Foreign direct investment in Brazil has risen almost 60%. Will it continue?

Brazil’s manufacturing sector received US$74 billion in foreign investment between January and October, almost 59% more than in the same interval in 2021.

It is the highest amount for the first ten months of the year since 2014 (US$74.7 billion), according to the Direct Investment in the Country (FDI) data published on Friday (Nov. 25) by the Central Bank (BC).

The amount invested by foreigners in the accumulated amount of the last 12 months is slightly lower, at US$73.8 billion, equivalent to 4.05% of the Brazilian Gross Domestic Product (GDP).

The rate exceeds that of the previous month (3.98% of GDP, according to data revised by the BC) and also that recorded a year earlier (3.14%) and is the highest since August 2019 (4.11%), months before the pandemic began.

A report released in October by the Organization for Economic Cooperation and Development (OECD) states that Brazil was the third country that attracted the most foreign direct investment in the first half of the year, behind only the United States and China.

Market expectations for FDI in 2022 reached US$80 billion, on the rise for several weeks, according to the Focus bulletin.

In the middle of the year, something close to US$60 billion was expected. Projections for 2023, which were also around US$60 billion at the turn of the semester, now reach US$75 billion.

Despite the profusion of positive data at the moment and Brazil’s comparative advantages in relation to other emerging economies, which led observers to classify the country as the “ball of the moment” for investment, the outlook for 2023 onwards carries a certain amount of uncertainty.

The country’s economic growth is expected to slow down, which in itself may inhibit more robust investments.

Besides this, the flow of foreign funds will depend on the elected government’s economic policies, which are the target of mistrust.

WHAT EXPLAINS THE ADVANCE OF FOREIGN INVESTMENT IN BRAZIL’S PRODUCTIVE SECTOR

Internal and external factors help explain the advance of foreign investment in Brazil, according to economist Rodolfo Margate, from XP Investimentos:

• a robust growth of the Brazilian economy;
• the high domestic interest rates; and
• the fact that the country is well positioned against other emerging countries.

“The more robust domestic performance favors investments,” highlights Margato.

The average point of the financial market expectations points to a 2.8% growth in GDP this year, according to the Focus bulletin, from the Central Bank.

At the beginning of the year, the median of the projections was only 0.3%.

Another factor that helps is the high domestic interest rates, as they favor the flow of inter-company operations, such as loans from headquarters to subsidiaries.

Externally, says the economist of the brokerage house, Brazil is relatively well positioned and with a more solid position in relation to some of its main competitors among the emerging countries.

Russia, one of the countries that dispute the attraction of investments with Brazil, is out of the market and will not return soon because of the war with Ukraine.

Turkey has an erratic economic policy. And Argentina is immersed in a foreign exchange crisis.

“Maybe only Mexico is an alternative to Brazil,” adds the CIO of Portofino Multifamily Office, Eduardo Castro.

According to him, Brazil has a good opportunity to differentiate itself from its peers.

“Despite the strong [political] polarization, it has shown that it is a democratic country, with reliable elections and going for another alternation of power,” he says.

The chief planner of the TC investor platform, Pedro Lafraia, assesses that Brazil can be considered the “ball of the turn” in the international scenario apart from the US and China, the two largest global economies.

“We anticipated the rise in interest rates, we have a stable Selic rate, we are attracting speculative capital, and we have contracted more than R$250 billion in investments, many of them in the infrastructure area”, he says, listing more Brazilian advantages.

Lafraia sees good opportunities in segments as diverse as education, retail, mining and infrastructure.

“Agribusiness can benefit from the continuing conflict between Russia and Ukraine, making it possible to incorporate a portion of the European market.”

WHAT ARE THE THREATS TO FOREIGN INVESTMENT IN BRAZIL FROM 2023 ONWARD

Lívio Ribeiro, a researcher at the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre/FGV) sees the scenario with more caution.

He points out that the continuity of this favorable flow depends on the policies adopted by the new government.

“It is necessary to offer predictable conditions and stability, and to create the capacity to reduce risks to make the inflow of capital to the productive sector feasible. It is money that comes to stay for five, ten years”, he says.

For Lafraia, what can help in this sense is the decision-making of the transition team, headed by the elected vice president, Geraldo Alckmin.

“It is necessary to know what is coming: how will the government conduct economic austerity? How will the fiscal issue be handled? Who will be the Finance Minister?” he questions.