,093
Currency loans 17,577 11,659 53,802 34,403 7,168
Short-term 2,602 869 909 19,667 3,093
Long-term 14,975 10,790 52,893 14,736 4,075
Other capital -139 -216 750 -1,068 -83
Capital account 25,271 10,115 14,294 29,820 8,297
Errors andomissions -1,386 -1,119 334 1,444 -531
Overall Balance 30,028 8,404 12,939 13,480 4,367
Memorandum items:
Reserves, endofperiod, US$milliona23,268 31,711 38,487 51,533 55,572
Reserves, asmonths ofmerchandise imports 14 15 14 12 14
Nominal exchange rate,national
currency/US$b12,387 326.1 0.844 0.972 0.9872
Terms oftrade (percentage change)c-0.8 1.8 6.1 ...
RealEffective Exchange Rate
(June 1994=100)107.8 96.4 89.3 99.6d...
... Notavailable
a Balance ofPayments (concept).
b Endofperiod, buying. Rates foraccounting purposes. Until 31July1993, ratesincruzeiros. Between 1August 1993 and
30June1994, ratesincruzeiros reais. Since July1994 ratesinreais.
c IMFestimates.
d September 1995.
Source: Central Bank ofBrazil, andInternational Monetary Fund.
2ThecurrentaccountpositionofBrazilisevenstrongerifitisexpressedinconstantprices,thatisafterallowing
forimprovement intheterms oftrade in1993 andin1994 (Table I.4).Brazil WT/TPR/S/21
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18. Merchandise trade hasgenerally beeninsurplus since 1982, although these havebeenfalling
bothinabsolute terms andasapercentage ofGDP since 1992. Thesurplus onmerchandise trade
in1992wasequivalent to3.4percentofGDP (Tables I.1andI.4). However, declining merchandise
trade surpluses in1993 andin1994 were insufficient tocover increased deficits inservices trade.
19. Between mid-1994 andmid-1995, thetrade balance swung intosubstantial deficit, reflecting
theupturn intheeconomy, growth ofrealwages, import liberalization, realcurrency appreciation
andanelement ofspeculative advance purchaing, particularly ofautomobiles. Subsequent tothe
introduction ofaseries oftrademeasures andre-alignment ofthecurrency, modest monthly surpluses
were registered forallbutonemonth between July1995 andJanuary 1996.
(ii) Capital account
20. Thecapital account hasremained strong inrecent years despite thelargeandgrowing external
debt. Apart from theinfluence oftheimproved economic climate onforeign investment, thecapital
account hasalsobenefited from external debtrescheduling and,until1994, therelative reduction in
therôleofshort-term capital. While short-term inflows contracted inearly1995, following theMexican
financial crisis, theyhavesince increased again, attracted byhighrealinterest rates. Overall, capital
inflows havesubstantially exceeded therepayment offoreign loans.
21. Since 1992, thestructure offoreign capital inflow haschanged somewhat, withportfolio
investment increasing substantially (seelater). Bonds issued bytheprivate sector havebecome the
mostsignificant component offoreign borrowings, while financing from international organizations
orgovernment agencies hasbeenstable orevennegative.
(iii) External debt
22. Overtheyears Brazil hascontracted averylargeexternal debt,which stood inDecember 1995
atsomeUS$159billion,orabout28percentofGDP(TableI.5).Althoughthetotaloutstandingexternal
debthascontinued toexpand inrecent years, theburden ofdebtservicing hasbeenconsolidated and
theratioofdebttoGDP hasremained essentially constant. Moreover, theexternal debtexposure in
terms ofearnings from exports ofgoods andservices hastended todecline.
