Why Brazil Has Become One of the Top Four Investment Destinations in the World

Along with China, India and Russia, Brazil is a country overflowing with opportunities to attract foreign capital. Brazil is the leading the way in Latin America’s economic development. In 2006, it was the third-largest economy in the western hemisphere and the 11th largest in the world. The economy has stabilized, the legislative reforms of the Lula Da Silva government are boosting cooperation between the public and private sectors, imbalances are improving, and the high valuation of markets is attracting the attention of foreign investors.

 

As a result, the Brazilian currency, the real, as well as the country’s stock market are both at all-time highs. “If you want to be in Latin America, you have to be in Brazil,” notes Rafael Pampillón, professor of economics at the Instituto de Empresa business school in Madrid.

 

Lula’s Success

 

Rediscovering Brazil as a financial destination for foreign business has become a huge challenge. Under the leadership of President Inacio Lula Da Silva, Brazil continues to strengthen its favorable business climate for foreign investors. “The key to Lula’s success has been to achieve sustained growth without undertaking populist adventures or struggling to combat the country’s poverty,” notes Juan Carlos Martínez-Lázaro, professor of economics at the Instituto de Empresa.

 

One of the keys to Brazil’s international success is the political stability of its government. The reform programs being carried out have been a success, enabling the country to lessen its vulnerability. “Lula has been a big surprise,” says Martínez-Lázaro, adding that initially, there was a “great deal of distrust. But he surprised everyone. His big success was to pursue a policy of fighting his country’s poverty, not by undertaking populist policies but through macroeconomic stability.” For Rafael Pampillón, Lula has been the person “at the forefront of the country’s progress and stability.”

The huge size of the market, the successful privatization program, the remarkable diversification of its manufacturing and export sectors, and its strong political democracy have become the pillars of Brazil’s dynamic economy and society. “Brazil is close to Chile, Peru and Mexico,” notes Pampillón. “It believes in globalization and it thinks that opening markets helps promote growth, not through the populist road followed by Ecuador, for example.”

The Brazilian government wants to guarantee stability through prudent budgetary policy and monetary policy that are appropriate for the country. The current approach has eliminated the nightmare of inflation while maintaining the health of the country’s external accounts. It began after the turbulence of 1998, when the economy faced serious problems because of its fiscal and external deficits. The situation worsened in January 1999 when Brazil became very vulnerable to international turbulence. The country’s gradual adjustment policy became unsustainable, forcing Brazil to turn to a free float policy. This led to a major devaluation in the Brazilian country, which led to the collapse of the Real Plan, in which the exchange rate of the Brazilian currency served as an anchor for internal prices. The instability persisted until March because of fears that the government could not face its public debt commitments. In addition, there was concern that the Central Bank lacked resources for containing the climb of the dollar. “Brazil has managed to recover the confidence that it lost. Growth is getting stronger … and there are good reasons to believe it will last a long time,” says Martínez-Lázaro.

The Stock Market’s Appeal

For more than 20 years, Brazilian capital markets were characterized by protectionism and underdevelopment. Following the improvement in the economy, capital markets began to modernize. Lately, Brazil has been benefiting from a favorable external environment. On a global level, it has significant liquidity. In a broad range of financial markets, prices have risen at a brisk pace and the country has growing economic ties with developed economies. Internally, its monetary policies have enabled it to control inflation, now between 3% and 4%. As a result, interest rates are trending downward. Economists anticipate that rates will drop to 9.5% by 2009 from their current level of 12%. “Brazil is a country where you have to be,” says Pampillon. For his part, Martinez-Lazaro notes that Brazil “has gone from being a country of the future to becoming a country of the present.”

 

Macroeconomic stability as well as widespread expectations that Brazil will play a growing role in the new global economy are turning the country into a very attractive destination for foreign investors. “There is a surplus in the trade balance, in exports,” notes Pampillón. The same thing is happening in the stock market where there has been a “spectacular jump,” he adds.

 

Barely four years ago, the largest Latin American stock markets were on the black list of investors in emerging markets. The economic crisis in Argentina, along with the arrival of Lula as president of Brazil, frightened away capital investment. The profits offered by Brazil, Argentina and Mexico could not compete with those in Asian markets. But the situation has changed. Analysts say that the rise of Latin American markets can be explained by the favorable international environment. “The exchange rate is variable. If global economic conditions change and Brazil doesn’t attract enough foreign capital, the exchange rate will adjust, which will lead to adjustments in the country. Now that it is a country on the rise, the exchange rate has gone up and continues to be strong,” Pampillon says.

