A Glimpse of Brazil

JULY 2013

Brazil, the Rise of a New Era?

Challenged by high inflation, decrease of GDP growth and the worst political crisis in the last decade, Brazil sees a new citizen in the streets, showing protagonism, proud, sense of reality, maturity and capacity of leveraging change. How will brands act in this new scenario, especially a few months before World Cup?

The scenario

When mass protests hit the streets of Brazilian major cities in mid-June, most of the political analysts, politicians, government officials and even the local media were disoriented. People in general had the idea that the demonstrations in Brazil were somehow unexpected: a revolt in the midst of relative prosperity. As a matter of fact, Brazil seemed to be one of the economic success stories of the past decade: the economy grew quickly and the benefits were widely shared “for the first time in the country’s history”, as per the main government leadership. It is true that since 2003 some forty million Brazilians have joined the middle class, and the percentage in extreme poverty has shrunk. Though the economy has slowed lately, most people are better off than they were ten years ago. Yet the protests have been widespread, rapidly contaminating medium and small-sized cities throughout the country.

Why did people go to streets?

The initial demonstrations were against the increase of R$ 0.20 on charges of public Transport. The protests were encouraged by Movimento Passe Livre, led by a group of young people who defend the free transportation ticket in the country, as well as the improvement of the urban mobility. After few days of claim, other groups and strata joined the movement to complain against the bad quality of the public

A fact that contributed for the amplification of the protests was the realization of the Confederation Cup, which gave people the hook to complain against the huge contrast between the costs with the World Cup in 2014 (US$ 15 billion) and with the Olympic Games in 2016. People complained about such costs – like US$ 700 million for each one of the new arenas in Rio and Brasília, for example – in a country where basic public issues, like health and education systems, urban mobility and infrastructure for ports and airports are far away from population’s expectation and needs. In a country where patients many times remain in lines in the floor of full hospitals with the threat of not being attended due to lack of doctors and medical equipment.

The protests were a demonstration that the Brazilian population woke up for a reality: living conditions haven’t really caught up with the improvements in people’s income and with the inclusion of millions of people in the production process in the last decade. Brazil is an increasingly middle-class country that still has many of the characteristics of a poorer one. Public infrastructure is notoriously bad. The public health-care system is overcrowded, and public education, while improving, is far from good: one recent study of education quality in forty major countries ranked Brazil next-to-last. Brazilian police forces are ineffective and corrupt, so citizens don’t feel safe. And cities like São Paulo are so congested that two- or three-hour commutes are routine. The original impetus for the demonstrations was a twenty-cent increase in bus fares; that’s just nine cents, but no one wants to pay more for a patently inadequate system.

Image published on social network (right) showed that the R$ 0,20 issue was just the

tip of the iceberg, where matters as bad quality of education and health, corruption, high taxes and violence were under water.

Other protests carried signs that said: “Sorry for the inconvenience. We are

changing Brazil.” (below)

People protest against World Cup in Brazil. “I give up the World Cup. I want money for health and education” and “The World Cup is here and health is still far away”, were some of the claims (top)

Also, demonstrations were against the huge costs with arena in a country where citizens have a very bad situation in basic public services, like edcuation and health, frequently facing huge lines in full hospitals

education, the bad quality of the public health systems, as well as against the corruption in political and other matters. The list of grievances was so extensive, that an image published on social media (right) showed that the R$ 0.20 issue was only the tip of an iceberg. Other protests carried signs that said: “Sorry for the inconvenience. We are changing Brazil.”

A Glimpse of Brazil

Another aspect of the recent demonstration boom in Brazil is the enormous importance of the social media. Through Twitter and Facebook, people were alerted, engaged, and informed, on a 24x7 basis. From June 6 to 22, Brazilian political-related media links represented 80% of the most accessed addresses at Twitter hashtags, while at Facebook, the number of people who shared or commented on Brazilian magazines and daily papers’ originated articles on demonstrations has tripled over the same period. The Digital Journalism Report, recently disclosed by Oxford’s Reuters Institute, shows Brazilians as the world leaders (44%) in news sharing through social media, followed by the Spanish people (30%).Even among assorted rumors and false news, Internet was key to disseminate constantly updated demonstration news, images and ‘real life’ testimonials.

Also Globo, largest Broadcast TV network, made an intensive coverage of demonstrations, not worring about Government`s reaction.

