In terms of geographical area, Brazil is the largest nation in south America and also the most important economy in the continent. Also, Brazil is one of the most sought-after emerging economies in the world for global trade and commerce. Also, in terms of population, Brazil is the fifth most populous nation in the world. Besides, the country boasts of an broad spectrum of flora and fauna making it a great travel destination. Brazil has a strategic position in global trade and commerce and shares it land borders with 9 countries making it a trade hub in South America.
Further, an insightful PESTLE analysis of Brazil will delve deep into how the country’s business environment is shaping up and how it is affecting various industries in the country. To elucidate, PESTLE Analysis is one of the most effective management tools that can assist in analyzing the external environment corresponding to the industry.
This article contains well-researched information about different industries getting impacted in Brazil due to various external factors. Based on this analysis, companies can make well-informed decisions about their businesses to sustain themselves in the highly competitive market.
Table of Contents
An Elaborate PESTLE Analysis of Brazil
Political factors affecting different industries in Brazil
Brazil is a democratic country but the businesses in the country can expect a bumpy ride ahead as the country is going through political downturns and violence. The Afro-Brazilian and indigenous community in Brazil named Samba has cornered the government and is regularly demonstrating on the streets against the discrimination meted out to them (Phillips, 2022). Further, the current president of the country is calling for the active role of the military in running the country and he supports the closure of the Supreme Court and congress (Stuenkel, 2021). This behavior from the country’s top rulers is not a good sign for the companies to expand their business in the country as there can be major uncertainties in the political environment and as a result, there can be a total overhaul of the rules that would result in difficulties for the companies. However, there are many positive aspects for the industries as well, the government is trying to improve its position in the ease of doing business index.
Going by this mission, new policies have been formulated that include completing the process of applying for and granting the business license through automatic mode without any human interference. This would ease the process and reduce the risk of corruption.
Further, the businesses face difficulties while dealing with taxes as lots of agencies like the municipality, state, and the federal government are involved and all of them have different tax policies but now registration for all these agencies has been unified, and now the companies do not need to register separately. Further, the companies can cheer as now they can source experts from overseas with ease as the government has given relaxation in norms concerning the requirement of residency for recruiting directors from foreign countries.
All these changes would streamline the operations of the companies. Another major problem that companies face is obtaining various connections from departments and to ease the process of obtaining electricity a 5-day deadline has been set within which the connection would be approved (Rage, Salzano, Monteiro, 2021).
The small and medium enterprises are being promoted by the government and it is in the process of launching a Simple Credit Company that would act as a financer for the SME industry, especially the forms and companies that are not served by the banks. The Brazilian government has digitized the reporting system for the companies and the companies now are required to report employee labor, tax, social security, and payroll information to the Brazilian government via the social platform. This would be beneficial for the companies as the process would be more streamlined and they would be protected from the administrative hurdles with the faceless service.
Moreover, the government has modified the working system that is implemented by the companies, until now remote work was not legally included in the working hours but the new laws state that only the work that is performed based on tasks or production are exempted from laws governing working hours and all other regular jobs and tasks would be included in the working hours of employees. Hence, the companies would now need to install an electronic timekeeping system to track the time of employees and also would have to shell out extra amounts for the overtime by the employees (Neeser, 2022).
The federal government has recently announced a monthly subsidy of $60 for poor families to purchase fuel. This is positive news for the oil companies as the subsidy would help keep the consumption stable amid the rise in prices. The government has enacted Rouanet Law wherein the companies can receive a deduction of 4% on the taxes charged on real profit by investing in cultural projects such as shows, exhibitions, books, museums, galleries, etc.
Economic factors affecting different industries in Brazil
Brazil is among the top 50 economies of the world. The COVID-19 pandemic resulted in the boost of e-commerce business in Brazil with the sector registering a growth of 70% and 30% during 2020 and 2021 respectively. Further, the interest rate in the country has been hiked the most compared to the last 20 years to contain inflation. The interest rates have been raised to a record high of 10.75% compared to a record low of 2% the last year (Ayres, 2022).
Besides, the central bank has announced that it would raise interest rates further if need be. This can make the business of the fintech industry more difficult as these companies already operate on low margins and provide credit at lesser rates but now they would have to increase the rate of borrowing which can result in a decline in demand for credit from the customers.
The power companies in Brazil can expect a good infrastructure in the future as according to McKinsey, the federal government has set up a target to invest $120 billion for enhancing the power generation capacity and improving the transmission lines. The power companies can also increase their profitability as the demand for power in the future is also expected to rise in the industrial sector as the government has decreased the tariff rate by 11%.
