Introduction
Brazil is located in South America and is the fifth largest country in the world in terms of geographical coverage. The country is known for its expansive beaches, booming economy, and exports from the agricultural sector. Although Brazil is the largest economy in the region, it has not been an easy ride. Brazilian policymakers had to open the market further to allow trade agreements, liberalization and unilateral tariff cuts. Therefore, any changes occurring in the international market adversely affect the economy of Brazil. The changes in the economic structure of Brazil have led to positive changes on the country’s economy such as the decrease in the rate of unemployment to 8.2% in 2007 (Polaski, Filho, Berg, McDonald, Thierfelder, Willenbockel and Zepeda 1). In addition, the country’s poverty line and rate of inflation have also decreased drastically. Despite these changes in the economy, economists have pointed at the need for the country to keep a closer look at its social and economic policies so as to cushion them against external changes. The country depends heavily on exports and the service sector which contributes greatly to its economy. The paper is an attempt to explore the overall economy of Brazil and how the economic situation has positively and negatively affected Banco do Brasil. Furthermore, the study analyses the forecasts of Banco do Brasil for over the last 3 years using balance sheet and income statements.
The overall economy of Brazil
Since 2000, the economy of Brazil has experienced a sustained growth rate (Polaski et al. 1). This has been necessitated by the major roles the country has played in the global market by engaging world trade negotiations. Prior to the economic growth, Brazil was among the countries with volatile economy characterized by high inflation rates and high unemployment rates. Between 2000 and 2006, the Brazilian exports increased by 150 % while exports grew by 62.5% (Polaski et al. 1). The country is a member of the G-20, a group formed by developing members with the aim of negotiating economic interests with the WTO. On matters of regional integration, Brazil is a major player in the economic alliance formed under the India- Brazil -South -Africa dialogue forum (IBSA). Therefore, the country emerges both as an emerging power of the developing and developed nations.
Brazil has been named as the largest economy in South America. The country has risen from poverty to become one of the major exporters of the 21st century. Around the world, its banks have been ranked among the 10 leading credit cards issuers. The country has invested heavily in automobiles, computers, cattle, petrochemicals, mining and mineral resources, aircraft, diamonds, coffee, footwear, wheat, and banking. All these economic activities have ensured that the Brazilian economy continues to flourish. Based on the current report by the CIA (2012), Brazil is still ranked number eight in terms of GDP based on purchasing power parity. The major contributors to the Brazilian GDP are the services sector which provides67.3% followed by industry and the agriculture sectors each with 26.9% and 5.8% respectively (CIA 2012). The country has an employment rate of 6% which is much far better compared to the last decade. Based on the 2008 statistics, the country has a 26% of population that lives below the poverty line. In the last quarter of 2011, Brazil had an inflation rate of 6.5% (CIA 2012). The major imports of Brazil are automotive parts, oil chemical products, transport equipment, electrical appliances, machinery, and electronic. These products are imported from South Korea, Germany, Argentina, China, and US. On the other hand, its major export partners are Germany, Netherlands, Argentina, Us and China.
The major boosters of the Brazilian economy include service manufacturing, mining, and the agricultural sectors (CIA 2012). Although Brazil has been reported to have surpassed the UK’s economy, the country is still categorized as a developing country as its social benefits and per capita income are unable to cover for its large population of almost 200 million people (BBC 2012). Based on the increase in economic growth, Brazil could be ranked as the sixth largest economy in the world. Its economic growth has been necessitated by successful decrease of inflation by the Brazilian government and the power exhibited by its internal market. Globally, Brazil exports over twenty five percent of the world’s total raw sugar and refined sugar products. It is the leading producer of soya beans in the world, and is ranked number five in the production of cellulose. About 80% of the world’s juice is exported from Brazil. All these agricultural related practices have necessitated Brazil to be ranked in the position it currently holds.
Negative and positive effects of the economic situation on Banco do Brasil
The Banco do Brasil which means Bank of Brazil in English is the largest bank in Latin America and in Brazil based on assets. The bank which is controlled by the Brazilian government has continued to expand annually. Banco do Brasil is among one of the Brazilian federal banks which according to Quadros (1) has gained recognition in offering credit emergencies to small and large banks, civil construction, and exporters.
