Brazil Tourism Report Q1 2010

The October 2009 decision by the International Olympic Committee (IOC) to award the 2016 games to Rio de Janeiro is the latest positive development for the Brazilian tourism industry, which is gradually moving towards realising its enormous potential. The trend in the number of inbound tourists has been erratic but unquestionably upwards - arrivals have risen from 4.7mn in 2001 to 7.2mn in 2008. BMI expects a fall in that number in 2009 because of the impact on developed countries of the global financial crisis but the recovery should be quick. BMI forecasts that the number of tourist arrivals will increase to 9.2mn by 2014.

Unlike most developed countries whose tourism industries have been hit - even if indirectly - by the global financial crisis, Brazil has the advantage of reasonably strong domestic demand. The number of Brazilians who are looking to travel within their own country and that can afford to do so is growing. According to Brazilian Institute of Tourism (Embratur) president Jeanine Pires, the revenue generated by tourism in 2008 was nearly 17% higher than in 2007, which was the best year on record. It appears likely that overall growth will continue through to 2009. The airline Gol Transportes Aereos raised its market outlook for 2009 in November after posting a Q3 profit that beat Bloomberg analysts' estimates. Gol forecast a 14% jump in 2009 in domestic traffic, up from an earlier prediction of 2-4% industry growth.

Other company news has been positive, with Accor developing a network of 20 Formule 1 and Ibis hotels in Brazil by 2010 - a project brining nearly 5,000 rooms and total investment of about EUR200mn. In November 2009, Brazilian flag carrier TAM Linhas Aereas reported a profit for Q309, boosted by the Brazilian real strengthening against the US dollar and dropping fuel prices, Bloomberg reported. Hotel das Cataratas, at Iguazu Falls, by Orient-Express Hotels was upgraded in autumn 2009. We see upgrades as signs of a more general boom in investment in Brazil's tourism infrastructure, which is widely regarded as a factor restraining the industry from reaching its full potential in the past.

Political Outlook We have upgraded Brazil's short-term political risk rating to 72.1 from 70.8 on the back of falling inflation. Headline consumer price inflation in Brazil fell below 5.0% year-on-year (y-o-y) for the first time since March 2008. At 4.8% y-o-y, we believe that this is favourable for the country's social stability rating, which rose to 70.0, from 65.0 in previous reports. We note that should the inflation rate continue to fall over the coming months we would revise up our short-term political risk rating for the country. Long-Term Outlook Still Bright While acknowledging the impact of the recession, we remain bullish in the long term regarding the Brazilian economy. We believe that Brazil's economy has a lot going for it, ranging from an enviable array of commodity resources, such as soy, sugar, iron ore, steel and hydrocarbons (our Oil and Gas team expects Brazil to become a net exporter of oil by 2011), to a highly promising consumer segment. We expect the Brazilian consumer to continue to grow in prominence over the coming decade and bank lending will continue to be a driving force behind Brazil's economic performance, offering more sophisticated financial instruments to different sectors of the economy, where housing and agricultural loans are still a relatively new phenomenon.

Business Environment With an abundance of agricultural and mineral resources and a government that is actively encouraging of foreign investment, in our view Brazil is one of Latin America's increasingly attractive places to operate business activities. Furthermore, President Luiz Inacio Lula da Silva's ambitious infrastructure investment plans should unlock opportunities across all major sectors, most notably the transport and energy industries. Overregulation, corruption and gang crime are the key threats to the business environment in Brazil.