Even by developed-country standards, Brazil is a pricey place: a recent study ranked São Paulo and Rio de Janeiro among the fourteen most expensive cities in the world—far above New York, which was thirty-third. A Big Mac costs more in São Paulo, adjusted for income, than in nearly every other country in the world. And high

administration as good or excellent. Earlier this month, before the demonstrations, this percentage was 57%. Meanwhile, the number of Brazilians who consider the management of the president as poor or very poor rose from 9% to 25%. The fall in Rousseff’s popularity is the largest recorded by the Institute since former President Fernando Collor fell 35 points, from 71% to 36%, when confiscated the population’s savings in 1990.

Also according to Datafolha, the deteriorating image of the President was not limited to a single demographic: Mrs.Rousseff’s popularity fell by over 20 points in all regions of the country and among people from all age, income and education strata.

The institute also asked people’s opinion about the President’s reaction to the protests and the results were split among the repondents: 32% percent of them considered Rousseff as having an excellent or good posture, while 38% rated her reaction as regular and 26% considered it as poor or very poor. In addition to the wave of dissatisfaction evidenced by the protests, Datafolha noted that other reasons for the decline are the bad review of the government’s economic management and the population’s concerns with inflation and unemployment.

Elections 2014: can Dilma be reelected?

A month ago the reelection of President Dilma was considered a reality. It was easy to say that she would win in the first round of voting. Although still leading the polls for the presidential elections in 2014, Rousseff would no longer have an easy win. Also according to Datafolha, now the president would face a runoff. She is the pre-candidate supposed to have lost more supporters in the presidential race, the survey says: the intention voting rate for Rousseff fell by 21 percentage points. The most likely scenario for the succession today includes Dilma, Marina Silva, Eduardo Campos and Aécio Neves. The situational Workers Party (PT), which had reached a 51% voting rate earlier this year, appears now with 30% only. Marina has risen from 16% to 23% and would play the second round. Aécio Neves, who had 14%, has added three

percentage points, while Campos increased from 6% to 7%.

Datafolha results reflect a national feeling that had been generated on June 15th, when at the Confederations Cup opening, Dilma Rousseff was booed by an audience of over 70,000 people who filled arena in Brasilia. The discomfort has not diminished even when Joseph Blatter - the president for FIFA - appealed to the people: “Friends of Brazilian football, where is the respect and fair play, please?”

Apart from all that, the five areas mentioned by Rousssef as priorities at her first speech following the demonstrations, started to fall down one by one, right after the announcement, either by unenforceability, lack of innovation or low political support. Thus, as the shot was out the breech, the government sees itself cornered, unable to indicate paths that lead to a solution

tariffs and less competition mean that cars, televisions, sneakers, and iPads are often two or three times more expensive than they are abroad. As a result, many Brazilians buy on installment plans, and high interest rates mean that Brazilians now devote a fifth of their income to servicing debt (twice as much as Americans do).

In developing countries, a growing middle class is often a crucial agent of political and economic change. Over the past few years, middle-class protesters have taken to the streets on issues of education, corruption, and public space in Chile, India, and Turkey, among other countries.

Government cornered and with no answers

From the five proposals President Dilma Rousseff presented to the Nation on June 24, in a attempt to control the effects of manifestations, two – the “plebiscite” and the political reform – were down due to lack of political support from the Congress.

Also, the public image of President fell down dramatically as per the Datafolha survey released on June 29, few days after manifestations. The survey showed that the positive evaluation of the government fell down 27 percentage points over a period of just three weeks. Acccording to Datafolha, 30% of the respondents rated Dilma’s

Source: In your opinion President Dilma performs a governance evaluated as: Basis: sample total - Brazil www.datafolha.com.br

Evolution of Dilma Rousseff’s Government Evaluation(stimulated and unique, in %)

47

34

49

38

10

48

39

11

59

33

6

64

29

62

30 30

6265

27

77775

57

33

9

30

25

43

15 and 3/16/2011

after 3months

47347

12

9 and 6/10/2011

after 3months

4938103

2 and 8/4/2011

after 3months

4839113

18 and 1/19/2012

after 1 year

593362

18 and 4/19/2012

after 1 yearand 3 months

642951

8/9/2012after 1 year

and 8 months

623071

12/13/2012after 2 years

623071

20 and3/21/2013

after 2 yearsand 3 months

652771

6 and6/7/2013

after 2 yearsand 5 months

573391

27 and6/28/2013

after 2 yearand 6 months

573391

Excellent/GoodRegularPoor/Very Poor/Don’t know

of the situation that generated the demonstrations in the first place”.

