Analysis of Brazil's Economy

External Factors 

Political Factors 

Political System and Stability 

Brazil is characterized by political uncertainty. For example, a leaked conversation between the President and a businessperson resulted in political instability along with a collapse of the equity market. The most affected organizations were those that were connected with the Brazilian state-owned development bank (Hillier & Loncan, 2019). Therefore, political connections and foreign capital exposure enhance the political risk to asset prices and cost of equity capital during a period characterized by political instability. 

Another factor that should be considered in analyzing Brazil’s political system is the political conflicts that might arise within political parties. For example, a rise in disputes between two factions of the country’s middle-class, the internal and internationalized middle-class, arose due to differing ideologies. The two groups determine government policies and outcomes using ideologies, institutions, policies, and forms of political industrialization. The Worker’s Party has not challenged the present structures, resulting in an authoritarian democracy. The party is timid and has limited power, which has resulted in aggression from the middle-class and upper-middle-class (Boito & Saad-Filho, 2016). Consequently, a severe crisis in presidential administration arises. 

Brazil has a strategic partnership with the European Union (EU), which was developed in 2007. The partnership focused on the reinforcement of multilateralism. It also addressed energy, environmental issues, and stability in Latin America. Brazil’s goals in developing a strategic partnership with the EU was to enhance international acknowledgement and prestige and boost investments and technology transfer in the innovation context. President Lula’s administration in Brazil led to the reorientation of external actions. The country used south-south cooperation and multilateral institutional forums to reinforce its universalism and ensure greater autonomy. The development of the partnership between Brazil and the EU led to bilateral conversations that addressed domestic issues, such as nuclear energy, social development and employment, industrial output, social cohesion, trade, investment, macroeconomic issues, and information technology (IT among others (Saraiva, 2017). Therefore, the strategic partnership is likely to facilitate political stability and reduce the impact of exogenous shocks. 

Taxes and Tariffs 

Brazil uses trade policies to promote industrial development. For example, the country implements production diversification and technology upgrading. Moreover, Brazil also uses subsidized credit and target subsidies to influence the business environment. The government applies import tariffs and barriers to final goods import. The policy is more flexible while considering intermediate goods, where some are subjected to low trade barriers. Industrial policies implemented through public enterprises promote the domestic production of inputs from vital sectors, including steel, chemicals, and petrochemicals. The developed policies led to a decline in the competitiveness of Brazilian manufactured products and dwindled market shares (Araujo & Flaig, 2016). Therefore, Brazil has remained a marginal player in world trade. 

Brazil has rarely made any changes to its tariffs over the last two decades. Only moderate progress has been made in reducing tariffs, resulting in a tariff profile that is similar to the one implemented in the early nineties. A reform in 1991 reduced the modal and mean tariffs from 40% to 20% and from 42% to 12%. Additional measures were also introduced, leading to the partial opening of the Brazilian economy. The reform eliminated import bans placed on more than 1300 products. Since the reform, import tariffs in most sectors range between 10% and 20%. In some sectors, such as wearing apparel and machinery and equipment, import tariffs have fallen from 90% to 20% and 48% to 14%, respectively. On the other hand, products with higher technological content, longer production chains, and low competitiveness relative to Asian economies are subjected to higher tariff rates between 30% and 35%. Brazil’s tariff profile is characterized by several small occasion amendments, such as tariff hikes and temporary tariff increases. An amendment in 2004 led to an indirect tax levy on imports, which was initially only applied to domestic production (Araujo & Flaig, 2016). Therefore, minimal policy changes regarding taxes and tariffs are made in Brazil. 

Brazil applies high import tariffs than other countries, such as Russia and India. It has the highest mean import tariff of non-agricultural products among BRICS countries (Brazil, Russia, India, China, and South Africa). A 35% tariff rate is applied to about 500 products in textiles and automobile vehicles sectors. In 2014, the mean and modal tariffs were 14% and 12%. Brazil applies tariffs exceeding 10% in wearing apparel, leather, textiles, motor vehicles, ferrous metals, wood products, machinery and equipment, and other manufacturing. Most manufacturing sectors have tariffs ranging between 5 and 10%, while no import tariffs between 2% are applied. Despite the high tariffs, Brazil created a bilateral trade policy, which included reduced trade barriers against other Latin American countries (Araujo & Flaig, 2016). Brazil entered into preferential trade agreements with these nations, offering tariff reductions and enhanced protection against other regions. 

