4.1 Economic Background

Despite a short recession during the past few years, the Brazilian economy is now on its way to recovery.

In the early 1990s, Brazil experienced a period of hyperinflation that destroyed the value of the currency, as well as investor confidence. When inflation rose to over 1,000 percent, the government instituted the "Real Plan" in July of 1994, issuing a new currency, the Real, that was fixed to the U.S. dollar. This solution succeeded in stabilizing the economy by holding inflation down and maintaining moderate GDP growth. Despite having survived the Asian economic crisis relatively unharmed, Brazil entered a recession in 1999. After experiencing fiscal structural reforms and capital flight, Brazil adopted a floating exchange rate that resulted in a short-term devaluation of the Real. This restructuring eventually led to a healthy business environment in 2000. Currently, the Brazilian currency faces pressure due to investor concerns that the economic crisis in neighboring Argentina may have a detrimental effect on Brazil's economy.

Sources: Standard and Poor's DRI, Country Outlook, Volume One, 2001/ First quarter,   U.S. Department of State

Foreign direct investments, exports and real GDP growth contributed to a strong economic recovery in 2000.

Currently, Brazil has the tenth largest economy in the world and represents about half of South America in population, territory, and economy. In the absence of hyperinflation, the potential for increased foreign investment in Brazil is positive. The U.S. is a primary investor in Brazil. In 2000, exports increased 9.8 percent from the previous year and real GDP (after adjusting for inflation) increased 3.2 percent to USD $606.4 billion. A 4.2 percent increase in real GDP is projected for 2001. Inflation dropped in November 2000 to 6.0 percent and is expected to decline another 1.0 percent in 2001, aided by a stable Real, a slowdown in the U.S. and Argentine economies, and the expected moderation of world oil prices.

Table 4.1: Selected Brazilian Economic Indicators

Note: A negative (-) change means lower purchasing power in U.S. dollars.

Sources: Standard and Poor's DRI, Country Outlook, Volume One, 2001/ First quarter; DRI-WEFA

Personal consumption and disposable income are rising.

Brazil's GDP per capita was estimated to be USD $3,408 in 1999. Real private consumption – which constitutes 63.0 percent of GDP – rose 7.2 percent in 2000 and is expected to continue to increase by more than 3.0 percent annually for the next four years. It is estimated that the average "middle class", or SES A-B, Brazilian annual household income is USD $42,000 (see Demographic Profile Section 3.1). SES A household buying power is estimated at $78,700 and SES B buying power is estimated at USD $15,156. As of fourth quarter 2000, the mean annual household income of all Brazilians was only USD $9,180. The government sanctioned minimum wage is a mere USD $1,056 per year. Total buying power of the Brazilian population is up 5.0 percent in 2000 over 1999, which should encourage higher private consumption.

Source: Strategy Research Corporation, The 2001 Latin American Market Planning Report

According to a study conducted by Florenzano Marketing, middle-income Brazilians spend their disposable income in the following ways:

• 39% on savings
• 17% on housing
• 12% on transportation (public or private)
• 12% on other personal items and recreation
• 10% on food and beverages
•   6% on health care
•   4% on education

Sources:  Standard and Poor's DRI, Country Outlook, Volume One, 2001/ First quarter

Unemployment is expected to continue to fall and wages are increasing.

Economic revival has brought lower unemployment and higher nominal wages to Brazil in the past few years. Approximately 70 million Brazilians (60 percent of the population) are employed, either legally or illegally. Unemployment has remained stable averaging 7.5 percent for the past two years and is forecast to stay at that level for the next four years. Exact employment figures are difficult to calculate, however, since almost half of the labor market works in the informal economy. As the economy expands and the job market tightens, average wages will continue to edge upwards. In 2000, average wages rose 9 percent and are forecast to increase at an annual rate approaching 10 percent for the next four years. Leading economic sectors include agriculture (9% of GDP), industry (34% of GDP) and services (57% of GDP). Thirty percent of the workforce is employed in the agricultural sector, 26 percent is employed in the industrial sector, and 44 percent is employed in the services sector. Women make up 35 percent of the workforce, 70 percent of whom are employed in the services sector.

Sources: Standard and Poor's DRI, Country Outlook, Volume One, 2001/ First quarter;  The Economist Intelligence Unit, Country Profile, Brazil

Brazil has a Central Bank (Banco Central Do Brasil) that oversees monetary policy.

