Brazil reaches highest domestic investment rate since 2014

RIO DE JANEIRO, BRAZIL – According to the Brazilian Institute of Geography and Statistics (IBGE), the investment rate in Brazil jumped from 16.6% to 19.2% last year. It is the best result of the indicator since 2014 and is above the average of the previous ten years, which was 17.7%. The performance is encouraging but still far from ideal. A survey of the Brasil 61 portal with the International Monetary Fund (IMF) indicates that 65% of countries are still ahead of Brazil regarding investment rate proportional to GDP.

According to the IBGE, the gross formation of fixed capital, i.e., companies’ investments to expand production capacity, advanced 17.2% in 2021. The highlight is the investment in machinery and equipment (one of the components of the indicator), which grew by 23.6%.

Professor Adriano Paranaíba, economist and director of the Mises Academy, says the result is promising. “For us to generate employment, income, and growth in a country is the most important indicator. The purchase of machinery and equipment means that the businessperson sees that there is going to be a resumption of consumption of goods, so I have to manufacture more products. By manufacturing more products, I have to hire more people, even to start the factory, and then you have this healthy growth wave,” he explains.

Margarida Gutierrez, economist and professor at Coppead of the Federal University of Rio de Janeiro (UFRJ), explains that nobody invests in machines and equipment to idle them in the factories. In other words, if there was growth in this indicator, it is because the outlook for the business environment for the coming years is optimistic.

“For an investment to happen depends on optimistic expectations, much more than on the interest rate. If this investment rate grew so much, if the purchase of machinery and equipment, construction, and new technology grew 17% in 2021, this is a sign of highly favorable expectations. No company increases a facility and its industrial park if it doesn’t have expectations of increased sales,” he says.

Pierre de Souza, professor and consultant at Fundação Getulio Vargas (FGV), points out that the growth of the investment rate is encouraging. Still, it is necessary to wait a little to evaluate if the increase will be sustainable in the coming years.

“We also have to keep in mind that it is a number that is still close to what it was between 2012 and 2014; it is not that we are above what it was at that stage. Looking at a slightly longer historical series, it’s still not that encouraging. It is a good number, a better level. We still have plenty of room to grow and, maybe, we will be able to see in the coming months if 2022 follows this growth line,” he evaluates.

For Pierre, such caution is justified because the investments in construction also increased (12.8%), but not in the same proportion as the machinery and equipment component, for example.

“When are we going to get excited about this number? When civil construction also follows this trend. Because if civil construction has increased investment in fixed assets, we have a long-term vision in the sense of: ‘there is a physical asset that is being built, and this is not going to be a short-term thing’. There is a significant growth in machinery and equipment, but civil construction is not yet so significant. It is a fact that we will have to follow because it would be more sustainable; in other words, investment in Brazil in these two areas goes up together,” he analyzes.

CAUSES

The economists that Brasil 61 spoke with are unanimous in pointing out that the growth in the investment rate has, among the causes, the improvement in the business environment. Pierre points out that the approval of the frameworks for basic sanitation, the exchange market and railroads, the new gas law, and the economic freedom law are among the initiatives that collaborate to attract investments.

“All of this that tends to generate a more investor-friendly environment is directly related to how much will be invested here. When we look at even more specific reforms for investment, that is, [the framework of] railroads, I’m attracting investors, giving them the possibility to invest in railroads to have a return in the future, I’m creating the right environment for investment,” he says.

Paranaíba says that the sanitation framework is already affecting the economy. “We have had auctions in cities in important metropolitan regions of Brazil, auctions with very high investment values,” he says.

In addition, he explains that the format of bids for service concessions to private enterprises is improving, which influences the impact of investments. “The 5G auction is a watershed in how Brazil does auctions. Because, until then, the investor to explore a public service gave money to the government [in grants]. In the 5G auction, the winner is the one who says he is going to invest more in infrastructure. It accelerates this process and attracts intelligent investment, which will bring change to society,” he says.

BELOW POTENTIAL

Despite reaching its best result since 2014, when the investment rate was 19.9%, Brazil sees 127 countries better placed when it comes to investment. The IMF’s World Economic Outlook (WEO) survey lists 196 countries. Almost two-thirds of the countries have a better performance in this indicator than Brazil.

When the comparison is with the 20 largest economies in the world, among which Brazil is included, the country only has a higher investment rate than the United Kingdom. It is tied with Italy but loses out to 17 other countries.

Concerning the BRICS group, made up of Brazil, Russia, India, China, and South Africa, the national investment rate is only above South Africans.

INVESTMENT RATE/GDP – BRICS:

• China – 42,9% – India – 29,7%
• India – 29,7% Russia – 23,4%
• Russia – 23,4% Brazil – 19,2%
• Brazil – 19,2%
• South Africa – 13,5%

Investment in Brazil is also below the average investment in the countries part of Latin America and the Caribbean, which is 19.4%. Compared to the emerging or developing economies, the performance is even lower. According to the IMF, these countries have an average investment rate of 33.1%.

Adriano Paranaíba states that Brazil is still “very far from the ideal”. He explains that other rankings, such as economic freedom and development, also reflect this situation. “Even with this improvement, we have climbed a few positions and, many times, we have climbed positions in some indicators because countries ahead of us fell during this pandemic period. But this is proof that we were really behind and that a 17% growth still made us stay there in the last positions,” he highlights.

Pierre says that the investment growth in Brazil is a reason to celebrate, but he can’t hide the fact that the country is below its potential. “Compared to other countries, the investment rate in Brazil is still lower than in economies similar to ours. And this is a point that worries us because it is one thing to be improving, us against ourselves. Now we have to see ourselves compared to the rest of the world,” he says.

PERSPECTIVES

Economists point out that the relationship between investment and GDP is direct. In other words, if investments increase, the country tends to grow economically. The opposite also applies as a rule.

“You will hardly find a country with sustainable GDP growth without having had sustainable investment growth. The country has to invest and create the assets that will generate savings in the long run. There are discussions about which is the investment vector: if public or private, this is another topic, but the important point is: how will you create a sustainable GDP? Through investment,” says Pierre.

“Countries that opened their economy more than Brazil to investments and allowed these investments to take place gave a leap in economic growth, such as Australia, South Korea, Chile. These countries achieved not only an economic growth to say that the GDP grew, but an improvement in people’s quality of life,” said Paranaíba.

Therefore, the trend is that if the investment rate in Brazil grew in 2021 and continues to advance, this will be reflected in the Brazilian GDP in the coming years. “You had more fixed capital invested. This fixed capital is expected to generate a return, which will be reflected in the GDP of 2022, 2023, and 2024,” says Pierre.

Paranaíba explains that the effects of the structural reforms already made, such as social security, labor, and legal frameworks, do not occur overnight. “Unfortunately, with an electioneering discourse, many people can say: ‘you see, we made a lot of reforms, and they didn’t change.’ It hasn’t changed because there hasn’t been time for them to actually happen, for the investments to mature and for these investments to succeed in attracting more investments,” he analyzes.

The specialists also affirm that tax reform is the next significant step Brazil must take, so investors keep coming. “This is the mother of the reforms that we need to make it to really have investment. The Brazilian tax system is insane. For an investor to come to Brazil, he first must hire a tax law firm to understand the system. The cost of paying taxes in Brazil can be even higher than the value of the tax itself. So, this is what scares off even more investments in Brazil,” he concludes.

With information from Brasil 61