 

Currently Brazil has an annual inflation rate of 3% and interest rates of 12.5%. Data show that there is interest in lowering the price of money. “From 1980 until 2005, the Brazilian economy grew at rates of 2.8%, 2.9% and 2.3%. It never went above 3%. In 2006, it broke that barrier, reaching 3.7%. In 2007, it has reached 4.4%.”  For Pampillón, these figures demonstrate that Brazil is a country for the long haul. “Everything is welcome; you see it wherever you look,” he says. “Most of its problems are now on the way to being solved,” adds Martínez-Lázaro.

 

The Spanish Presence


Over the last 10 years, Spanish investment has played a major role in Spain’s economic relations with Brazil. The total volume of Spain’s investments exceeds 30 billion euros, making Spain the second-largest foreign investor [in Brazil] after the United States. Among member-states of the European Union, Spain is the country that interests Brazil the most because Brazil leads the way in Latin American economic development, ranking third in the hemisphere and 11th in the world in 2006.

 

Because Brazil is an emerging economy, there are many sectors where investors can make the most of the gold mine contained in Brazil’s economic development. Martínez-Lázaro encourages Spanish companies that have a great deal to teach Brazil. He advises them to take advantage of the opportunities offered by Brazil with its population of 180 million. Martinez-Lazaro lists the following attractive sectors: “The financial sector, telecommunications, tourism, construction, residential real estate, clean energy and exports of agricultural products …. Spain has a great deal to teach in those sectors.” He also emphasizes the management of infrastructure and educational services. “At the moment, Brazil is making Spanish its second official language. That provides an open door for our tourism sector to take advantage of,” Martínez-Lázaro notes.

 

Although the big Spanish multinationals already have a footprint in Brazil, the Spanish government wants to strengthen their presence in the infrastructure and service sectors by helping small and midsize Spanish companies move into Brazil and expand their role. “The problem that I see is that if you don’t have enough financial resources and your managers are not well trained, they [the Spanish government] won’t push you to globalize because they are afraid of failure,” notes Martínez-Lázaro. However, little by little, the culture of globalization is catching on in the mindset of [Spanish] business executives. Ultimately, “companies will have to take that approach.”

 

The worst fear of many analysts is that Lula will not continue with the reforms already on the drawing boards. “In addition, it is a corrupt country where there is a lot of pressure from [high] taxes,” says Pampillon. Nevertheless, now “is the time to awaken Brazil,” he adds. All indicators point to Latin America as a region that will receive a deluge of capital from investors.

 

Tourism Destination


Spain and Portugal have derived already significant benefits from their investments in Brazil. Per capita income in both those countries is growing and they have the skills they need to continue increasing their exports. Their presence in Brazil acts as “a stimulus for increasing competitiveness and inefficiency and making Brazil more dynamic,” says Enrique Panés, Spain’s ambassador to Portugal. According to Ricardo Espírito Santo Silva, president of Brazil’s Banco Espirito Santo (BES), Brazil takes in almost one hundred times more tourists than Portugal does, which means there are a great deal of opportunities in the tourism sector for Portuguese projects. Brazil’s attractive economy makes it “an inevitable destination for the inflow of global investment [from Portugal],” notes Espirito Santo Silva.

 

Pestana is the Portuguese tourism company that has invested the most in Brazil. José Roquete, who heads Pestana, believes that it is easy to try your luck investing in Brazil “because of the low entry costs and labor flexibility. In addition, foreign countries are exporting their business models and Brazil is importing new approaches to business.” Nevertheless, Roquete warns of the country’s complex tax regime and high tax rates. He says that factor can become a “disincentive for investment.” In addition, he notes a serious problem in “air transportation and in the country’s security and its image.” For all that, Roquete encourages European investors to pursue new opportunities on the other side of the Atlantic. He believes Brazil “forces you to think big.” He also stresses the delicate balance involved in Brazil’s efforts to maintain growth while managing its risks.

 

Miguel Stilwell, director of analysis at Energias de Portugal (EDP), a company that serves the electricity sector, believes that business in Brazil is progressing at a better pace than anticipated. In 2003, EDP reorganized its business in Brazil, limiting itself to a strategy that stresses growth above all. Currently, EDP has a presence in four Brazilian states, where it deals with more than three million customers. This year, EDP is opening a dam in Maranhấo in northeast Brazil. The company is committed to pursuing other new projects, always with local partners. In Brazil, electricity is a sector “that provides a good return and it is well regulated. Several companies participate,” he notes.

 

Brazil clearly has an enormous potential to attract investors. Panés, Spain’s ambassador to Portugal, encourages business executives to take advantage of those opportunities. “Working together, we have a lot of opportunities to take advantage of.”

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