Further, the companies dealing in agricultural products are predicted to register a positive growth as Brazil is forecasted to export almost half of its seaborne soybean by 2027 and more positive news is that China is expected to import 2/3rd of soybean imports, it is considered to be one of the top consumer markets so Brazilian soybean companies can earn hefty profits in the future. The businesses where entrepreneurship is most common in Brazil include restaurants, apparel, and catering along with auto mechanics, beauty salons, and cosmetics.
The banking industry of Brazil is in a good state and performing above the international banking companies in terms of return on equity. McKinney’s report states that in 2018, the top banking players of Brazil including Itau, Santander, Bradesco, and Banrisul generated ROE of 21.7%, 20.8%, 19.5%, and 16.7% respectively as compared to an average of 16.5% in Africa, 13.5% in North America and 10.4% in emerging Asian economies. The road contractors may have a positive future ahead as 57% of roads in the country are classified as moderate, low, or very low and the government would be keen to upgrade the infrastructure which would require huge investment, thus private contractors can play a huge role.
The federal government is trying to modernize the airport infrastructure by transferring the concessions to private players, hence the companies that are experts in developing and managing airports can utilize the opportunity to expand their footprints.
Social factors affecting different industries in Brazil
The people in Brazil are increasingly becoming tech savvy and currently, there are 189 million mobile phones in use in the country and internet usage among the people is considered the fifth largest in the world. Further, around 122 million people use social media frequently and the usage of social media is also high with the average person spending 3 hours and 40 minutes on social media each day.
Moreover, as per McKinsey, 39% of Brazil’s population is classified as early adopters of digital apps and this proportion is one of the highest in the world. Such hi-tech infrastructure and the ever-increasing tech-oriented population of the country present a significant opportunity for the companies dealing in digital and innovative products and services like video games, software, e-commerce, and ed tech among others. The e-commerce trends are thriving in the country at a rampant pace.
The e-commerce companies currently operating or that want to expand their footprints in Brazil must be aware that people greatly prefer those platforms which offer free shipping, discounts and promotions, and lower prices. The traditional banking and fintech startups stand a great chance to benefit from the fact that over 45 million people in the country still do not have access to banking facilities. These people can be targeted by providing them with facilities including zero balance accounts and credit facilities at a nominal cost.
The companies from China, the US, and Japan can establish their base as over 23 million Brazilian people purchase products from companies belonging to these nations and if the companies establish their base in Brazil then they would be able to provide the goods at an affordable price as the customers would not have to worry about paying customs (Martins, 2020).
Technological factors affecting different industries in Brazil
The Brazilian government promotes research and development by providing incentives to companies. As per the data highlighted by OECD, the tax incentives vary in the range of 60% to 100% for the cost incurred by the companies depending upon the type of innovation. Further, if the companies become successful in getting a patent registered then they can avail an extra 20% of the cost incurred on developing a patent.
In addition, Brazilian businesses can take advantage of various emerging technologies like the conversion of carbon dioxide into useful chemicals like fertilizers, and textiles through the use of sunlight. This can be helpful for the companies that emit high volumes of gasses. Further, the pharmaceutical industry can acquire great benefits from virtual patients. To explain, the pharma companies can leverage the data generated from high resolution images processed through complex mathematical algorithms and models have the capability to control the functioning odf human organs. The various algorithms can resolve the consequent equations and in this way, virtual organs resembling real organs can be generated.
This would ensure that pharma companies do not have to delay the testing process because of delays in finding dead bodies and also this process is much quicker, safer, and affordable. The construction industry would be relieved in the future and would not have to face accusations of releasing emissions as many scholars are researching developing low carbon releasing cement by changing the volume of ingredients that are used in making cement (Elliott, 2020).
Legal factors affecting different industries in Brazil
The government has recently formulated new laws wherein the companies need to compulsory hire an independent board member if they want to function in the country. This would increase the cost of operations for the companies as they would need to provide salary to an additional employee along with other required facilities. Further, till now the agencies presumed that the businesses do not act in good faith and asked the businesses to undergo various formalities if there was any doubt over something but now the government has formulated a new law called Economic Freedom MP wherein the agencies cannot ask for any extra document if that wasn’t mentioned upfront.
In addition, the government agents are now forbidden to interpret the laws and act differently for different companies and now the same procedure would be held for the companies committing the same mistake. The companies operating in or are looking to start operations in Brazil must be aware of the corruption laws wherein the companies cannot bribe any government official for availing undue advantage. Though the individuals running the company cannot be tried under the law, the companies can be fined from 0.1% to 20% of the gross revenue in the last year before the start of the administrative proceedings. This can have a significant impact on companies’ profit margins.
