Brazil

Risk assessment

In principle, recovery in 2013

Activity is expected to accelerate in 2013, in the wake of fiscal and monetary measures taken to support the economy in 2012. As before, household consumption will drive activity. Wage rises will be extensive after the minimum wage increased by 9% on 1 January 2013, while employment looks set to rise again, stabilising unemployment at around 5%. Higher unemployment benefit and welfare payments under the Bolsa Familia programme, targeted on poor families, will also have a positive impact. However, consumption growth is likely to remain contained with households seeking to control their borrowing and loan interest payments, which in late September 2012 reached 44% and 22% of their income. Investment looks set to pick up with the approach of two major sporting fixtures (Football World Cup in 2014 and Olympic Games in 2016) and the development of public/private partnerships for energy and transport infrastructure construction. Construction of social housing will continue under the Minha casa minha vida programme. Exports will benefit from the stop to the appreciation of the real, achieved thanks to control on capital inflows, interventions on the foreign exchange markets and a cut in the key SELIC rate. However, the contribution of external trade to growth could be slightly negative as imports are growing more rapidly. Industry, especially automotives (20% of industry), are expected to be the major beneficiaries of the recovery, while agriculture and services will continue to post good performances. The economic improvement together with the different underlying government measures will benefit companies. Paper, steel and petrochemicals will nonetheless be weaker as their margins will be hit by falling prices.

External and public accounts under control

Despite the primary surpluses (i.e. excluding debt interest payment) and debt reduction of recent years, the public accounts are still in deficit and liabilities significant and well above the emerging country average. The weight and rigidity of current expenditure, with salaries and pensions representing 70% of the budget and generally index-linked, the already high level of taxes (37% of GDP), the cost of fighting poverty and the need to increase investment spending, even if it involves turning to private finance, will limit progress. However, cautious management of the debt, low external debt and an improved debt profile will keep sovereign risk at a satisfactory level.

Trade occupies a modest position in the economy (22% of GDP) and is weakly in surplus (amounting to less than 1% of GDP). Unprocessed or little-processed products (iron ore, soya, oil, beef, chicken, sugar, coffee, orange juice, paper pulp…) make up 60% of exports with the remainder made up of manufactured products (chemical and metallurgical products, motor vehicles, aircraft, and machines). They are therefore very susceptible to fluctuations in world prices. Against this, they are sent to very diverse destinations in Asia, Europe, the United States and the region. Trade in services and revenues are largely in deficit due to the scale of Brazilian tourism spending, the use of foreign freight carriers and the importance of revenue repatriation by foreign investors. But net inflows of foreign investments more than cover the resulting current account deficit. External debt as a percentage of GDP (14%) is modest and stable. The share of public borrowers have fallen in favour of the private sector as Brazilian companies need to attract foreign capital to mitigate the shortfall in domestic savings monopolised by public domain.

Many challenges for President Dilma Roussef

For over a decade, namely since the coming to power of President Lula, inequalities have reduced and the standard of living risen. Under President Dilma Roussef continuity is the order of the day. The political system is fragmented and the firm stance taken by the President against corruption and environmental damage (the Amazon) has led to discontent within the coalition and her party, which frustrates her ability to act. The 16,000 kilometer border, through the Amazon, with Colombia, Peru and Bolivia is no barrier to cocaine trafficking. Despite belonging to Mercosur, trade relations with Argentina are marked by mutual implementation of protectionist measures. With the automotive trade in deficit, Brazil succeeded in getting Mexico to limit its automotive exports to the country. Oil policy is also at stake, with Petrobras (the state-controlled company), the development of ultra-deep water drilling, high imports of refined oil products and petrol price control.

Payment incident index

Insolvency trends

MEANS OF PAYMENT AND COLLECTION METHODS

Bills of exchange (letra de câmbio) and, to a lesser extent, promissory notes (nota promissória) are especially used in local commercial transactions. The validity of either instrument requires a degree of formalism in their issuance.

The use of cheques is relatively commonplace – often post-dated in practice and thus transformed into credit payment instruments – and their issuance requires comparable formalism.

Although the use of the above credit payment instruments for international settlements is not advisable, they nonetheless represent, in case of default, an effective means of pressure constituting an extra-legal enforcement title that affords creditors with privileged access to enforcement proceedings.

The duplicata mercantil, a specific payment instrument, is a copy of the original invoice, presented by the supplier to the customer, within a 30 days time, for acceptation and signature and then can circulate as an enforceable credit instrument.