23. Following acomprehensive public debtrescheduling package withtheParis Club, thevalue
ofarrears wasreduced considerably in1992-toUS$5.3 billion. On15April 1994, Brazil completed
anagreement withcommercial bankcreditors thatprovided forfurther public debtanddebtservice
reductions. Theagreement involved therestructuring ofsome US$47 billion ofpublic debt(including
allexisting payments arrears tobankcreditors) andresulted inareduction ofUS$3.9 billion inthe
stock ofdebt. Byearly 1996 allofBrazil 'sarrears hadbeendischarged.WT/TPR/S/21
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Table I.5
External Debt
(US$ million)
1992 1993 1994 1995
(December)
Registered debt 110,835 114,270 119,668 129,313
Public sector 86,669 83,515 86,864 87,168
Banks 44,945 44,016 6,212 6,138
Multilateral 9,854 9,014 8,870 8,837
Bilateral (including Paris Club) 19,595 19,226 19,264 18,480
Debt bonds from banks 8,408 8,363 51,538 51,451
Others 3,867 2,896 980 2,262
Private sector 24,166 30,755 32,804 42,145
Banks 12,850 18,910 22,004 30,252
Multilateral 1,942 1,852 1,789 1,984
Bilateral 579 607 413 700
Others 8,795 9,386 8,598 9,209
Non-registered debt 25,114 31,456 28,627 29,943
Public sector 6,768 7,098 466 287
Arrears 5,316 6,449 386 286
Othera1,452 649 80 1
Private sector 18,346 24,358 28,161 29,656
Credit lines 2,606 2,377 2,586 3,421
Commercial banks (liabilities) 15,740 21,981 25,575 26,235
Total External Debt (TED) 135,949 145,726 148,295 159,256
Public sectorb93,437 90,613 87,330 87,455
Private sector 42,512 55,113 60,965 71,801
Memorandum items: Percent
TED/Exports ofgoods &servicesc331 332 295 283
TED/GDP 30 30 28 28
Reserves/TED 7 22 26 33
a Credit lines, Paris Club andCentral Bank ofBrazil.
b Non-financial public sector; excludes PETROBRAS andValedoRioDoce.
c Exports from balance ofpayments (Table I.4).
Source: Central Bank ofBrazil, Boletim doBanco Central doBrasil.
(4) Trade Patterns
24. TheSecretariat report fortheprevious Trade Policy Review ofBrazil noted thattheshare of
tradeofgoods andservices inGDPhadremained relatively stagnant between themid-1970s and1990;
thisreflected agrowing ratioofexports toGDP being offset bydeclining imports relative toGDP.
Incontrast, between 1991 and1995 there wasaconsiderable increase intheratiooftrade ingoods
andservices toGDP, from about 17.2percenttosome 23.8percent.3Thisreflected arelatively
modest riseintheexport toGDPratio, from8.3percentto10.0percent,andamuch stronger increase
intheimport toGDP ratio, from 9.0percentto13.8percent.
(i) Commodity composition oftrade
25. Asaresultofstrongdomesticrecovery,merchandiseimportgrowthinnominalvalueaccelerated
from22percentin1993toover50percentin1995(Table I.6). Bothagricultural andmanufactured
products participated; themost dramatic increase, however, wasinimports ofautomotive products
3Based ondataonmerchandise imports andexports, andonservice inflows andoutflows from theBoletim
doBanco Central doBrasil ,May 1996.Brazil WT/TPR/S/21
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(Chapter VI(3)). Inconstrast, thevalue offuelandother mineral imports grewmodestly asfuelprices
fellonworld markets.
26. Tradeperformancehasalsobeenaffectedbyexternalfactorswhichhavestimulatedanadjustment
intheexport sector. Therecession intheOECD areaintheearly 1990s primarily affected exporters
ofprimary andsemi-manufactured products. Theresult wasstagnation ofprimary exports suchas
ironoreandagricultural rawmaterials between 1990 and1993 (Table I.7). Incontrast, the
manufacturing sector responded welltostructural policies andexport incentives. Themostdynamic
exports included machinery andtransport equipment, particularly autoparts. In1994theimprovement
inexport performance wasmainly duetoastrong recovery ofprimary exports (coffee andsoybeans);
manufactured exports continued toincrease albeit ataslower pace. In1995 theshare ofagriculgural
products intotalexports continued torisewhile thatofmanufactures fell,although invalue terms
manufactured exports increased.
