Evaluating an Emerging Market

Case Study: Evaluating an Emerging Market

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In financial description, a country that is termed as an emerging market is one that has features of a developed market, but then the market standards does not meet that of the developed market. The emerging markets are those countries that have the opportunity to develop in the future or were developed in the past times (Bursztyn, 2016). According to research by The Economist, it is shown that among the emerging markets are the BRIC countries; China, India, Brazil, and Russia. In this paper am going to evaluate the Brazil emerging market.

Gross Domestic Product of Brazil

        Brazil has the largest economy by nominal GDP setting it as the 9th world largest. The purchasing power equivalence is rated the 8th largest in the world. Between the years 2000-2012, the economy of Brazil was the fastest in growth recording an annual average GDP growth rate of 5%.  In 2013 the country’s growth rate reduced, and by 2014, the county had entered into a depression. Years later to 2017, the economy of the country started to grow at a rate of 1% in the first quarter (Amado, & Mollo, 2015). The components of GDP in Brazil are derived from the Personal consumption expenditures, Investment, Net exports and Government expenditure. The service sector in the economy of Brazil is the leading component of GDP recording a 67%. The manufacturing segment, on the other hand, records a rate of 27.5%. The agriculture part represents 5.5% of the GDP in Brazil. The trading of the agricultural produce in Brazil contributes to a trade balance regardless of the trade barriers and the subsidizing guidelines implemented by the developed countries.

 The manufacturing industry of Brazil is the third largest in America representing 27.5% of the GDP. The industry sector ranges from the bolsters, wood, iron, fabrics, shoes minerals, tin, steel, airplanes, chemical elements, gas-powered vehicles and parts. The banking industry has also contributed to the Brazil economy posting a 16% of the GDP. The energy sector has been improved in order to reduce the dependence on the imported petroleum (Bursztyn, 2016). The country has a 260, 000 megawatts of hydroelectric power which provides 90% of the total required energy in Brazil.

Inflation Rates of Brazil

        The inflation rates of Brazil are based upon the consumer price index (CPI). The average inflation rates of Brazil from the year 2012 are 5.40% for the year 2012. The rate increased to 6.21% in the year 2013. In the year 2014, the rate was at 6.33% an increase from the preceding year. In the year 2015 the rate of inflation increased to 9.01%, and by the year 2016, the rate had reduced to a rate of 8.77%. (Bursztyn, 2016) The inflation rate in the year of 2017 is at 4.01%. The administration of Brazil has projected to reduce the public debt to a rate of 30% of the GDP.

Political Risks in Brazil

        The political environment in Brazil is a stable one, and this has contributed to the diverse economic environment, the rise in the incomes, availability of cheap assets, and high investment profits. The stability of the government increases the chances that investors will place their money on the government bonds. However, there are political risks that have emerged in that the relationship between the Congress and the government which has raised alarm about the ability of the government to meet its fiscal targets (Amado, & Mollo, 2015). There is also the Enron scandal by Petrobras which has hauled Brazil into the worst corporate scandals ever recorded. This has scared the short sellers to invest in the government bonds.

Economic risks in Brazil

        Brazil had undergone a recession for 2years, but the country is now on its back posting a GDP growth rate of 1% in the first quarter of the year 2017. Inflation rates have been eased back to the target range with the government adopting a pro-growth policy. The downward pressure on the currency has been reduced (Amado, & Mollo, 2015). The government of Brazil focused on the short term risks that pose danger to the economy through; monitoring the impact of fiscal consolidation measures on prices. The uncertain external environment has also been put on spot that has effect on the currency.

Demographics of Brazil

        The country has a structural advantage as the population increase is directly proportion to the increasing demand for labor. The country is termed to have an economically active population. The country has achieved the demographic bonus. This demographic situation of the country aids attraction of new businesses and supply of other talents (Amado, & Mollo, 2015). This is an attractive feature for the Brazilian business hub. Liquidity of Local Debt; the country of Brazil in order to reduce the stress scenarios in banks, requires them to hold enough highly liquid assets to survive for a month.

Differences between Emerging Markets and Developed Countries

There are differences between the emerging markets right from the GDP rates, liquidity of debt and government regulations. An emerging market has a young working-age population. This is the economic point of view means that the working population adds to the economic growth. The ratio of the working-age to retired population in the developed countries is very low this, in turn, means that there is a high economic growth because of the reduced need for government support. The export strength in developed countries is higher than in emerging markets. This, in turn, will increase the GDP of the country (Bursztyn, 2016). The labor costs in emerging markets are lower than developed countries hence the developed countries produce more goods compared to what they import. Developed countries has low levels of government debts and consumer debts compared to the emerging markets because of the high manufacturing and production levels which results to trade surpluses.

Brazilian and Chinese Economy

        The macroeconomic reforms that were adopted by China were rejected by the Brazilian government. The economic rates of China increased, and the savings rates grew as compared to Brazilian. The Chinese government enjoyed the economic autonomy that was not adopted by Brazil. This was due to the market rules that attracted foreign investments. China had political stability because of the one party system in China that had greater autonomy in decision making compared to the Brazilian democratic system. The Chinese’s GDP dependence on exports is on a scope of 40-60% whereas the Brazilian dependence is 0-20% (Bursztyn, 2016). The Chinese economy is not protected against foreign predicament. The Brazilian growth is supported largely by the domestic demand, while the Chinese is sustained by foreign demand because the homegrown Chinese market has not yet developed to withstand its growth.