Use of the duplicata mercantil, whose validity depends on compliance with particular rules of form, is relatively commonplace in domestic commercial transactions.

Bank transfers, sometimes guaranteed by a standby letter of credit, are also commonly used for payments in domestic and foreign transactions, offering relatively flexible settlement processing, particularly via the SWIFT electronic network to which major Brazilian banks are connected.

For moving large sums, various highly automated interbank transfer systems are available like, since April 2002, the STR real time Interbank Fund Transfer System (Sistema de Transferência de Reservas) managed by the Banco Central do Brasil or the RSFN / National Financial System Network (Rede do Sistema Financeiro Nacional) linking the various financial operators in Brazil in real time.

Out-of-court settlement begins with telephone contacts followed up as necessary with a final demand by recorded delivery letter giving the debtor eight days to pay the outstanding principal, increased by past-due interest stipulated in the transaction agreement.

Absent an interest-rate clause, the civil code stipulates use of the penalty interest rate imposed on tax payments, which is one per cent per month past due.

Considering the slow pace and the cost of legal proceedings, it is always advisable to negotiate directly with delinquent customers where possible and attempt to settle on amicable basis, taking into consideration that a repayment plan may last for a two years period.

The legal system comprises two types of jurisdiction the first of which is at the State level.

Each Brazilian State has its own courts – there are 26 States, plus the distrito federal of Brasilia – notably including a Court of Justice (Tribunal de Justiça) whose judgments can be appealed at the federal level. Legal costs vary from State to State.

States courts are competent to hear civil, commercial, criminal, and family current law cases in first instance.

The second type of jurisdiction involves the Federal Courts.

There are five regional Federal Courts (Tribunais Regionais Federais / TRF), each with its own geographic competence encompassing several States. The five TRF are located respectively in Brasilia (região 1), Rio de Janeiro (região 2), São Paulo (região 3), Porto Alegre (região 4), and Recife (região 5).

For recourse on no-constitutional questions, TRF judgments can be appealed to the highest court of law, the Superior Tribunal de Justiça / STJ that sits in Brasilia.

A special monitory or injunctive procedure (ação monitória) is available since July 1995 to creditors holding a contract or other written evidence providing the legal basis for founded allegations although not constituting an enforceable instrument.

After examining the documents submitted and the grounds for the request, the judge will issue an injunction to pay within 15 days against the debtor who will be summoned to pay the arrears.

There will then be three possible outcomes: (1) the debtor meets his obligations. (2) there is no response and the case is transferred to enforcement proceedings (3) the debtor disputes the injunction and the case is converted into ordinary proceedings.

Brazilian legislation moreover makes some documents enforceable. To benefit from forced execution, the co-contracting party’s obligation must be certain, liquid, and payable (certo, liquido e exigível).

Enforceable documents fall into two main categories :

– legal enforcement titles including judgments made by a local court recognizing the existence of a contractual obligation, court-approved conciliations, arbitral awards, and foreign judgments covered by an exequatur,

– extra-legal enforcement titles : bills of exchange, promissory notes, duplicata mercantil, cheques, official documents signed by the debtor, private agreements signed by the debtor and two witnesses, secured agreements, and so on.

Ordinary proceedings, presided over by an interrogating judge (inquisitorial procedure), are often formalist. They entail three major phases : the preliminary investigation of the case, then the lengthiest phase, the scrupulous examination of evidence submitted by each party in conjunction with study of any expert reports ; finally, the main hearing during which the respective witnesses of the parties are heard under oath and moreover questioned, albeit through the judge, by the lawyer for each side, and which concludes with the judgment made by the court.

It takes two to three years to obtain an enforceable judgment in first instance.

However, since March 2007, a new regulation provides for the computerization of judicial proceedings, which allows the judge to conduct the trial in a quicker and more efficient manner.

Two new laws are intended to speed up the forced-execution procedure in favour of creditors and increase the effectiveness of the debt collection process to the extent possible.

The law of 22 December 2005 – on legal enforcement titles – stipulates that the debtor now has 15 days after formal notice to make payment at the risk of incurring a 10-per-cent penalty and the seizure of assets that the creditor has the prerogative of designating to the judge.

The law of 6 December 2006 – on extra-legal enforcement titles – stipulates that the debtor must pay the arrears within 3 days of formal notice at the risk of incurring the seizure of assets that the creditor again has the prerogative of selecting and designating to the judge.

The creditor may also request that the court obtain information from the Central Bank on the bank accounts owned by the debtor and then request that the judge seize funds from said accounts up to the amount due.