In 1985, the government decided to reorganize Brazil's financial institutions by breaking down the accounts and functions of the Central Bank, the Bank of Brazil, and the National Treasury. In a process that continued through 1988, the functions of monetary authority were progressively transferred from the Bank of Brazil to the Central Bank. Atypical activities carried out by the Central Bank, such as those relating to economic incentives and the administration of the federal public debt, were transferred to the National Treasury. The 1988 Constitution establishes the structure and activities of the Central Bank. This includes the exclusive authority to issue money, the need for the President of the Republic to gain Senate approval for leadership appointments to the Central Bank, and the prohibition of direct or indirect granting of loans to the National Treasury. Specifically, the Central Bank exists to:

• formulate, implement, and monitor the monetary policy
• formulate, implement, and monitor the credit policy
• formulate, implement, and monitor the exchange and international financial transactions policy
• organize, regulate, and monitor the National Financial System
• issue notes and coins and service the supply of currency, storage and distribution

The World Bank is providing loans to Brazil as part of its Country Assistance Program to implement fiscal reforms and eradicate poverty.

In May 2001, the World Bank approved two loans worth USD $412.84 million to Brazil. The USD $404.04 million Programmatic Financial Sector Adjustment Loan is the first of a possible series of loans to help Brazil's broad-based financial sector reform program underpin economic growth, contribute to poverty reduction in the long run, and avoid their reversal through financial crisis prevention. The program's goals and outcomes include:

• rationalization of financial regulation
• broadened access to financial services, especially for the poor
• increased efficiency and depth of financial intermediation
• banking soundness of both public and private banks
• deeper securities markets.

The USD $8.8 million Fiscal and Financial Management Technical Assistance Loan will assist the government of Brazil in establishing and modernizing fiscal and financial management tools. Brazil's fiscal reform program aims to:

• refine and strengthen the federal multi-annual expenditure framework
• upgrade federal debt management including strengthening of institutions, systems and guidelines
• implement the Fiscal Responsibility Law and companion legislation
• support the upgrading of the core federal financial management information system.

Long-term predictions for Brazil's economy are positive.

With the economic crisis in Argentina expected to culminate in 2001, experts predict that any impact it has on Brazil will occur through 2002. Yet by 2003, a healthy Argentina and a stronger Mercosur are expected to emerge, which will likely bode well for Brazil's economy. Uncertainty surrounding the October 2002 presidential elections might impede economic growth through 2001, as politicians become increasingly less likely to support unpopular reforms in the period leading up to the elections. Post-elections, however, the government will most likely continue implementing economic reforms to stimulate the private sector. Such reforms should promote competition and encourage privatization, deregulation, and investment in the stock market.

Sources: Standard and Poor's DRI, Country Outlook, Volume One, 2001/ First quarter;  The Economist Intelligence Unit, Country Profile, Brazil

4.2 Economics and Travel

In 2000, the Brazilian Real remained stable as the currency began to appreciate.

The Brazilian Real depreciated to $0.55 USD (1.83 Real = $1.00 USD) in 2000. This was in response to unstable U.S. financial markets, the risk of devaluation and debt default in Argentina, concerns about Brazil's trade position, and a currency crisis in Turkey which heightened investor risk aversion to emerging markets. While the Central Bank has been reluctant to intervene directly in the market, it continues to watch the situation very closely. Economic projections suggest that the U.S. dollar buying power of the Real will remain in the range of 1 Real = $0.45 to 0.56 USD (R 1.80 to 2.31 = USD $1) through 2003, as long as the domestic economy in Brazil remains strong. Additionally, a sustained weakening of the Brazilian Real should be supported by further cuts in U.S. interest rates, steady growth, the improving trade balance, and reasonable access to international capital.

Against the Euro, the Real is expected to depreciate through 2003 to 1 Real = 0.36 Euro (R 2.80 = 1.00 Euro). Such unfavorable exchange rates against the Euro may make Europe an unattractive destination for Brazilians. This would allow the U.S. to be a more competitive travel market destination.  In addition, experts predict that decreasing interest rates in the U.S., combined with rising interest rates in Europe, will eventually make the Real more competitive. For current information on exchange rates, see the Federal Reserve.

Sources: Standard and Poor's DRI, Country Outlook, Volume One, 2001/ First quarter;  The Economist Intelligence Unit, Country Profile, Brazil

Economic implications for travel to the United States will improve.

The devaluation of the Real in 1999 had negative consequences for travel to the U.S. that year. Although the Brazilians had better-than-expected reactions to the recession, the Brazilian Real depreciated 36 percent against the U.S. dollar in 1999. Similarly, arrivals to the U.S. fell 27 percent in 1999 to 665,000. Despite this decline, Brazil was able to maintain its fifth place overseas ranking of international arrivals to the U.S. The recovering economy in 2000 had a favorable effect on Brazilian arrivals to the U.S., which increased 10.9 percent from 1999 to 737,245. Forecasts for 2001 project that arrivals from Brazil will increase 9.4 percent from 2000 to 807,000.

Sources: Office of Travel and Tourism Industries/ITA, DRI-WEFA