By Jay Forte, Contributing Reporter
RIO DE JANEIRO, BRAZIL – Many foreign investors are looking at Brazil as an interesting option again, between the high interest rates and weaker currency. After reaching an all time high for direct foreign investments of US$20,427 million in December of 2010, years of disappointing declines have just bounced back in December 2015 showing US$15,211 million, as reported by the Banco Central do Brasil (Central Bank).
In February, the director of economic policy of the Central Bank, Altamir Lopes, told Exam magazine that the direct investment flow in the country (IDP) is something permanent, “here to stay”, and also finances the current account deficit.
“Investors come to the country because they know that crises are cyclical. In addition, with the exchange rate depreciation, the economy is cheap,” he said. “In view of the foreign investor, this crisis is over,” he continued.
The country’s high interest rate – currently 14.25 percent per year – is appealing to speculative financial operations, according to experts. To take advantage of the high Selic (Brazil’s interest rate), some foreign investors are borrowing money in countries with low interest rates, for example the United States or Japan, and leverage resources in securities of Brazilian debt. It is what is called “carry trade”.
Investment advisor, Paulo Bittencourt, told O Globo news that he believes this year, even with political uncertainty, the number of investors looking to carry trade and benefit from the difference of interest will increase. “These investors, which are in large emerging investment funds, are always looking at opportunities to ‘raid the henhouse’ in the currency market and securities.”
Although he notes that for this investor profile, a volatile exchange rate could be harmful, since a sharp devaluation of the Brazilian real currency may offset the gains with interest. Bittencourt also warns that at the time these investors detect that it is ‘time to get out’ they will all sell off all at the same time.
Financial advisor and British expatriate living in Rio, Amit Ramnani of Ipanema Wealth, explains what he is seeing in the individual investment market. “More individual investors (compared to pre-2014) are enquiring about transferring funds into Brazil. They usually have a longer term personal interest in Brazil (e.g. family, work) and have existing residency status, proof of address, existing banking relationships etc. Hence many of these are not sensitive to exchange rate fluctuations.”
He continues, “Smaller investors, with no connection to Brazil (pessoa fisicas) have made enquiries but have been deterred by the number of requirements to open accounts and engage with the financial system in Brazil. Larger investors with higher investment levels e.g. R$500,000+ have been able to justify the admin costs of appointing legal and fiscal reps to purchase Brazilian fixed income – including treasuries.”
Ramnani’s advise is “For individual investors, define why you are interested in the first place. If you are connected to Brazil on a long-term basis, it would make sense – e.g. ease of opening accounts, buying treasuries etc. If you are sensitive to risk, your interest gain in Reals may be eroded by a further deterioration in the Real if you plan to convert back the USD or GBP within the next three years. Do your calculations in relation to inflation, IOF (0.38 percent) for bringing money into Brazil and exchange rate scenarios.”