Table I.6
Imports bygroups ofproducts, 1990-95
(US$ millions andpercent)
1990 1991 1992 1993 1994 1995a
Total (US$ million) 22,460.3 22,976.9 22,346.3 27,300.2 35,552.7 53,783.2
Agricultural products 12.0 13.9 12.3 14.1 14.1 13.8
-Food 9.4 11.2 9.6 9.7 10.9 10.8
-Cereal grains,preprd nes(SITC 0481) 1.5 1.1 1.0 3.1 2.4 2.0
-Rice,milled,semi-milled (SITC 0423) 0.5 1.2 0.5 0.6 0.7 0.4
-Rawmaterials 2.6 2.6 2.7 4.3 3.2 3.0
-Cotton, notcarded, combed (SITC 2631) 0.7 0.8 1.0 2.5 1.6 1.3
Mining products 31.8 28.7 29.2 24.4 18.2 15.1
-Oresandother minerals 3.1 3.0 2.7 2.1 1.9 1.5
-Non-ferrous metals 1.8 1.8 1.9 1.6 1.5 2.1
-Fuels 26.9 23.9 24.7 20.7 14.8 11.5
-Crude petroleum (SITC 3330) 21.5 16.5 15.6 8.8 7.2 5.5
Manufactures 56.2 57.4 58.5 61.5 67.6 70.4
-Ironandsteel 1.3 1.1 1.2 0.9 0.8 0.8
-Chemicals 15.4 16.3 15.8 16.2 16.5 15.5
-Acyclic monohydric alcohols (SITC 5121) 1.4 1.6 0.6 0.8 1.6 1.4
-Heterocyclic compounds other than
organo-sulphur (SITC 5157)1.2 1.1 1.4 1.4 1.5 1.2
-Other semi-manufactures 4.6 4.8 4.4 4.6 4.7 5.1
-Textiles 1.1 1.4 1.2 1.6 1.8 2.8
-Clothing 0.3 0.3 0.2 0.2 0.3 0.7
-Machinery andtransport equipment 28.3 28.1 30.8 33.0 38.2 40.0
-Power generating machinery 1.8 1.3 1.1 1.0 2.0 0.7
-Other non-electrical machinery 10.9 10.7 10.4 9.6 10.7 8.9
-Other mach. andequip. specialized for
partic. ind.(SITC 728)1.1 1.3 1.5 1.4 1.7 1.2
-Textile andleather machinery SITC 724) 1.9 1.6 1.3 1.4 1.6 1.4
-Agricultural machinery andtractors 0.0 0.1 0.1 0.1 0.2 0.2
-Office machines andtelecommunications
equipment6.7 6.6 7.5 8.7 9.6 9.6
-Parts,telecommun. equipt (SITC 7649) 1.3 1.4 1.3 1.7 1.8 2.1
-Electronic microcircuits (SITC 7764) 1.4 1.2 1.1 1.2 1.3 1.4
-Parts,data proc. etc.mch (SITC 7599) 0.9 0.7 1.0 1.0 0.8 0.8
-TV,radio transmittrs etc(SITC 7643) 0.2 0.2 0.4 0.5 0.8 0.6
-Electrical machinery andapparatus 4.0 3.7 4.0 3.9 4.3 3.8
-Automotive products 2.4 3.3 4.9 7.5 9.7 15.0
-Pass.transport vehicles (SITC 7812) 0.1 0.5 1.3 2.6 4.3 9.2
-Parts formotor vehicles (SITC 784) 1.7 1.8 2.4 3.0 3.3 2.8
-Other transport equipment 2.5 2.5 2.9 2.3 2.0 1.9
-Other consumer goods 5.2 5.4 5.0 5.0 5.3 5.6
Other 0.0 0.0 0.0 0.1 0.0 0.7
a Shares based ondataforfirstsemester.
Source: UNSTAT, Comtrade database (using SITC Rev.3); 1995 dataprovided bytheBrazilian authorities.WT/TPR/S/21
Page 10Trade Policy Review
Table I.7
Exports bygroups ofproducts, 1990-95
(US$ millions andpercent)
1990 1991 1992 1993 1994 1995
Total (US$ millions) 31,411.6 31,621.7 35,975.5 38,700.9 43,558.0 46,505.4
Agricultural products 31.1 28.3 28.7 28.3 32.3 33.7
-Food 27.7 24.9 25.4 25.3 28.9 28.5
-Coffee, notroasted (SITC
0711)3.5 4.4 2.7 2.8 5.1 4.2
-Oil-cake, oilseed residue
(SITC 0813)5.3 4.5 4.6 4.8 4.7 4.4
-Soya beans (SITC 2222) 2.9 1.4 2.2 2.4 3.0 1.7
-Orange juice (SITC 0591) 4.7 2.8 2.9 2.1 2.3 2.4
-Soya beanoil,fractions
(SITC 4211)1.1 0.7 0.8 0.8 1.9 2.3
-Sugars, beetorcane, raw
(SITC 0611)1.0 0.8 0.9 1.4 1.8 3.1
-Poultry, meat andoffal
(SITC 0123)1.1 1.3 1.3 1.5 1.5 1.4
-Rawmaterials 3.4 3.4 3.3 3.1 3.4 5.2
Mining products 15.9 15.8 13.6 12.3 11.5 11.2
-Oresandother minerals 9.0 9.6 7.4 6.8 6.1 6.3
-Ironore,concntr.not aggl.
