Molan will be speaking at a breakfast meeting in the House of Commons on 11 June, hosted by Robert Halfon MP. Places are limited but if you would like to attend
please emailfor details.
How would you characterise business confidence in Brazil in this World Cup year, and with the Olympics coming in 2016?
Brazil faces challenges on the macroeconomic front. Inflation has been edging up, the fiscal deficit has increased and there is an exchange rate adjustment underway. So we should expect a tightening of fiscal and monetary policy in the future.
For these reasons we have seen business confidence falling in the past year as companies perceive increased risk of a slowdown in economic activity. But in the medium to long-term, the business community remains very positive, as they see a lot of opportunities.
Let me give you some examples. The middle class has been increasing fast, poverty has been falling. In the last ten years more than 40 million people were incorporated into the middle class. Brazil also has a favourable demographic situation, with the working age population growing faster non-working age population by half a million people per year.
The size of Brazil and its market makes it very attractive to transnational companies and to investors. Brazil is the seventh-biggest consumption market in the world and the fourth most important attractor of foreign direct investment in the world.
What advantages does Brazil have over other emerging nations?
Brazil also stands out in terms of business sophistication, technological readiness, financial market development, but we still have some homework to do, especially infrastructure. In this context I see the World Cup and the Olympics as an opportunity.
The most important legacy will be the improvement of existing infrastructure. We estimate that around $3bn (£1.8bn) has already been invested by the private sector in airports. Almost the same amount has been spent on urban mobility in recent year to prepare the country for these sporting events. The government estimates the total amount of investment related to the World Cup and the Olympics will be $15bn, including in communications and other areas. So although the macro-economic environment has not been very positive, the business community is relying on infrastructure changes to improve Brazil’s competitiveness.
The UK has organised several trade delegations to Brazil. How is Britain perceived in Brazil?
Brazilians have a very favourable view of developed economies in general, who are seen as far ahead in terms not just of economics but also culture and technology. We are also usually impressed by human rights, social conditions and another aspect that is very sensitive for Brazilians is the political system. Our system, the presidential system, is more prone to corruption than the parliamentary system you have in the UK.
From a business point of view Britain is recognised more as a provider of services by Brazilians than a trader of goods. This is because the majority of the top ten companies in Britain are from the financial sector, and there is a strong presence and name-recognition of British banks in Brazil.
From the point of view of a Brazilian we don’t hear much about trading, exports and imports, from Great Britain. When you look at the data, it only exports only $3.6bn last year which is not very representative for both countries. That is not more than 2% of Brazilian imports. It could be much better. The most important reason for this under-developed trade is that Brazil is not a very open economy yet.
Imports are slightly above 10% of GDP. In Britain it is 25%, so we still have some way to go. Unfortunately we still have some policymakers with a protectionist mentality. That is why a closer relationship in terms of trade agreements could be useful for both countries.
What are the barriers to trade for UK companies?
Although some progress has been made recently, tariff rates on imports remain very high and the system is both complex and favours local goods. Those barriers have been a source of concern for the US and EU and they continue to work to reduce those barriers through negotiations at the World Trade Organisation. The average import tariff duty is around 12%, which does not appear to be much, but there are other taxes such as industrialised products tax, a kind of federal VAT, and a merchandise services tax, depending on the state in which the product is consumed.
We also have several smaller taxes and fees applied to imports.
It is important to bear in mind that Brazil is part of the Southern Common Market – the MERCOSUR – with Paraguay, Argentine, Uruguay and Venezuela. This is a common external tariff for the region, but each country maintains separate exemption lists of items for tariffs.
Bilateral trade agreements outside MERCOSUR tend to focus on these lists of exemptions.
Negotiations between Brazil and the EU are ongoing about a trade agreement. How will that help trade?
The European Union is Brazil’s first trading partner. It accounts for around 30% of total trade. Brazil is the EU’s eighth trading partner, accounting for around 2% of EU trade, so it is an important relationship. Brazil, within the MERCOSUR, has been negotiating a free trade agreement, so ideally in future agreement would boost trade and stimulate new opportunities. But I am sceptical about an agreement being close to being reached. Recently there has been an increase in protectionism not just in Latin America but in Europe.
With MERCOSUR, there are very diverse mentalities within those governments that means an overall trade deal is difficult to reach.
What is the ‘good news’ for UK companies that want to trade in Brazil?
There is a lot of opportunities when you consider British knowledge in several areas. For example, the Olympics were hosted by London in 2012, and there may be some strategic partnerships. I was recently talking to a company that provides public transportation in London. Brazil’s large urban centres such as Rio and Sao Paulo desperately need this sort of know-how to address their current chaotic state of urban mobility.
On knowledge and education, last year we had a visit from business secretary Vincent Cable, and he held discussions on technology partnerships between Brazilian companies and UK universities. The idea was to attract students from emerging economies and improve research collaboration.
Another opportunity is the aerospace supply chain. We know that half of the world’s commercial aircraft have wings manufactured in the UK. One of the largest Brazilian exporting companies, Embraer, is a very competitive player in the aircraft global market.
The oil sector is also of huge importance to Brazil and the UK. Brazil has a huge amount of oil reserves in deep waters. Unfortunately policymakers have recently decided that PetroBrasil will be the sole operator of these fields. This has limited investment in the sector. There is potential to more than double Brazil’s oil production by 2020, particularly if we are able to attract and make partnerships with well-capitalised and important companies such as BP and Shell.
What is the scale of
Santander’s operations in Brazil?
We are the third-largest private bank in Brazil and the largest foreign bank with a market share of around 8% in terms of assets. Credit penetration, especially of mortgages, is still very low; around 8% of GDP. This business has been growing fast in Brazil, more than 30% per year, but we have to develop the infrastructure for those houses to be built and also to keep relying on increasing penetration of credit.
Molan will be speaking at a breakfast meeting in the House of Commons on 11 June, hosted by Robert Halfon MP. Places are limited but if you would like to attend
please emailfor details.