Latin America Advisor

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Should Brazil Expect to See More Foreign Direct Investment?

photo of Rio de Janeiro Foreign direct investment in Brazil more than doubled in 2022 as compared to 2021. Rio de Janeiro is pictured. // File Photo: Victor Tarcitano via Creative Commons.

Brazil’s level of foreign direct investment more than doubled last year as compared to 2021, to $90.6 billion, its highest level in a decade, according to central bank data. What are the main reasons behind Brazil’s soaring level of FDI last year, and how much is it likely to increase this year? Which sectors of Brazil’s economy are seeing the largest increase in investment? How will Brazilian President Luiz Inácio Lula da Silva’s economic policies play a role in the country’s ability to attract investment?

Ernesto Revilla, managing director and head of Latin America economics at Citigroup: “Foreign direct investment to Brazil had a banner year in 2022, reaching close to $91 billion, 93 percent higher than in 2021. However, the details of the data paint a picture that, while still positive, is more nuanced. Out of that $91 billion, only $37 billion (or 40 percent) of the total corresponds to new capital in the Brazilian economy. This is still significant, as it increased 23 percent versus the $30 billion of 2021. But the rate of growth is less spectacular. However, reinvested profits in the Brazilian economy reached $33 billion, from $17 billion in 2021, and inter-company loans accounted for $21 billion from nothing the year earlier. In other words, the financial decisions of multinational firms to keep the money in Brazil or allocating it there in 2022 accounted for most of the foreign direct investment that year, rather than new capital. This was probably a consequence of the strong growth of Brazil last year (3 percent) coupled with the strengthening of the real. Stronger growth means larger profits, while currency appreciation means more dollars when converting them. President Lula is facing the challenge of maintaining the growth momentum under more difficult conditions. Some less business-friendly policies such as the interruption of the privatization agenda or an increase in the inflation target might reduce foreign appetite for investment. Still, although growth is expected to slow down sharply in 2023, FDI should remain high (at an expected $88 billion in 2023), though there is risk forecast given uncertainty around the policy agenda.”

Anya Prusa, senior director at the Americas practice at Albright Stonebridge Group: “Brazil’s better-than-expected foreign direct investment figures for 2022—which came despite high inflation and global uncertainty—resulted from a number of factors, both internal and external. The previous government undertook a series of measures to facilitate the entry of foreign capital, including as part of Brazil’s OECD ascension process, and stepped-up concessions and privatizations. Moreover, the devaluation of the real has made Brazilian assets a relative bargain, creating ready opportunities for investment in energy, infrastructure, real estate and more. Technology and financial services have also performed well. Combined with pent-up demand as investment resumed post-pandemic, these factors alone would have provided a boost to FDI inflows even in the face of lingering concerns over Brazil’s fiscal and political stability. However, Brazil also benefited from the shifting geopolitical landscape: the sudden shock of the Ukraine war, as investors divested from Russia and pulled out of Ukraine in search of less risky markets, but also the longer trend toward nearshoring and ‘friend’-shoring—particularly in strategic sectors like mining, energy and technology. Still, the internal and external environment in 2023 remains far from certain. Although the Brazilian market is inherently attractive due to the size of its consumer base, substantial natural resources and a relatively diversified economy, investors will be looking to the new Lula administration for clear signals of its commitment to fiscal responsibility and to boosting productivity and growth.”

Mauro Cazzaniga, economic analyst at BMJ Consultores Associados: “Both external and internal factors explain the increase in Brazil’s level of FDI. On the external side, FDI rose globally in 2022 as a result of the recovery from the economic effects of the pandemic, with less risk-averse investors and capital. Also, events such as the conflict in Ukraine contributed to diverting investments from affected regions (such as Europe) to locations with fewer risks. Internally, Brazil’s economy grew in 2022 at above-expected levels, there were regulatory improvements to facilitate investments in sectors such as sanitation and energy, and advances in infrastructure concessions helped to increase FDI. In fact, infrastructure and green energy projects were some of the main recipients of investments. For 2023, high interest rates in the United States and slower economic growth could decrease global FDI flows. In Brazil, the Lula administration is less likely to proceed with infrastructure concessions, and there is some uncertainty regarding regulatory frameworks. However, green energy projects are likely to receive incentives and remain a significant attractor for investments. And given that Brazil’s complicated tax system is regarded as one of the main barriers to doing business in the country, the prospect of a tax reform could also boost foreign investments.” 

Joel Korn, president of WKI Brasil and senior international partner at UPITE Consulting Services: “Indeed, last year’s level of foreign direct investment in Brazil was impressive and even more noteworthy when considering the risks associated with the political uncertainties in an election year. Given its long-term, nonspeculative nature, the investment decisions following a holding period during the pandemic may be attributed to a combination of factors: Brazil is Latin America’s biggest economy and the second-largest consumer market in the Americas. Additionally, confidence in the country’s resilience and strategic geographic position leverage its huge competitive advantages in raw materials, agriculture/ agribusiness, energy and renewable sources. The surge in FDI has been driven by the view that constraints for economic growth will be overcome with the passing of long-overdue tax and other critical reforms to help reduce the ‘Brazil cost,’ which, in turn, will open opportunities in infrastructure projects, public concessions and investments in industrial and services sectors to cope with the expansion of domestic consumer market and demand for exports. The latter is seen as an inevitable trend within the context of increased protectionism and anti-globalization movements, prompting supply chain repositioning by global players. The commitment of the current administration to sound fiscal responsibility will pave the way for sustainable economic development and critical social policies, thus further enhancing the country’s ability to register even higher levels of foreign direct investment in the years to come. Some sectors that are likely to attract FDI include oil and gas exploration, renewable energy, agribusiness, mining, technology, financial services and commerce.”

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