Polítics and institutions under suspicion

Another research, from Ibope, released on July 8th by International Transparency (IT - The Global Coalition Against Corruption), shows that 81% of the Brazilians consider political parties are “corrupt or very corrupt”. This means that 4 out of 5 people put in check the basis of the political representation in the Country. The figures of the research, concluded in March 2013, reflect a dissatisfaction that was explicit three months after, with the series of demonstrations throughout the country. When we compare that with the opinion of people from other parts of the world, it is clear that Brazilians are very unhappy. In general, among the 107 Nations researched, an average of 65% of people say that parties are “corrupt or very corrupt”. The same research made in 2010 by IT, shows the situation has worsened in Brazil: 3 years ago, the rate of dissatisfaction was 74%.

National data on perception of corruption - obtained after interviews with 2002 people - also show that, after the parties, the Congress is the second most discredited institution. Around 72% classify the Congress as “corrupt or very corrupt”. The worldwide average (114 thousand interviews) is 57%. The survey also asked whether respondents considered as efficient the measures undertaking by governments against corruption: 56% of Brazilian answered NO; 54% of the worldwide average also said NO. Alejandro Salas, author of the paper produced by International Transparency stated: “The discrediting of parties and politicians is very large. The result is sad. Political parties are pillars of democracy.”

In Salas opinion, the positive about Brazil is the fact that people went to the streets to protest and made a direct link between corruption in the political class and the lack of adequate public services. “People made a connection between corruption and the quality of life they have. For many of them the most dramatic is the fact that Brazil grew up in the last years. But people realized that the benefits were not shared and part of that was due to corruption.

A Glimpse of Brazil

With a dramatic decrease of popularity, it is now hard to believe that Dilma will win 2014 elections in the first round of voting

Name Party 12.13.12 06.29.13

Dilma RoussEff PT 54% 30%

maRina silVa REDE 18% 23%

aécio nEVEs PsDB 12% 17%

EDuaRDo camPos PsB 4% 8%

invalid * 16% 8%

*As voting is an obligation, people who do not have a specific choice invalid their votes

not for 47% of brazilian people

Base: Total sample (%) (500) (140) (60) (240) (60)

61% wouldn’t hold the World cup in Brazil.instead, would invest in hospitals, schools, safety and transport

schools/universities 90%Hospitals 95%

Public safety 86%

Daycare 57%

urban Bus network 61%

subway/metro 56%

According to the author, data show that Brazilians are tired of not knowing the way power is managed. Who pays for it, who gets and who benefits. “Politic parties are like black boxes and, to change this perception, a major reform will give more transparency to party funding”, states Mr. Salas. He also believes that “after the manifestations, if the parties do not change, they will end up sinking”.

moment of hope

Salas also alerts to the possible emergence and strengthening of charismatic leaders because of distrust of political parties. Concludes, however, that what happened in June was positive. “What happened brings hope”.

The research shows that in Brazil 80% of respondents said they can make a difference in fighting corruption. Among the researched countries the average rate is 65%. In a scale of 1 to 5, where 5 is the maximum degree of corruption, Brazil’s public sector reached 4.6 note. Salas says that this is the highest note at Latin America.

After the parties and Congress, the police appears in the survey as the most discredited institution. Around 70% of Brazilian classified

police as “corrupt or very corrupt”. Worldwide rate is 60%. The Judiciary, among Brazilians, has more credit than among the population in other countries. In Brazil, 50% or respondents consider it “corrupt or very corrupt”. Abroad the rate is 56%. The Armed Forces appear with low index of perception of corruption. In Brazil it is 30% and in the average of the other countries it is 34%.

World cup: is it a Good idea?

One of the most popular claims shouted by Brazilian demonstrators relate to the Government expenditure and lack of transparency regarding the upcoming FIFA World Cup 2014 and Rio Olympics 2016. Celebrated throughout the country some years

ago, when Brazil was announced as the selected country for both events, nowadays people in the streets - and the media - question the money supposedly invested by the Government in the events, the lack of infrastructure initiatives to support them (also announced as post-events legacy for the population), and the alleged ‘submission’ to FIFA demands.