The Brazilian banking behaviour is influenced greatly by the different phase of the macro-economic factors resulting from changes in an economy. Despite enormous affects of the world financial markets crisis on other banks in the world especially in Europe, Banco do Brasil is expected to gain its loan growth by over 10 percent (Eeuwens 2012). According to the news reports, Banco do Brasil SA’s U.K which is an affiliate of the Brazilian based bank will benefit from loan growth, as the bank has put plans to serve some of the clients affected by the fall in the European banks. As a result, the bank will be able to loan out to the clients since the banks are curbing lending given that the economy is very volatile. Bank do Brasil has seen an opportunity which will positively impact the bank. In 2011, the bank grew as its loan portfolio increased by 10 percent and is expected to grow further in 2012. The bank also has seen opportunities in Europe and as a result it has increased its support on Brazilian banks based in European markets as well as home companies doing business in the region (Eeuwens 2012). According to Eeuwens (2012), Banco do Brasil consolidated loan portfolio increased by 21% reaching a volume of 442 billion reais in 3rd quarter of 2011. Because of the opportunities made available by the global financial crisis, the bank was able to maintain its forecast for fifteen percent to eighteen percent in Brazil.
The growth in the economy of Brazil has obviously led to a growth of Banco do Brasil as a result of the increase in credit boom (Barreto 2010). As the largest bank in terms of assets, the bank enjoyed a rise of 46 % in profits in 2010 which was necessitated by la reduced provision for bad debt provisions and credit portfolio. The bank’s record of unemployment over the past years has ensured that the real income, creditworthiness and purchasing power of the consumers in Latin America increases (Barreto 2010). As a result, the demand for credits has increased credits which have pushed credits consumption to higher levels at the same lowering loan default rates. The growth of the real economy in Brazil over the last eight years has been very positive. The Chief Financial Officer of the bank acknowledged that if the business environment was doing well then the bank was doing even better. As a result, its assets have increased to 796.8 billion reais which is the equivalent of 16.2%. Corporate loans also grew by 20.1% as small and large companies continued to acquire loans to expand their business in Brazil and abroad (Barreto 2010).
As a result of the financial market crisis, the Bank do Brasil has been under pressure to increase its lending. According to Trusted Sources research & Networks (27), the bank has expanded its export financing after the Lehman Brothers announced their bankruptcy. Also, the bank has increased the available capital to business suffering from the financial crisis. However, despite the increased lending, the bank is keen to avoid huge risks associated with loaning. The company has shown interest in acquisition of properties in the most affected areas especially in Europe and Latin America to boost is assets (Trusted Sources research & Networks 27).
As seen under the overall economy of Brazil, the country is a market leader in agriculture and this has boosted the economy greatly. Because of the boom in agriculture, the bank has been the leading agricultural financier in Brazil. For example, in 2009/2010, Banco do Brasil financing led to “the production of roughly 15.6 million tons of soybeans, 10.5 million tons of corn, and 4 million tons of rice” (Management Report 2009, 12). By the end of 2009, the bank loan portfolio as a result of the increase in the agricultural performance had increased to R$ 66.4 billion which was 74% increase. Lastly, Banco do Brasil has been doing well as it continues to offer financial support to the booming agricultural sector.
The fall of the Lehman Brothers in September 2008 affected most of the economies in the world (Filho1). The contagion effect spread to the world economies thus affecting the international trade, capital markets, and the credit markets. Consequently, countries which depend heavily on exports like Brazil were affected by the economic changes as the price of commodities fell abruptly (Filho1). Price volatility was experienced in 2008 end of the year which spread to South America affecting countries in Argentina, Venezuela, Chile, and Brazil. Although Brazil recorded a positive growth of 0.7% (Filho 1), Banco do Brasil has been affected negatively by these effects. For example there was a withdrawal of the portfolio capital which affected the stock market which is major revenue sources to Banco do Brasil. The offering of credit in foreign markets were interrupted which means the Banco do Brasil was affected as it was not in a position to offer credits in foreign markets in fear of the excessive risks involved. As seen earlier, Banco do Brasil is a major financier of Agribusiness in Brazil, with the price of the products being affected; it implies that the bank financial growth was also affected. Brazil export major zones are US and Europe which were affected by the economic crisis. According to Filho (2011), the exports to these countries declined which implies that the effects were felt by Banco do Brasil. Lastly, the exchange rates become volatile which affected international transactions in which Banco do Brasil is a major player.
The aforementioned changes in the preceding paragraph plus the fact that Banco do Brasil was encouraged by the government to increase its credit during the financial crisis increased the bank’s credit risks. On top of that, the bank was exposed to credit failure although it was not affected. Given that Brazil has been doing well over the last years and recorded a positive economic growth in 2008 while other major economies of the world recorded a negative economic growth rate is an indication that the Banco do Brasil was not affected greatly and so the less negative effects compared to the positive ones.
