Brazil: The World's 7th Largest Economy And Still Growing

Official Name:  Federative Republic of Brazil.

GDP and global rank (2010): US$ 2.09 trillion ranking as the 7th largest in the world.

Per Capital GDP and rank (2010): US$10,816 ranking as 54^th largest in the world.

Local Currency: Real Brasileiro (R$), or “real” for short.

How did Brazil get to where it is today?

In the mid 1800s Brazil was the world's largest producers and exporter of coffee, a commodity whose popularity had begun surging worldwide. The United States was Brazil's largest trading partner exporting millions of tons of coffee beans per year. Demand continued to increase exponentially, forcing the Brazilian government to seek ways to maintain their global dominance in coffee exports. New land was cultivated and railroads were developed in remote areas rich in coffee beans, making transportation to ports more accessible.

Soon immigrants began flocking to Brazil seeking opportunities in the coffee trade. By the late 1800s Brazil became extremely wealthy due to coffee sales. The nation continued to increase their wealth after discovering how resource rich the land was. Brazilians began mining and exporting sugar, cotton, tobacco, cocoa, and rubber. All of these industries benefited from the newly established railroads that connected a large part of the country to sea ports. Today, due to the aggressive expansion of the mining industry in the 1800s, Brazil has the world's tenth largest railway system and the forth largest roadway system.

Economic expansion continued throughout the decades and like all other nations Brazil suffered economically during World War 1 and the global depression in the 1930s. The already democratic government system was modified in the 1950s to offer even more freedom and favorable exporting policies helping businesses even further. Brazil's GDP grew 7 percent annually between 1950 and 1961. The economy grew even faster from 1968 to 1973 as GDP rose over 11 percent annually led by steel, cement, transportation equipment and electricity generation exports.

An oil crisis in the 1970s slowed Brazil's economy as the heavily dependent industries were faced with the price of oil doubling. In addition the government borrowed heavily throughout the 1970s and 1980s, which lead to a debt crisis. Inflation, public and private debt all increased to dangerous levels and the “high growth” formula of the 1970s, that was added to the economic woes as inflation, suddenly escalated to almost 250 percent annually. Several government plans reduced inflation however the economy was still lagging. It wasn't until 1994 that a concrete plan was set into motion to kick start the economy. The “Real Plan” called for new monetary and fiscal policies, that has resulted in stable and consistent growth to this day. In 2010 Brazil had one of the world's best preforming economies with a growth rate of 7.5 percent annually.

Where is Brazil today?

Brazil has become one of the world's largest economies, as well as one of the most resource rich nations. Nickel, tin, uranium, copper, gold and other minerals are mined and exported to dozens of countries worldwide. In 2011 36 Brazilian companies were listed in the Forbes Global 2000 (an annual ranking of the top 2000 public companies in the world) including the world's fourth largest company, oil giant Petrobas.

Brazil is a global leader in the aerospace industry due to the nation's extremely large surface area, it's underpopulated land boarders and it's huge coastline, all of which demand an advanced aerospace plan for efficient transfer of goods and individuals. Embraer (NYSE: ERJ), a well known jet manufacture is based in Sao Jose dos Campos, is the world's third largest aircraft company and Brazil's largest exporter by total dollar amount. Embraer has a vast line of products including commercial aircrafts used by major airlines worldwide, a fleet of luxurious and modern private jets intended for corporate clients and a fleet of fighter jets and other military aircrafts used by several Air Forces worldwide.

Currently, Brazil is the world's 11th largest oil producer .In the coming years this ranking is predicted to improve drastically due to an oil field that was discovered in 2006 near Petrobas (NYSE: PBR) containing anywhere from 50 billion to 150 billion barrels of oil. It easily could turn out to be the third largest oil field in the world, yielding a value of $5 trillion. With the discovery Petrobas immediately skyrocketed. The Brazilian government owns 64 percent of Petrobas and can use the offshore oil to completely eliminate dependence on foreign oil and avoid the type of crisis that damaged the economy in the 1970s. Revenues from exporting oil can be used to further fund government activities and re-invest in other key industries so that Brazil can continue growing in the global stage.

The mining industry is also vital to the Brazilian economy as it employs over 600,000 people. A few key companies in the sector contribute over 2 percent to Brazil's US$2 trillion GDP. Brazil is a major producer and exporter of key commodities such as gold, coal, phosphates and iron ore, which is the largest exported mineral, combining for over 6 percent of the country's total export revenues.