Brazil applies tax levies on export and import taxes. However, export taxes are applied to few products of little economic relevance, such as raw hides and skins to all global destinations and cigarettes, arms, and ammunition to the Caribbean. The country’s exports are also subjected to indirect taxes. The high level of indirect taxes on exports creates a competitive disadvantage for Brazilian exporters compared to their foreign competitors. High indirect taxes to exports act as a de facto barrier. The indirect taxes are applied despite a constitutional amendment that exempted exports from indirect taxes. However, businesses face administrative hurdles and limited instruments, such as individual state legislations, which hinder exporters from recovering levied taxes in the production chain. Applicable indirect taxes include ICMS, IPI, Cofins, and Pasep. Exporters fail to claim credits for inter-state indirect taxes, such as the ICMS, which is a state tax levied on the transportation of goods and services. States have unique tax codes and rates, which makes it difficult to coordinate State tax administrations (Araujo & Flaig, 2016). The lack of coordination in State tax administration, complexities of the tax system, fears of uncompensated revenue loss by states leads to positive taxation of exporters. 

Government Policies on Ownership 

There is a positive correlation between technological capabilities and foreign ownership. Brazil underwent a privatization process, where the government stipulated that foreign ownership would not exceed 40%. In the development of information technology in Brazil, State ownership was one of the policy responses. State ownership of international businesses in Brazil protects the businesses from being sold off since they provide influence in the strategy and ownership structure. Therefore, businesses have a source of funds and maintain their competitive advantage since they are insured from hostile takeovers (Schneider, 2015). The success of key sectoral industries was influenced by State ownership since most of these sectors were developed by state enterprises. 

Encouraging Foreign Direct Investments (FDI) 

The Brazilian government attracts FDI using incentives to facilitate job creation and generate competition among domestic producers. The government eliminated most barriers to FDI. For example, the government supported the privatization and deregulation of many sectors as a tool to increase FDI. Additionally, the government also introduced various policies, such as the Inovar-Auto Programa and the Consulta Publica Ex-Tarifario. The first policy aims at improving technological development and energy efficiency while the second one temporarily reduces the rate of import taxes of capital goods, hence supporting increased innovation by companies. The country also developed a platform, Renai, which provides potential investors with information on current business opportunities in Brazil (Owen, 2019). The country has also signed several bilateral agreements with various states, such as the BRICS states, which protect foreign investment. 

Removing Profits from Country 

The Brazilian government permits Brazilian taxpayers to remove the results of its controlled foreign subsidiaries in Argentina and Chile from the calculation of corporate income tax and social contributions (Owen, 2019). However, this policy is under review. Changes to the policy will influence businesses’ profit margins. 

Technology 

Country Infrastructure 

One of the chief disadvantages of performing business in Brazil is that its inadequate infrastructure, which is associated with the tendency of political institutions to undermine rational national planning. Low infrastructure investment also arises from weak capital markets and regulatory inconsistencies. Moreover, political incentives of wealth distribution and the sector-specific oligopoly characteristics encourage corruption. The high rates of corruption discourage foreign businesses that are prohibited from using corruption to ease market entry by home countries, such as the US. Additionally, governments fail in improving infrastructure since some improve infrastructure service delivery and ignore stimulating investment, while others raise infrastructure investment and undermine public finances and efficiency. Despite the failure of the government to adequately develop country infrastructure, greater technocratic consensus on reforms to stimulate investment is one of the positive consequences of the inadequacy (Armijo & Rhosed, 2017). Therefore, the successful development of the country's infrastructure depends on the commitment of the current government. 

Communication and Information Technology (IT) 

Brazil is characterized by inefficiency in the use of IT. The variation in the condition of communication infrastructure adversely affects export performance. The conditions of the physical transport system influence the efficiency in communication and information technologies. High-quality infrastructure improves communication. The Brazilian trading system is characterized by a lack of timeliness and reliability, which results from the use of obsolete communication technology (Faria et al., 2015). The inefficiencies in the physical transport system and in communication and information technology adversely influence the reliability of Brazilian transactions. 

Economic Factors 

Unemployment 

Since 2014, the rate of employment in Brazil has increased, along with cuts in the budgets of social programs. Additionally, there has also been a decrease in formal jobs in the country. Between 2014 and 2016, the unemployment rate increased from 6.5% to 9%. The increased unemployment rate can be associated with a decrease in the productivity of the manufacturing industry, which is influences by seasonal factors related to sugar-alcohol production (Costa et al., 2017). The high unemployment rates lead to a decrease in the population’s income and purchasing power, hence reducing import demands. 

Business Growth 

Business growth in Brazil is influenced by the interaction between public policies and other drivers of business growth. The access to public financial resources, public procurement contracts, public assistance on information and knowledge about markets, and adverse regulatory and inconsistent regular frameworks influence business growth in Brazil (Cardoza et al., 2016). The government acts as a customer for most businesses, which influences business growth among SMEs. 