“Give us back the Maracanã”, read one banner held by protesters who clashed with police during the Brazil-Spain soccer match two weeks ago (Confederations Cup Final Game). The stadium in Rio may be beautiful, but it no longer belongs to the people, say the protesters. The refurbishing cost of US$700 million, double the amount estimated expected, and a private consortium was awarded a management

On May, one month before the demonstrations’ explosion in Brazil, a research conducted by local marketing consultancy firm MC15, was able to feel the heat was rising. Conducted at the 12 cities selected by FIFA to host World Cup games in 2014, the research heard 500 people from 15 to 69 years old, representing a wide social spectrum. Although known internationally as the ‘Soccer Country’, almost half of

the Brazilians heard by the research - 47% - do not considered the event to happen in a ‘good moment’, while 95% of them believe the money spent or yet to be spent in stadiums and related infrastructure constructions will surpass the previewed estimates and will involve corruption. To 72% of the researched people, their cities will experience minor or no benefits from the FIFA World Cup investments. Sixty one percent of these cities’ people would prefer not to host the World Cup games, and would invest that huge amount of money in Health (95%), Education (90%), Security (86%) and Mobility (61%) instead.

contract for the next 35 years. Surely, Brazil’s World Cup preparations have been a cause of concern for FIFA for some time. Following the delays and last minute rush seen in South Africa in 2010, the entity is keen to ensure that Brazil completes preparations on time. However, the status report gives little to ease concerns at FIFA, with only 25% of projects completed thus far, and a worrying 31% of projects yet to enter construction. With one year to go and Brazil’s complicated bureaucracy to struggle through, there are growing concerns that preparations will go down to the wire. Whilst the current state of affairs seems concerning on paper, progress is largely in line with targets, especially for stadiums. More of a concern is that the plan leaves

little leeway for delays, with 69% of projects planned to be completed in 2013, and 17% in 2014. Brazil’s bureaucratic, planning, permitting and tendering procedures are notoriously slow, meaning the BRL1.8bn worth of projects which are yet to even get off the drawing board could be in trouble.

The projects which are facing the greatest delays are in the transport sector. Six of the 12 planned stadia were completed for the FIFA Confederations Cup. However, ports, airports and urban mobility projects, crucial in transporting the expected influx of tourists, are delayed. Problems with acquiring permits and delays in planning and regulations have weighed on progress, making the

June 2014 deadline look ambitious for the 23 urban transport and 13 airport projects yet to enter construction.

Another concern is growing costs in Brazil. The government has outlined 101 projects worth a combined BRL27BN (US$13bn), but these are already over budget, given the rising costs experienced by all active in the construction sector over the recent years. Labour and raw materials cost increases are likely to have pushed preparations over budget already. In addition, as projects are rushed through to meet ambitious deadlines, costs will further accelerate. Currently, only around 15% of the costs are being financed by private investment, much of which is being funded by Brazilian Development Bank (BNDES) loans.

A Glimpse of Brazil

47% of researched peolple think it is a bad or an awful time to hold the World cup

Growing economic risk

While the political scenario points to chaos, with the forecast of more demonstrations and strikes until the World Cup, Brazil’s economic risk increases. As the government waved to a GDP growth around 4%, analysts estimated in June a decrease from 2.7% to 2.5%, with a tendency to fall. Brazil’s Central Bank has resumed its counterattack against inflation. The Bank has raised interest rates from 8 to 8.5% per year, at its last meeting. It is a difficult time since indicators show an economy with a declining trend.

Some examples: inventories increased and according to IBGE, employment in the industry fell in May by 0.5% - the highest fall since December 2009, when the international crisis reached its peak. In addition to the significant downturn in the cost of food, June figures showed inflation less scattered in the economy: the diffusion index was 54.7%, against 63.0% in May and 65.8% in April. But the progress is small, there is a too strong 8.6% height in the services area over the last 12 months and, to some extent, new setbacks in the cost of living will be affected by withdrawals of increases in the public transportation prices - a factor that creates other distortions. Apart from that, it is still necessary to evaluate the effect of the dollar increased value (12% in the last two months) on the consumption basket of the Brazilian citizen.

It is true that the market estimates a 12-month inflation of 6% this year - or a 5.67% rate, as reported at the Focus Survey, weekly conducted by the Central Bank with around 100 institutions and consultancies. It is, however, a too high number if compared to the 4.5% target. The rising inflation trend is reflected in the mood of the regular Brazilian when it comes to consumption decisions.

Even if it is effective in its endeavor to fight inflation, it is not enough to Central Bank only, to regain credibility, if the rest of the government is not. Few believe that, after so many accounting errors in the execution of public expenditure, fiscal targets - even reduced by a shrunken GDP - will be met by the Government. Analysts keep on repeating that Dilma’s government needs a jolt of credibility, even to save its political future. So far, however, there”s no sign that this will happen.

Another negative point refers to retail sales - since Lula presidential terms,

a PT government pride. The fact is that the events that occurred in the second half of June brought down the retail sales. In June, the number of queries for cash sales fell 4.1% in comparison to the same period in 2012. Regarding financed sales, the decline was 2.8%. In average (retail/financed), the reduction reached 3.5% if compared to 2012, learns a survey by the Commercial Association of São Paulo (ACSP), based on a sample of

customer data from Boa Vista Services, which administers the Credit Protection Service (SPC). By June results, which was negative year-over-year, retail in Brazil ended the 2013 first half almost stable against 2012, which makes impossible to achieve the 4% projected growth for the retail drawn this year by the association.