(SITC 2815)5.3 5.6 4.7 4.1 3.5 3.7
-Ironoreagglomerates(SITC
2816)2.4 2.7 1.9 1.7 1.7 1.8
-Non-ferrous metals 4.6 4.8 4.5 3.9 3.5 4.0
-Fuels 2.2 1.4 1.6 1.7 1.8 0.9
Manufactures 51.4 54.4 56.3 58.5 54.5 52.9
-Ironandsteel 11.4 13.0 11.5 10.8 9.4 9.2
-Chemicals 5.9 6.0 5.9 6.0 5.9 6.6
-Other semi-manufactures 7.0 7.6 8.1 9.3 9.2 9.6
-Textiles 2.4 2.7 2.8 2.4 2.3 2.1
-Clothing 0.8 0.9 1.0 1.1 0.9 0.6
-Machinery andtransport
equipment18.6 18.6 20.8 20.9 20.6 19.0
-Power generating machinery 0.4 0.5 0.4 0.7 1.0 0.8
-Other non-electrical
machinery4.5 4.9 5.0 5.6 5.6 5.7
-Agricultural machinery
andtractors0.4 0.3 0.4 0.4 0.4 0.5
-Office machines and
telecommunications equipment2.2 2.3 2.1 1.9 1.7 1.6
-Electrical machinery and
apparatus1.2 1.3 1.5 1.8 1.6 1.6
-Automotive products 6.5 6.5 8.4 8.0 7.5 6.4
-Parts oftractors and
motor vehicles (SITC 784)1.9 2.1 2.8 3.2 3.3 3.2
-Goods vehicles (SITC
7821)1.4 1.3 1.7 1.3 1.4 1.1
-Pass.transport vehicles
(SITC 7812)1.3 1.1 2.1 1.5 1.2 1.0
-Other transport equipment 3.8 3.2 3.3 3.1 3.3 2.9
-Other consumer goods 5.3 5.7 6.2 7.9 6.2 5.6
Other 1.6 1.5 1.4 0.9 1.7 2.3
Source: UNSTAT, Comtrade database (using SITC Rev.3).Brazil WT/TPR/S/21
Page 11
(ii) Direction oftrade
27. AnotherimportantfeatureofBrazil'sadjustmentprocesshasbeenthegeographicalreorientation
offoreign trade. Brazil 'straditional partners were thedeveloped markets oftheEuropean Union,
theUnited States andcertain oil-exporting countries (Table I.8). Trade orientation began tochange
atthebeginning ofthe1990'swiththecreation ofMERCOSUL andtherecession intheOECD countries
which resulted inastagnation ofBrazil 'sexports tothese countries. Thevalue ofexports to
MERCOSUL countries, quadrupled between 1990 and1995; Latin America asawhole nowtakes
about aquarter ofBrazil 'sexports compared to12percentin1990, although theregion 'sshare shrank
in1995following asharp fallinsalestoMexico. Exports toCanada andtheUnited States alsodecreased
between 1994and1995. Incontrast, thevalue ofsalestoAsiaandtheEuropean Union rose,although
theshare ofthelatter fellsharply.