Not only the financial penalty but the company would be barred from receiving any incentives, subsidies, grants, donations, or loans from public agencies or entities and public financial institutions or institutions controlled by the government, for up to five years and in severe cases, the entities can be partially suspended from conducting operations in the country.
Now, the companies are not allowed to donate anything to political parties. The mandatory facilities that the organizations in Brazil must provide to the employees include paid sick leave of up to 14 days if the employee has a doctor’s note.
Further, both the mothers and fathers of newborns are eligible for the leave and the period for maternity leave is 120 days can be extended up to 180 days wherein paternity leave is granted for five days with a possible extension up to 20 days. The employees are also entitled to bereavement leave in the event of the death of an employee’s parent, sibling, spouse, or child for two days along with paid marriage leave of three days. The data protection laws in the country states provide customers many rights that include the right to access the data anytime they want, the right to get the data deleted or blocked and to get the data ported anytime along with the right to revoke the consent for the usage of data by companies.
To ensure compliance with the laws, the companies must appoint a data protection officer and the companies are allowed to keep the data with them as long as it is required to solve the original purpose (Martinez, 2020). The enterprises failing to comply with the legal norms may be subjected to penalties of up to 2% of their annual revenue up to 50 million reals. The organizations that fail to abide by the law could face penalties of 2% of their yearly revenue up to 50 million reals. The requirement of an additional officer would unnecessarily increase the expenses for the companies.
The startup ecosystem is being made friendlier and a new legal framework has been introduced wherein the startups are now mandated to have just one statutory officer as compared to earlier when the requirement was for two officers. The startups could save on the cost with this.
Further, costs could be reduced as now the private companies with gross revenues (annual) amounting to BRL78 million can now indulge in the legal publications of their corporate acts electronically and free of charge on a government platform (Mori & Abdalla, 2022). The payment system for the local companies that have to deal with the exporting firms has been eased under the New Brazilian Foreign Exchange Framework wherein for a few agreements, the companies can now pay or receive the amount in foreign currency.
The agreements where this law will prevail involve wherein there is an exporter on one hand and companies holding concession, permission, authorization, or lease in the infrastructure sector on the other. This would benefit the power industry as the local companies would be able to procure electricity on easy terms and without needing to worry about payment issues. Another industry that could take advantage of this law is the logistics industry as these companies are required to deal with the port terminals for the handling of cargo (Baker Mckenzie, 2022).
The government has changed the way the sanitation practices are implemented in the country and now the municipalities should engage in a fair tender process before allotting any project and form a proper concession agreement containing clear investment commitments. This would promote competition and allow the private sanitation companies to avail the opportunity of investing in waste collection and water programs. The investment opportunities are huge as 80 percent of the population does not have sewage collection and 30 percent of people do not have a water supply system (Engel & Baumgaertner, 2020). The business of the Forex industry would increase as now the individuals are allowed to hold foreign currency in Brazilian bank accounts unlike earlier.
Further, the corporates operating in Brazil and dealing with foreign companies can benefit from the new guidelines wherein the foreign and Brazilian entities companies that hold receivables and payables against each other are allowed to offset mutual debts. Further, earlier the Brazilian companies that had money deposited in foreign banks abroad were only allowed to use that amount for investments or to pay their tax liabilities generated from the values of goods or services exported but the new law gives Brazilian companies more flexibility in deciding the conduct of using amounts from foreing accounts (EY, 2022).
Moreover, the social media companies may be impacted by the new law wherein the platforms cannot remove content or deactivate the accounts of their own will (TRT World, 2021). This would lead to a reduction in their brand image if the users upload content that spreads misinformation or any other disturbing content.
Environmental factors affecting different industries in Brazil
With most nations toughening the environmental laws, the Brazilian government has turned heads and tried to seize the opportunity for investments in the country by weakening the 57 environmental laws that would enable the companies to conduct their businesses without the need to adhere to such obligations.
To exemplify, the government 2020 declassified the toxicity of dozens of pesticides which can benefit companies in various industries including agriculture and other related ones. Further, the positive news for the companies is that the government has reduced the number of fines issued for environmental violations, in the pandemic, there was a decline of 70% in the number of fines issued to the companies.
Hence, the companies will need to work on effective change management strategies to ensure compliance with environmental norms in a swiftly changing regulatory framework.
To encapsulate, Brazil being the largest economy in South America has a positive environment for industries to flourish in the country. Also, the economy seems to be recovering from the setbacks brought by the COVID-19 pandemic and the social trends are changing rampantly in the country. Speaking of compliance measures, companies will have to adhere to stricter legal and environmental frameworks to operate in the country in hassle free manner.
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