Industrial production fell in May despite a record achieved in automotive production, bringing down the estimates of recovery for the sector. The information was released on Tuesday, July 2, by the Brazilian Institute of Geography and Statistics (IBGE). The production declined 2% in May compared

to April, after rising through the previous two months. The month’s result was the worst since February - when there was a 2.3% production fall - and it eliminates part of the 2.6% expansion accumulated in the months of March and April. In terms of sectors surveyed, 20 of the 27 industrial sectors studied ones have declined, especially food products (-4.4%), machinery and equipment (-5%) and automotive vehicles (-2.9%).

Brazil exports and imports balance experienced its worst semester in 18 years, according to the data released by the Ministry of Development, Industry and Foreign Trade, big villain being oil and its derivatives’ imports by Petrobras. The Brazilian trade balance accumulated a negative U$3 billion balance from January to June. It’s the worst result since 1995, when the negative figure was U$4.227 billion.

Imports totaled a record U$ 117.516 billion between January and June, 8.4% more in comparison to the same period last year. Exports totaled U$ 114.516 billion in the period, down 0.7% on the daily average also.

Economy

1. Fight against inflation forced the raise of interest rates from 8 to 8.5% per year

2. Analysts estimated in June a decrease of GDP growth from 2.7% to 2.5%, with a tendency to fall.

3. Events that occurred in the second half of June brought down the retail sales in Brazil.

4. The industrial production declined 2% in May compared to April, after rising through the previous two months.

5. Brazil exports and imports balance experienced its worst semester in 18 years.

BRazilians

1. Before demonstrations, Brazilians had the following image:• Cheerful• Friendly/ Welcoming• Emotional• Likes football• Corrupt• People with low quality education

2. After manifestations, a new image of Brazilians came up:

• Protagonist• Maturity• Proud• Hopeful• Focused on the reality and needs• Transformer• Responsible• Active• Victorious

BRazilian soccER TEam, WoRlD cuP, fifa anD sPonsoRHiP BRanDs

1. After Confederation Cup the Brazilian Soccer Team seem to be:• The return of the champions• The spirit of competition• The best in the world

2. After demonstrations World Cup seemed to be: • Unnecessary• Superfluous• Megalomaniac• Resources not focused on needs• Possibilities for corruption

3. After demonstrations FIFA seemed to be: • Demanding• Exploiting• Exorbitant profit• Not concerned with the people• Exposes the government’s weakness

4. After demonstrations, what should World Cup sponsorship brands ask themselves? • Will the brands benefit? Will they only have visibility?• Negative traces may be linked to the brands?• Can one say it is a dream to have the World Cup?• Is the Cup ours?• Support to the national team would be more appropriate?

Will time mitiGate tHe issues relateD to Brazilian PolitiCal Crisis anD tHe BaD imaGe of WorlD CuP anD fifa?

Can tHe BranDs exPlore all tHis neW sCenario? HoW?

refleCtions

PoliTics

1. Given the troubled political and economic scenarios, the feeling grows that Partido dos Trabalhadores (PT), in power for 11 years, will struggle to reverse the situation in its favor. Demonstrations should continue all over the country until the World Cup. And they are having an increasingly political overtone.

2. August will be a crucial month for the govenrment, when the Supreme Court will judge the appeals from 25 of the 37 defendants sentenced of Mensalão, among them José Dirceu, the Chief of Staff of President Lula between 2003 and 2005, condemned to 10 year and 10 months to prison due to active corruption and conspiracy, and José Genoíno (President of PT between 2003 and 2005), condemned to 5 years and 11 month for the same crimes.

3. Former President Lula, the most influent national political leader, traveled during all demonstrations in order to give speeches at South Africa, abandoning the party and the Government in a difficult situation

A New Brazil is BorningInflation progress in 12 monthsIPCA, in %

N D J F M A M J J A S O N D J F M A M J2011 2012 2013

6.64

Sour

ces:

BAN

CO

CEN

TRAL

, IB

GE

AND

MO

NEY

OU

6.5

6.22

5.84

5.24 5.245.28

5.45 5.53

5.84

6.156.31

6.59

6.49 6.5

6.7

5.20

5.10

4.994.92

A Glimpse of Brazil

The rising inflation trend is reflected in the mood of the regular Brazilian when it comes to consumption decisions.