National Gross Domestic Product (GDP) 

Brazil’s GDP in 2019 was $1,839 billion. The economic growth declined from 1.3% in 2018 to 1.1% in 2019 (Cardoza et al., 2016). The growth in the nation’s GDP is directly associated with an increase in energy consumption. Therefore, the government’s commitment to increase energy efficiency in the country is likely to result in an increase in the country’s GDP. 

Financial Capital Structure 

The principal determinants of the financial capital structure in Brazil are book debt and market debt. The capital structure behavior in the country is stable since companies maintain leverage levels over more than two decades. On the other hand, leverage related to market value experiences sharp fluctuations in debt levels, indicating capital structure instability. The Brazilian capital market is vulnerable to international financial crises due to increased risk aversion and preference for liquidity among foreign investors. Consequently, increased uncertainty in the Brazilian economy arises. An increase in leverage leads to an increase in capital expenditure due to the increased availability of resources to finance investment. The country is characterized by unstable corporate debt. The rising real interest rates, rising levels of corporate leverage, and lower cash flows are associated with a decline in investment. Book leverage is more stable than the market average (Tristao & Sonza, 2019). Brazil’s capital structure fluctuates over prolonged periods, indicated by oscillating stability in market and book leverages. 

Monetary Structure and Stability of Rand 

The Brazilian Real is unstable (Tristao & Sonza, 2019). For instance, the coronavirus epidemic led to the weakening of the Real to the US dollar, even with government intervention. The fluctuation in currency is likely to adversely affect international businesses due to variations in foreign exchange rates that will impact income. 

Socio-Economic and Cultural Analysis 

Language 

English is the medium of international communication. However, the English proficiency levels in Brazil are low. The majority of the population lacks good quality basic education and access to English tutors. Therefore, it is difficult for international employers to find employees with the required English proficiency level. However, increased government initiatives to promote the internationalization of higher education ad student mobility focus on foreign language acquisition (Archanjo, 2017). Therefore, implementing a more inclusive and multilingual language policy in the country is likely to improve English proficiency levels and support the international employability of citizens. 

Religion 

Catholicism is Brazil’s main religion. Religion influences Brazilian politics. Erica (2016) reported that there is minor societal favouritism towards Catholicism. Religion emphasizes social justice position, thus influencing employment policies in Brazil. 

Cultural Aspects 

Brazil has a comparatively relaxed work ethic, which might be influenced by the hot and humid weather and poor economy. They also have a relaxed attitude towards time (Fregidou-Malama & Hyder, 2015). These factors are likely to decrease worker productivity. 

Customer Base Within Society 

According to Costa et al. (2017), Brazil has a high unemployment rate, which is associated with lower income levels. Therefore, the customer base for Caesarstone Quartz is likely to be limited to the small upper-class society. 

Labor Force Demographics and Labor Unions 

Urban centers in Brazil are characterized by a concentration of unskilled labor force, expansion of informal work, low wages, and poor working conditions. Public policies seek to eliminate informality in Brazil’s employment sector. Informal labor is associated with illegal activities. Moreover, employees work in unsafe conditions. Public policies implement tax breaks for firm turnover thresholds (de Loyola Hummell et al., 2016). Therefore, Caesarstone Quartz would have to pay international workers to fulfil the demand for skilled workers. 

Internal Factors Pertinent to Company 

Caesarstone Quartz SWOT Analysis 

Strengths . Caesarstone has the ability to develop and introduce innovative new and improved products, which strengthens its brand and enhances competitive advantage. The company also has a wide product variety, which offers superior strength and resistance levels. Caesarstone has stringent quality control measures, which ensure the products’ superior quality, strength, and durability (“2019 annual report,” n.d.). Consequently, the company’s competitive advantage is enhanced. 

Weaknesses . The company is characterized by deficiencies and material weaknesses in the design and operation of internal control over financial reporting. Consequently, the company’s ability to record, process, summarize, and report financial information is adversely affected. The company also has limited resources, which might make it difficult to achieve business objectives (“2019 annual report,” n.d.). Limited resources also limit the investment in research and development, thus impacting its ability to compete with other companies in the industry. 

Opportunities . Bilateral trade agreements will enable the company to take advantage of emerging new markets and increase its market share. Additionally, a decrease in inflation rates is likely to create stability in the market, thus reducing interest rates to customers. Lastly, an increase in customer spending is likely to increase the company’s market share. 

Threats . One of the chief threats that Caesarstone faces is the variation in customer buying behavior, whereby more customers are embracing online purchases. Additionally, increased raw material costs are likely to decrease the company’s profitability. New environmental regulations could impact mining operations, thus threatening existing product categories. Lastly, the company’s competitors can imitate their products and copy innovative ideas, thus adversely impacting its competitive advantage. 