Table I.8
Exports bydestinations, 1990-95
(US$ million andpercent)
1990 1991 1992 1993 1994 1995
Total (US$ million) 31,411.6 31,621.8 35,975.5 38,700.9 43,558.0 46505.4
America 38.1 38.5 43.5 47.2 46.1 43.1
USA 24.6 20.2 19.7 20.7 20.6 18.9
Canada 1.7 1.5 1.1 1.2 1.1 1
Other America 11.8 16.9 22.7 25.3 24.4 23.2
Mercosul 4.2 7.3 11.4 13.9 13.6 13.2
Argentina 2.1 4.7 8.5 9.5 9.5 8.7
Paraguay 1.2 1.6 1.5 2.5 2.4 2.8
Uruguay 0.9 1.1 1.4 2.0 1.7 1.7
Europe 36.5 34.8 32.5 29.0 30.6 31.5
EU15 32.5 32.1 30.2 26.4 28.0 27.8
Netherlands 7.9 6.8 6.5 6.4 7.1 6.3
Germany 5.9 6.8 5.8 4.7 4.7 4.6
Italy 5.1 4.3 4.4 3.4 3.8 3.7
Belgium-Luxembourg 3.1 3.4 3.3 2.9 3.1 3.5
United Kingdom 3.0 3.3 3.6 2.9 2.8 2.9
France 2.9 2.7 2.3 2.0 2.1 2.2
EFTA 1.0 0.7 0.6 0.7 0.9 1.1
EastEurope 2.1 1.2 1.0 1.2 1.3 2.2
Former USSR 0.7 0.3 0.4 0.6 0.5 1.4
Other Europe 0.8 0.8 0.7 0.7 0.4 0.5
Asia 20.2 21.5 19.2 19.0 18.7 20.4
Middle East 3.4 3.6 3.6 3.2 2.5 2.8
EastAsia 16.0 17.1 14.7 15.1 14.3 16.3
Japan 7.5 8.1 6.4 6.0 5.9 6.7
China 1.2 0.7 1.3 2.0 1.9 2.6
Korea 1.7 2.1 1.6 1.4 1.5 1.8
South Asia 0.8 0.9 0.8 0.7 1.9 1.3
Oceania 0.7 0.8 0.7 0.7 0.7 0.8
Africa 3.2 3.3 3.2 2.9 3.1 3.4
Sub-saharian Africa 1.4 1.4 1.7 1.2 1.6 1.3
Other Africa 1.8 1.9 1.5 1.6 1.5 2.1
Other 1.2 1.1 1.0 1.3 0.8 0.8
Source: UNSTAT, Comtrade database.WT/TPR/S/21
Page 12Trade Policy Review
28. Imports from most areas declined during 1992, butalmost allofBrazil 'strading partners
benefited considerably from thesubsequent large increases inthevalue ofimports (Table I.9). In
constrasttoexports,theimportanceofOECDcountriesinBrazil'simportshastendedtoincreaserelative
tothetotal. Thisreflects inlargepartBrazil 'sproduct composition ofimports, inwhich manufactured
products, particularly capital goods, areimportant. Strong import increases in1995 wereshared by
practicallyallofBrazil'smajorpartners,withparticularlymarkedrisesinimportsfromtheMERCOSUL
area.
Table I.9
Imports byorigin, 1990-95
(US$ million andpercent)
1990 1991 1992 1993 1994 1995
Total 22,460.3 22,976.9 22,346.3 27,300.2 35,552.7 53,783.2
America 40.0 45.0 45.5 45.5 46.4 ...
USA 20.1 23.5 24.1 23.0 23.1 ...
Canada 2.2 2.5 2.4 2.7 2.5 ...
Other America 17.8 18.9 19.0 19.8 20.8 ...
Mercosul 10.9 10.5 10.6 13.0 13.7 ...
Argentina 6.7 7.6 8.2 10.3 10.7 ...
Uruguay 2.6 1.9 1.6 1.6 2.0 ...
Paraguay 1.5 1.0 0.9 1.0 1.1 ...
Europe 26.4 28.1 27.9 28.0 31.4 ...
EU15 22.3 23.5 23.6 23.7 27.4 ...
Germany 8.7 8.8 9.0 8.9 10.2 ...
Italy 3.3 3.7 3.9 3.7 5.8 ...
France 2.8 2.8 2.8 2.7 2.6 ...
United Kingdom 2.0 2.1 1.9 2.1 2.2 ...
Netherlands 1.4 1.6 1.7 1.7 1.6 ...
Belgium-Luxembourg 0.6 1.0 1.0 1.1 1.4 ...
EFTA 2.3 2.7 2.5 2.6 2.5 ...
EastEurope 1.7 1.7 1.7 1.5 1.3 ...
Former USSR 0.6 0.6 0.9 0.9 0.8 ...
Other Europe 0.1 0.2 0.1 0.3 0.1 ...
Asia 30.1 22.1 22.8 21.4 18.6 ...
Middle East 19.7 12.8 14.2 9.3 6.4 ...
Saudi Arabia 7.4 6.4 7.4 6.1 4.0 ...
EastAsia 10.1 9.1 8.4 11.8 11.9 ...
Japan 7.2 5.9 5.6 6.1 5.6 ...
Korea, rep. 0.4 0.6 0.7 1.3 1.7 ...
Chima 0.9 0.3 0.3 0.6 0.6 ...
