By Ben Tavener, Senior Contributing Reporter
RIO DE JANEIRO, BRAZIL – Brazil’s Banco Central (Central Bank, BC) has revealed that foreign investors have dramatically reduced the amount of capital they are investing in Brazil: a forty percent drop has been registered in the first six months of 2012. Investments from overseas plummeted from US$12.4 billion to US$7.5 billion in the first half of 2012, in comparison with the same period in 2011, according to BC data.
External investors have been disappointed after the weaker performance posted by Brazil in the past two years, and analysts say government fiscal policy altering the exchange rate of Brazil’s currency, the real, has eroded investors’ bank balances and led to a change in the mood of the market.
President Dilma Rousseff is set to unveil a new stimulus package this week, expected to include tax relief and reduced energy bills for industries, as well as privatization schemes for roads, railways and airports.
However despite previous interventions from the government – including slashing interest rates and increasing access to cheaper loans – official predictions for 2012 growth have been cut to 3.0 percent, and some have described the fiscal policies as “a bucket of cold water” in investors’ faces.
Yet others say the pessimism is not warranted, including economist and former Banco Central President Armínio Fraga, who says that although the economy is suffering from a “cyclical downturn influenced by the [financial] crisis in Europe,” it is actually the perception from outside that has changed the most:
“Brazil is doing well, but it has some challenges in order to sustain higher growth: investing more and educating better,” he told O Globo newspaper.
Australian expatriate Michael Connell, working at Rio-based business management consultancy Wilson Sons, also believes that the foreign investment statistics for Brazil are more to do with the pessimistic perception from the global economic environment than any fundamental change in underlying opportunities provided by the Brazilian economy.
Although factors like the exchange rate movements may have contributed to a feeling of uncertainty, he explains to The Rio Times, “the basis for sustained growth in Brazil continues to depend on the improved efficiency through investment in infrastructure, education and productivity producing reform.”
Mr. Connell continues: “While these are challenging they do seem more achievable than the hurdles that many other nations of the world need to overcome right now.”
Although a slowdown in China’s economy has translated into reduced demand for Brazilian commodities – mainly iron ore and soya – has undoubtedly affected industry in Brazil, some are saying that a longer-term look at the economy shows the country returning to strong growth.
This view is largely shared by financial consultancy Ernst & Young, which says that Brazil – the world’s sixth largest economy – is definitely still investors’ preferred Latin American country with which to do business – with big increases in investment over the last year.
One such example, according to the consultancy, was the UK which expanded its total number of investment projects in Brazil by 125 percent in a year, making it Brazil’s second largest investor.
But others say that the excitement over Brazil is petering out, and that others countries are now benefiting from funds once destined for Brazil, most notably Mexico, which has been dubbed the “New Brazil” by some, whose main stock exchange has grown seventeen percent this year.
Brazil’s main stock exchange, the São Paulo-based Bovespa, has seen its dollar value reduce by 4.15 percent year-on-year, and O Globo reports that foreign investments have been making a noticeable exodus from Brazil for four months now.