Have foreign investors really turned on Brazil?

Natália Scalzaretto . May 09, 2019

For emerging economies such as Brazil, the ability to attract foreign direct investments (FDI) is crucial to bringing dynamism and growth. More than money itself, this kind of investment is focused on real assets—such as factories—which in turn create jobs, develop infrastructure, and open up channels for technology transfer that otherwise wouldn’t be possible.

But to convince foreigners to run the high risks inherent to productive enterprises, countries must project promising returns. As Latin America’s biggest market—and one of the largest in the world—Brazil is always an attraction. However, according to consultancy firm A.T. Kearney, Brazil’s market size and potential are matched only by its economic and political uncertainties—a trait we share with other countries in the region.

That has led to Brazil’s exclusion from A.T. Kearney’s annual <a href="https://www.atkearney.com/foreign-direct-investment-confidence-index/2019-full-report">Foreign Direct Investment Global Index</a>, which ranks the 25 most trusted countries for investments. For the first time since the list was created, in 1998, Brazil is nowhere to be seen. The report is based on research with 500 executives and measures the markets likely to attract the most investment in the next three years. As we stated in our May 8 Daily Report (for <a href="https://brazilian.report/subscribe">Platinum subscribers</a>), Brazil had been sliding down the ranking in recent years. Between 2010 and 2014, the country featured in the top 5. But Brazil has hit 12th, 16th, and 25th in the last three years—before dropping out of the list altogether. “The great political uncertainty of recent years—with Dilma Rousseff’s impeachment, the 2018 elections, and issues related to Operation Car Wash—created a negative environment,” says Mark Essle, an A.T. Kearney partner in Brazil. The country is also hurt by a shortage of liquidity, infrastructure problems, and a complicated tax system. <script src="https://www.buzzsprout.com/299876/1079168-58-a-look-into-brazil-s-super-complex-tax-system.js?player=small" type="text/javascript" charset="utf-8"></script> The move happens amid a global shortage of foreign direct investments. According to United Nations Conference Trade and Development estimates, FDI fell 19 percent last year, to USD 1.2 trillion. In developed countries, results were even worse: a 40-percent decrease, propelled by the “repatriation of profits amassed by American multinational companies in countries like Ireland and Switzerland”, <a href="https://g1.globo.com/economia/noticia/2019/01/21/investimento-estrangeiro-mundial-caiu-19-em-2018-segundo-relatorio-da-onu.ghtml">said</a> James Zhan, director of Investment and Enterprise at Unctad. <h2>Is everything lost?</h2> Data from Brazil’s Central Bank shows that net FDI in the country has recovered in 2018, reaching its best level since 2012. The numbers are composed by two variables: equity, in which an investor from one economy controls at least 10 percent of a company’s voting capital, and debt instruments, which comprise credit granted to Brazil-based firms by a parent company—or fellow company within an economic group. Looking specifically at the equity component, throughout the last decade, only services had an increase in the FDI influx. Comparing to 2011, the best year on the series, every sector registered steep losses. However, comparing to 2017, last year showed improvements in some sectors, such as agriculture and extractive activities. Other specific groups, such as financial services, have also received more foreign capital. For A.T. Kearney, the “relatively robust FDI inflows in 2018 indicate that many investment opportunities still exist.” <hr /> <img class="alignnone size-full wp-image-17226" src="https://brazilian.report/wp-content/uploads/2019/05/export-Di0Vs.png" alt="fdi brazil investments" width="1200" height="800" srcset="https://brazilian.report/wp-content/uploads/2019/05/export-Di0Vs.png 1200w, https://brazilian.report/wp-content/uploads/2019/05/export-Di0Vs-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/05/export-Di0Vs-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/05/export-Di0Vs-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/05/export-Di0Vs-610x407.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /> <hr /> Overall, there is a consensus that Brazil will only become a more attractive economy once the government is able to balance public accounts, primarily through the much-talked-about pension reform. Though public finances are a major pain point, other issues may be tackled in the meantime to boost demand. One area that has been addressed by the government is privatization. Since the beginning of the year, the Jair Bolsonaro administration has pushed forward several infrastructure auctions, putting railways, ports, and airports into the hands of private investors in a very successful way. In the case of airports, there has been an increasing demand by foreign operators, <a href="https://brazilian.report/money/2019/03/16/airport-auction-privatization/">who dominated the most recent auctions</a>. <h2>“Even the past is uncertain in Brazil”</h2> Besides offering assets and a better economic scenario, Brazil has another roadblock to battle: a lack of legal security. Often quoted as a major issue by Brazilian and foreign investors, the complex legal system makes investors afraid of losses due to canceled licenses or delays in court orders. A classic example is the sale of six power distribution units belonging Eletrobras, <a href="https://brazilian.report/money/2018/04/25/brazils-government-bad-news-eletrobras/">Brazil’s state-owned electric power company</a>. The subsidiaries amassed huge losses and the cash-strapped parent company could not allow itself to absorb BRL 21 billion in deficits—threatening to interrupt power supply to millions of Brazilians. The solution found by former President Michel Temer was to sell them off in small pieces, a process that lasted months and <a href="https://www1.folha.uol.com.br/mercado/2018/12/eletrobras-vende-sua-ultima-distribuidora-e-encerra-ciclo-de-reestruturacao.shtml">was disrupted by several court injunctions</a>. The president of Brazil’s National Confederation of Industries, Robson Braga de Andrade, defined the effects of this issue <a href="https://veja.abril.com.br/economia/os-danos-da-inseguranca-juridica-para-o-brasil/">in an op-ed on weekly magazine Veja</a>. “When business stability and the validity of contracts is uncertain, investments are canceled, projects are shelved, job opportunities are not created, and the social and economic recovery is postponed,” he wrote. So far, the Jair Bolsonaro administration has banked on <a href="https://brazilian.report/power/2019/05/08/business-owners-backing-brazil-bolsonaro-poll/">reducing red tape</a> to diminish these issues but, as noted by lawyers Maurilio Guignoni Dutra and Romero Paes Barreto De Albuquerque, for a comprehensive effect, every power sphere has to be included. “Any attempt to define new parameters for an environment of effective legal security must include every actor connected to the issue. In the public sphere, the Executive, Legislative and Judiciary powers should be involved, alongside the Public Prosecutor’s office in every level of the federation,” they said, <a href="https://www.jota.info/opiniao-e-analise/artigos/a-hora-e-a-vez-da-seguranca-juridica-26032019#sdfootnote6sym">in an article published by Jota</a>.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

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Natália Scalzaretto