South westAsia 0.3 0.2 0.2 0.4 0.3 ...
Oceania 0.6 0.7 0.9 1.0 0.7 ...
Africa 2.9 4.0 2.7 4.0 2.8 ...
Sub-saharian Africa 1.2 2.2 0.5 1.2 1.1 ...
Other Africa 1.7 1.8 2.1 2.7 1.7 ...
Other 0.0 0.1 0.2 0.0 0.1 ...
... Notavailable.
Source: UNSTAT, Comtrade database (using SITC Rev.3); 1995 totalprovided bytheBrazilian authorities.Brazil WT/TPR/S/21
Page 13
(5) Investment Patterns
29. Foreign investment hasplayed akeyrôleinporviding capital, technology andmanagerial and
marketing knowledge. Since theprevious review, policy towards foreign investment hasbeen
substantially liberalized.
30. Inthepast,foreign participation hasbeenlimited inactivities suchaspetroleum production
andrefining, public utilities andshipping. Majority foreign investment inmining operations wasbanned
bythe1988 Constitution. However, inthelastfewyears considerable progress hasbeenmade in
reducing obstacles toforeign investment, including theapproval ofconstitutional amendments that
facilitate suchinvestment. Thisandother issues concerning thelegalframework forforeign investment
inBrazilarecoveredinChapterII;requirementsforforeigninvestmentsinfinancial,telecommunications
andtransport activities areelaborated inChapter VII.
31. Theliberalization oftheBrazilian economy during the1990s hasserved asapowerful catalyst
forforeign investment. Total foreign investment inflows increased steadily fromsome US$2.2 billion
in1990 toreach US$42 billion in1995 (Table I.10). DataintheSecretariat report fortheprevious
Trade Policy Review showed thestock offoreign investment inBrazil amounting toclose to
US$37 billion inSeptember 1991; suchinvestment stood atclose toUS$58 billion inJune1995, an
expansion ofsome 57percent(Table I.11). Although portfolio investment accounted foralargepart
ofthenewflows, foreign direct investment hasalsobeenconsiderable andgrowing, having reached
arecord US$5.3 billion in1995; within manufacturing, newinvestment wasparticularly significant
inautomobiles andbasic chemicals. Thegreater importance ofthemore mobile portfolio investment
isbehind thelargeoutflows alsorecorded inrecent years, which reached atotalofsome US$22 billion
in1994andjustoverUS$27 billion in1995. Larger inflows offoreign direct investment haveoffset
falling netportfolio inflows andledtoupward trends intotalnetinvestment inflows andinternational
reserves.
32. Thesources offoreign direct investment arewelldiversified. However, anincrease ofsome
U.S.investment inBrazil almost doubled between 1991 andJune1995, bolstering itsposition asthe
leading investor with35percentofthetotal(Table I.11). Germany andJapan remained thesecond
andthird largest investors inBrazil. Investment stocks areconcentrated inservices, mostly inthe
formofportfolio investment, andinmanufacturing, especially inthemotor vehicle andbasicchemicals
industries (Table I.12).
33. Over theyears, Brazil hasalsoaccumulated sizable investments aborad, amounting tosome
US$4.2 billion inJune1995(Table I.13). Most investment ishelfintheCayman Islands andtheUnited
States, which together account foralmost two-thirds ofBrazilian netinvestment abroad. Important
investment alsooccures inmanufacturing, particularly petroleum refining.WT/TPR/S/21
Page 14Trade Policy Review
Table I.10
Foreign investment flows toandfrom Brazil
(US$ million)
PortfolioaDirectbIntercomapny Loans Total
Inflows
1990 824 1,130 258 2,212
1991 4,186 1,095 308 5,589
1992 9,960 1,749 871 12,580
1993 23,554 1,294 1,064 25,912
1994 32,621 2,589 632 35,842
1995 35,858 5,291 1,133 42,282
1996, firstquarter 9,644 1,544 413 11,601
Outflows
1990 245 230 170 645
1991 378 123 177 678
1992 2,594 169 390 3,153
1993 10,602 580 487 11,669
1994 21,046 618 454 22,118
1995 25,846 1,163 402 27,411
1996, firstquarter 5,384 319 89 5,792
Net
1990 579 900 88 1,567
1991 3,808 972 131 4,911
1992 7,366 1,580 481 9,427
1993 12,952 714 577 14,243
1994 11,575 1,971 178 13,724
1995 10,012 4,128 731 14,871
1996, firstquarter 4,260 1,225 324 5,809
a Includes bonds, commercial paper, notes, excludes external debtrestructuring bonds.
b Includes reinvestment ofearnings.