Analyses of the forecast of Banco do Brasil over the last 3 years
To begin with, the assets of Banco do Brasil rose to 797 billion reais in the third quarter of 2010 which was a growth increase of 16.2 percent. In addition, the profits increased by 46% to reach 2.58 billion reais. According to Barreto (2010) the increase in assets and profits were necessitated by the increase in credit portfolio which rose by 21.1 percent as a result of the increased consumer lending rates and levels. In 2009, Banco do Brasil recorded an income of R$ 10.1 billion which was an increase of 15.3% compared to the 2008 (Management Report 2009 3). This could have resulted from the efforts carried by the Banco Central Brasil in 2008 to revive the economy by manipulating the monetary policy. According to Filho (1) the BCB and the Monetary Policy Council lowered Selic and increased liquidity levels in the interbank markets. In addition the Banco do Brasil was ordered by BCB to acquire credit portfolios and indirectly or directly acquire ownership interest on public and private financial institutions (Filho 1). According to Management Report 2009 (2) increase in credits boosted the performance of the company. Banco do Brasil (13), the bank recorded a net income of 12.1 billion reais with total assets of 981.2 billion reais in 2011 compared to end of year 2010 assets which stood at 811.1 billion reais which was a 21% growth. The assets increased as a result on increase in short-term interbank investments, securities, and loan operations which contributed 73% towards the Banco Brasil total assets. This was an increase of 2.4% as in 2010the short-term interbank investments, securities, and loan operations accounted 70.6% of the total assets (Banco do Brasil 13).
Compared to 2010, the 2011 net income of Banco do Brasil increased by 3.6% (Banco do Brasil 9) while the recurring income was recorded at R$ 11, 751 million which was 10.2% higher than 2010 (Banco do Brasil 9). According to the Banco do Brasil 2011 management report, the revenues were able to surpass the 2011 forecast of R$ 100,000 million to reach R$ 102,849 which was an increase of 27.9% compared to the figures recorded in 2010. In 2011, the lease and loan operations led to a loan portfolio performance of 19.4% which was a growth of 20.7%. This may have increased after the BB was allowed by the BCB to increases its credits to strained companies and other borrowers within the Brazilian economy. The report is keen to add that the 2011 increase in securities resulted from the role played by the Brazilian Central Bank to increase the average Selic rate, increase in the bank’s average balance securities, and depreciation in the Brazilian real (Banco do Brasil 9).
In 2009, the bank’s earnings per share was 3.95 which rose to 4.34 in 2010 but slightly dropped in 2011 to a level of 4.28 which was a decrease equivalent to 1.38%. The decrease in earnings per share resulted from a decrease in the attributed net profit. Despite the decrease in the earnings per share, Banco do Brasil continued to pay 40% of its net income to respective shareholders. The annual increase in the number of the borrowers since 2008 led to an increase in loan income which totaled R$40.5 billion in 2009 which was an equivalent of 22% (Management Report 2009 4). The shares of Banco do Brasil in 2009 ended trading at R& 29.70which was an increase of 117% for a period of 12 months (Management Report 2009 6). This was against 82.7% appreciation of Ibovespa. Its market capitalization increased to R$ 76.3 billion which was an equivalent of 102.4%.
It has not always been a smooth ride for Banco do Brasil as its agribusiness loan portfolio (ALP) was affected. In 2009 the APL was at 54.9% which increased to 63.1% in 2010 but decreased in 2011 to a level of 58.1%. Despite the decrease in ALP, the Brazilian balance of trade was able to increase from 20.3% to 23.0% which was used to maintain a positive Brazilian agribusiness trade of balance (Branco do Brasil 38). To ensure that the bank is not affected financially by bad or prolonged debts as a result of bad weather, Banco do Brasil has been able to get covered by the Agricultural Insurance. In addition, the bank has put into place mitigation plans to evade any associated risks. This has helped the bank maximize its operations without a lot of fear on the financial consequences which may arise.
Conclusion
In summary, the economy of Brazil has grown and it cannot be compared to what it was 20 years ago. The country which is regarded as the largest economy in South America depends heavily on export of agricultural products among others. It has also been able to sustain its economy by reducing the level of unemployment as well as keeping low level of inflation rate. Brazil which is ranked eighth in terms of economic growth survived the 2008 financial market crisis by registering a positive economic growth as most of other countries registered a negative growth. The economic situation has seen Banco do Brasil grow and increase its loan portfolio by over 10 percent. In addition, the bank has found opportunities in Europe of facilitating credits to clients of the affected European banks. It has also invested and acquired small companies which were affected by the crisis. In terms of the general growth of the Brazilian economy, Banco do Brasil has also grown, real income, profits, and assets have all increased. For instance, credit portfolio increased by 21.1 percent in 2010 as assets grew to 797 billion reais. Based on the financial statements analysis, profits increased 46% to reach 2.58 billion reais which has also increased in 2011.
Works Cited
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