Why Brazil seeks diversification

Brazil seeks diversification

Brazil is an emerging market economy. It’s mainly dominated by the services sector. It’s followed by manufacturing, processed food, agriculture, and natural resources. Given the declining competitiveness of its commodity exports, Brazil’s economy is attempting to diversify away from its economic model. The economic model is driven by commodity exports. Commodity exports account for two-thirds of Brazil’s exports.

As a result, investors in commodity firms—like Petroleo Brasileiro SA Petrobras (PBR) and Vale SA (VALE)—may want to reevaluate their holdings. The iShares MSCI Brazil Capped ETF (EWZ) invests in these firms along with others—like Itau Unibanco Holding SA (ITUB) and Ambev SA (ABEV).

The depreciating real

The Brazilian real has been depreciating. It depreciated by ~50% over the last four years—since Rousseff became President on January 1, 2011. The exchange rate was ~1.66 BRL = $1 on January 2, 2011. It was 2.55 BRL = $1 on November 6, 2014.

Brazil should diversify its export model

Brazil is a prime export earner. Brazil devoted a substantial amount of its labor and capital resources to commodity-related sectors. Now, commodity export prices are mainly driven by demand for these resources. Demand for resources is driven by industrial development in foreign nations.

China is Brazil’s main market for commodity exports. Recently, China slowed down. Global markets have also been preoccupied with several geopolitical and economic issues.

Therefore, Brazil has a depreciating currency. This is good for exports. Brazil may want to diversify and increase the focus on its non-commodity exports. It’s a good time for Brazil to devote more labor and capital resources to its non-commodity exports. Brazil should take advantage of its favorable exchange rate to become more competitive in that area.

In the next part of the series, we’ll discuss the third challenge that Brazil faces—China.