Source :Central Bank.Brazil WT/TPR/S/21
Page 15
Table I.11
Stock offoreign investment inBrazil at30June 1995, bysource
(US$ million)a
SourcebInvestments Reinvestment Total Share inTotal (%)
Total 45,504 12,579 58,083 100.0
United States 17,427 3,003 20,430 35.2
Germany 5,029 2,845 7,874 13.6
Japan 3,660 900 4,560 7.9
United Kingdom 3,612 729 4,341 7.5
France 2,036 1,150 3,186 5.5
Netherlands 1,734 707 2,441 4.2
Italy 2,004 422 2,426 4.2
Switzerland 1,344 779 2,123 3.7
Canada 1,272 612 1,884 3.2
Bahamas 1,230 13 1,243 2.1
Sweden 352 273 625 1.1
Panama 458 128 586 1.0
Belgium 267 305 572 1.0
Luxembourg 498 130 628 1.1
Bermuda 803 14 817 1.4
Argentina 146 218 364 0.6
Leichtienstein 323 32 355 0.6
Portugal 319 19 338 0.6
Kuwait 268 0 268 0.5
Netherlands Antilles 270 32 302 0.5
Australia 248 9 257 0.4
Other 2,204 259 2,463 4.2
a Conversion toUSdollars attheparity of30June; investments inportfolio, Fixed-income Funds, Foreign Capital andPrivatization
Funds areincluded. Distribution byholding 'scountry.
b Countries shown havetotalinvestment greater thanUS$250 million.
Source: Central Bank.WT/TPR/S/21
Page 16Trade Policy Review
Table I.12
Stock offoreign investment inBrazil at31March 1995, bysector
(US$ million)a
Sector Investment Reinvestments Total Share inTotal
(percent)
Total 43,273 12,565 55,839 100.00
Agriculture 156 167 324 0.58
Livestock 127 1 128 0.23
Fishing 12 2 14 0.03
Minerals 925 192 1,118 2.00
Manufacturing 29,735 9,782 30,517 54.65
IronandSteel 539 89 628 1.13
Metals 1,952 643 2,595 4.65
Non-electirc machinery 2,490 763 3,254 5.83
Electric machinery andcomm. equipment 2,493 1,119 3,613 6.47
Automobiles 3,181 1,286 4,468 8.00
Auto parts 693 576 1,170 2.10
Basic chemicals 2,844 1,297 4,141 7.42
Petroleum products 500 348 848 1.52
Medical andvet.products 1,287 485 1,772 3.18
Textiles 361 320 682 1.22
Food products 774 1,062 1,836 3.29
Tobacco 196 68 265 0.48
Other 3419 1,820 5,239 9.38
Public utilities 57 10 68 0.12
Transport 26 3 29 0.05
Other 31 7 39 0.07
Services 20,533 2,259 22,793 40.82
Banks 1,426 560 1,987 3.56
Portfoliob13,581 13,581 24.32
Property management 3,335 1,085 4,421 7.92
Other 2,189 613 2,802 5.02
Other 724 148 872 1.56
a Conversion toUSdollars attheparity of31March 1995.
b Includes investments inFixed-Income Funds-Foreign Capital andPrivatization Funds.
Source: Central Bank.Brazil WT/TPR/S/21
Page 17
Table I.13
Brazilian investments abroad, June 1995
(US$ million, historical-cost basis)
Outflow Inflow Net
Total 4,398.6 -201.1 4,196.5
Bymain sector: 4,397.6 -201.1 4,196.5
Agriculture andfishing 13.6 -10.0 3.6
Mining 33.9 -2.1 31.8
Manufacturing 1,320.2 -100.4 1,219.8
Petroleum refining 837.4 0.0 837.4
Food products 111.4 -79.7 31.7
Public services 0.6 -0.2 0.4
Other services 2,529.2 -71.2 2,458.0
Banks 1,675.4 -14.6 1,660.8
Commerce, export, import 298.6 285.7 584.3
Portfolios 16.7 -12.4 4.3
Other activities 500.1 -17.0 483.1
Bymain destination:
Cayman 1,643.7 -15.7 1,628.0
United States 1,225.6 -26.9 1,198.7
Portugal 269.1 -13.9 255.2
Argentina 255.2 -13.6 241.6
United Kingdom 247.5 -82.3 165.2
Bahamas 114.8 -27.4 87.4
Other countries 642.7 -21.3 620.4
Source: Brazilian authorities.