What are some negative aspects of Brazil’s economy?

The slowed economy in the second half of 2011 is not guaranteed to recover in 2012. The industrial sector is faced with growing competition from other emerging markets like China and India. Tax incentives and lowering of interest rates were introduced by the government to aid the slowing economy. The results of this are yet to be known. The real has appreciated in value making exports more expensive. Due to the European Debt Crisis and a world wide economy that has still not fully recovered from 2008, investors should still exercise a great deal of caution.

Crime is still a large concern in Brazil which could lead foreign investors and businesses to think twice about conducting business in Brazil. Many countries have issued serious warnings relating to conducting business (or visiting) Brazil, such as this stern warning from Foreign Affairs and International Trade Canada:

Incidents of gang-related violence continue to pose a threat to the safety of travellers in large urban centres, where there is often a visible disparity in the levels of wealth. In the past, targets have included police stations, buses, official buildings, and businesses, as well as most tourist hubs and destinations.

ETFs of interest

iShares MSCI Brazil Index Fund (NYSE: EWZ) holds 84 of the largest companies based in Brazil.  The largest holding in the fund is Petrobas (NYSE: PBR) which accounts for approximately 10 percent of the fund’s holdings.  Financials make up the largest sector representing almost 25 percent of the total fund.  Itau Unibanco Holding (NYSE: ITUB) is the world’s tenth largest bank and the largest conglomerate in the Southern Hemisphere. 

Emerging Global Advisors EGShares Brazil Infrastructure (NYSE: BRXX) holds 30 companies that provide goods and services related to infrastructure.  Included industries are metal miners, energy/ power producers, transportation, utility and water companies.    The largest holding in the index is CPFL Energia (NYSE: CPL) which accounts for 6 percent of the total fund and is the third largest Brazilian utility and energy generation company, providing electric energy to 6.7 million households across 568 municipalities.  The second largest holding in the fund Companhia Energetica de Sao Paulo owns and operates 6 hydroelectric plants and 57 generation units.  The smallest holding, OSX Brasil SA is involved in the oil and gas industries.  OSX Brasil can produce 100,000 barrels of oil per day and has storage capacity of 1.3 million barrels and has proven reserves to last at least 20 years. 

Investors believe the fund could increase as the Brazil government is expected to spend over US$1 trillion over the next five years on infrastructure upgrades in preparation for hosting both the World Cup and Summer Olympic games.  Most, if not all, of the companies in the index will benefit directly from this direct investment which could represents one of the largest infrastructure investments in history.

Companies of interest

Petrobas (NYSE: PBR) is currently the world’s fourth largest company based on market capitalization.  It is also Latin America’s largest company by both market size and revenue.  Petrobas is the second largest oil and gasoline company in the world due to it’s total assets of US$133.5 billion spread across 18 countries.  In addition the company discovered what is believed to be the world’s third largest oil field.  The Carioca/Sugar Loaf field is a deepwater oil field in the Atlantic Ocean off the coast of Sao Paulo.  Petrobas revenues are US$ 146.1 billion, and net income of US$20 billion

Vale (NYSE: VALE) is the second largest metals and mining company in the world.  Vale is the largest producer of iron ore and pellets producing over 250 million tons annually. Vale is also the world’s largest producer of nickel producing over 250,600 tons.  Vale is active in coal, potash, and all stages of aluminum production.  To facilitate transport of all these fossils, Vale has purchased over US$1.3 billion worth of locomotives and 14,090 freight cars.  Vale also owns and operates the port of Tubararo which is the largest iron ore embarking port in the world, shipping more than 80 million metric tons of iron ore through the port.  Finally, Vale has purchased seven ore carriers from South Korean (More about South Korea here) manufacturers to transport iron ore to clients in Asia.  The first of these ships was delivered in 2011 and is the world’s largest bulk carrier with a capacity of over 400,000 tons.  Vale has invested over US$880 million in hydroelectric power plants to provide power to the mining operation.  Vero’s mining activities accounts for over 4 percent of Brazil’s total consumption.  All of this coupled with revenues of over US$60 billion and net income at US$22.8 billion Vero is in a position to continue its global dominance in the industry.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

(c) 2011 Benzinga.com. All rights reserved. This material may not be published in its entirety or redistributed without the approval of Benzinga.