Corporate Controllable Variables 

While the company is unable to control currency exchange rates and raw material costs, it has a direct sales channel in the US, Canada, Australia, Israel, and Singapore (“2019 annual report,” n.d.). Consequently, the company can maintain greater control over the entire sales channel, inventory management, and product prices. 

Corporate Competitive Strategies 

Caesarstone’s competitive strategies include maintaining and enhancing the brand, proprietary technology, and intellectual property. The company also executes confidentiality agreements with suppliers, customers, and other third-party agents to protect its trade secrets. Caesarstone also has direct sales channels for fabricated and installed countertops in various markets, such as the US, Canada, and Australia (“2019 annual report,” n.d.). Control over sales channels enables the company to control product prices. 

References 

2019 annual report. (n.d.). Caesarstone. https://ir.caesarstone.com/financials/annual-report/default.aspx 

Archanjo, R. (2017). Moving globally to transform locally? Academic mobility and language policy in Brazil.  Language Policy ,  16 (3), 291-312. https://doi.org/10.1007/s10993-016-9408-0 

Araújo, S., & Flaig, D. (2016). Quantifying the effects of trade liberalisation in Brazil. Organization for Economic Co-operation and Development Economics Department (OCED). https://doi.org/10.1787/18151973 

Armijo, L. E., & Rhodes, S. D. (2017). Explaining infrastructure underperformance in Brazil: cash, political institutions, corruption, and policy Gestalts.  Policy Studies ,  38 (3), 231-247. https://doi.org/10.1080/01442872.2017.1290227 

Boito, A., & Saad-Filho, A. (2016). State, state institutions, and political power in Brazil.  Latin American Perspectives ,  43 (2), 190-206. https://doi.org/10.1177/0094582X15616120 

Cardoza, G., Fornes, G., Farber, V., Duarte, R. G., & Gutierrez, J. R. (2016). Barriers and public policies affecting the international expansion of Latin American SMEs: Evidence from Brazil, Colombia, and Peru.  Journal of Business Research ,  69 (6), 2030-2039. https://doi.org/10.1016/j.jbusres.2015.10.148 

Costa, N. S., Santos, M. O., Carvalho, C. P. O., Assunção, M. L., & Ferreira, H. S. (2017). Prevalence and factors associated with food insecurity in the context of the economic crisis in Brazil.  Current developments in nutrition ,  1 (10), e000869. https://doi.org/10.3945/cdn.117.000869 

de Loyola Hummell, B. M., Cutter, S. L., & Emrich, C. T. (2016). Social vulnerability to natural hazards in Brazil.  International Journal of Disaster Risk Science ,  7 (2), 111-122. https://doi.org/10.1007/s13753-016-0090-9 

Erica S. A. (2016). When Clergy are Threatened: Catholic and Protestant Leaders and Political Activism in Brazil.  Politics & Religion ,  9 (3). 

Fregidou-Malama, M., & Hyder, A. S. (2015). Impact of culture on marketing of health services–Elekta in Brazil.  International Business Review ,  24 (3), 530-540. https://doi.org/10.1016/j.ibusrev.2014.10.010 

Faria, R. N. D., Souza, C. S. D., & Vieira, J. G. V. (2015). Evaluation of logistic performance indexes of brazil in the international trade.  RAM. Revista de Administração Mackenzie ,  16 (1), 213-235. https://doi.org/10.1590/1678-69712015/administracao.v16n1p213-235 

Hillier, D., & Loncan, T. (2019). Political uncertainty and stock returns: Evidence from the Brazilian political crisis.  Pacific-Basin Finance Journal ,  54 , 1-12. https://doi.org/10.1016/j.pacfin.2019.01.004 

Owen, E. (2019). Foreign direct investment and elections: The impact of greenfield FDI on incumbent party reelection in Brazil.  Comparative Political Studies ,  52 (4), 613-645. https://doi.org/10.1177/0010414018797936 

Saraiva, M. G. (2017). The Brazil-European Union strategic partnership, from Lula to Dilma Rousseff: a shift of focus.  Revista Brasileira de Política Internacional ,  60 (1). http://orcid.org/0000-0001-8212-5509 

Schneider, B. R. (2015). The developmental state in Brazil: comparative and historical perspectives.  Brazilian Journal of Political Economy ,  35 (1), 114-132. http://dx.doi.org/10.1590/0101-31572015v35n01a07  

Tristao, P. A., & Sonza, I. B. (2019). Is the capital structure stable in Brazil?.  RAM. Revista de Administração Mackenzie ,  20 (4). 10.1590/1678-6971/eRAMF190154