(6) Outlook
34. According totheauthorities, thereduction inthefiscal deficit atalllevels ofgovernment in
1995 underlines theneedtoincrease thedomestic savings ratethrough permanent fiscal adjustment.
Thisisconsidered tobetheGovernment 'sgreatest challenge overthefollowing years, requiring:
- thereform ofthepublic administration;
- simplifying andreducing thenumber oftaxes;
- broadening thefiscal base;
- reforming thesocial security system; and
- agreater engagement oftheStates intheprivatization process.
35. In1996, theauthorities werealsofocusing ontherestructuring ofthebanking system, which
isbeing forced toadjust toalower inflation environment (Chapter VII(3)). TheGovernment wasalso
committed tocontinue theprocess ofreform oftheConstitution toconsolidate themodernization of
theeconomy (Section {legal framework-being prepared}).
36. Estimatesfor1996bytheBrazilianEconomicInstitute(IRE)projectedeconomicgrowthslowing
tobetween 1-3percent. Theforecasts alsosuggested amodest trade balance andacurrent account
deficit ofUS$14-17 billion. Public finances werelikely toclose1996withaprimary surplus, relative
toGDP, of1.0percentandanoperational deficit of2.5percent. Annual inflation wasestimated
torunatbetween 12-20 percent, withaconsiderable fallininterest rates.WT/TPR/S/21
Page 18Trade Policy Review
Annex I.1 Exchange Rates
37. TheBrazilian currency isthereal,introduced on1July1994toreplace thecruzeiro real,which
hadinturnreplaced thecruzeiro inAugust 1993. Asnoted in(Chapter II),foreign exchange policy
issetbytheNational Monetary Council andadministered bytheCentral Bank.
38. Twoofficial exchange markets operate simultaneously: thefloating ratemarket (tourism dollar)
andthefreeratemarket. Operations inthefloating ratemarket mainly involve those related to
international travel, personal transfers andBrazilian investments abroad. Operations inthefreerate
market cover allimport andexport transactions; profit anddividend remittances; capital repatriation;
debt-service payments andregistered foreign investments. Theexchange rateisdetermined bymarket
forces inbothfloating rateandfreeratemarkets.
39. TheCentral Bank stopped fixing thedaily rateofexchange inMarch 1990, when thefree
exchange ratemarket wascreated, however, theCentral Bank maintained theability toinfluence the
daily exchange rate. According totheauthorities, suchpower wasfullyuseduntiltheintroduction
ofthereal;theCentral Bankthenwithdrew fromthemarket, leaving thedetermination oftheexchange
ratetoprivate agents. Theauthorities indicated thattheexchange rateinitself isnotusedasan
instrument ofinternational competitiveness, asindicated bythebehaviour ofthenominal exchange
ratesince theestablishment ofthereal. However, exchange ratepolicy doesseeknottocompromise
thecountry 'scompetitiveness inthemedium andlonger-term.
40. Theexternal value oftherealisdetermined bydemand andsupply intheexchange market.
Since March 1995, theexchange ratewasallowed tofloatwithin abanddefined bytheCentral Bank.
InlateJanuary 1996 thebandlimits stood atR$0.97 andR$1.06 perU.S.dollar. TheCentral Bank
iscommitted tointervene, buying foreign exchange when theratefallstotheband'slower limitand
selling itwhen theupper limitisreached. Suchcommitment doesnotpreclude theCentral Bank from
intervening toavoid extreme oscillations intheexchange rate.TheBankactsmainly through electronic
currency auctions inwhich some 60accredited financial institutions participate.
41. Asfrom July1994 importers were permitted topurchase foreign currency intheexchange
market within 180daysofthesettlement date. TheForeign Trade Secretariat (SECEX) mayapprove
applications forimport payments without prior authorization from theCentral Bank when financing
terms donotexceed 720daysfrom thedateofshipment; financing atlonger terms requires Central
Bank authorization based onforeign debtconsiderations. Repayment oftheinitial amount financed
andinterest duemaybemade onlyuponpresentation ofanauthorization andapayment schedule issued
bytheDepartment ofForeign Capital intheCentral Bank.