Introduction
Brazil has recently taken over the newsstands as election season approaches. The nation’s far-right president, Jair Bolsonaro, stands out. While his rivals have eagerly anticipated the election for months, he has worked on casting doubt on it prematurely. To some, this may appear to be the foundation for a coup. However, his actions manifest to his supporters as the beginning of a revolution.
Foreign Portfolio Investment in Brazil has seen a significant rise in the last decade and continues to show potential. As we have seen throughout history, such political unrest and uncertainty often leave investors seeking clarity about the market’s future. It poses whether it is wise to engage in foreign portfolio investment in Brazil or if one should err on the side of caution regarding FPI in Brazil.
Research conducted in early 2022 about the global investment outlook placed Brazil on the 22nd for investor confidence, making it 1 of only 4 emerging markets to make this year’s list. Brazil, undoubtedly, has a resilient economy. With a domestic market of 200 million people, it has the fifth-largest population in the world, the twelfth-largest economy globally, and the fourth-largest internet market with 140 million users (a vital asset in a digital innovation environment).
With still-moderate interest rates (which will inevitably rise slightly to manage inflation), considerable returns, and advantageous currency exchange rates, Brazil offers an excellent destination for Foreign Investment, particularly Foreign Portfolio Investment. As such, this Article aims to uncover whether the potential outweighs the risks faced by investors in the Brazilian market.
Brief History of Foreign Portfolio Investment in Brazil
Foreign portfolio investment (FPI) in Brazil has begun to acquire traction in this broadly defined and interpretable environment, and its application is gaining traction throughout the business. FPI occurs when investors purchase securities on a foreign financial market, primarily stocks, bonds, and funds. The general assumption in the industry has historically been that FPI does not have a direct enough influence on the local economy to be counted as FDI because securities may be swiftly sold off and do not carry a sizable share of the underlying assets.
The number of purchasers on the Brazilian stock exchange has significantly increased. There are now more than 3 million individual investors, a five-fold increase from three years ago. One of the most alluring possibilities has proven to be the real estate industry. Brazilian developers participated in six IPOs in 2020, raising a combined R$5.2 billion. Since then, this number has increased twofold. Real estate returns are highly alluring. The Brazilian Association of Property Developers (ABRAINC) estimates that the average return from real estate purchased in 2020 will include capital growth and rental returns at 16.1%.
Understanding FPI in Brazilian
For a deeper understanding of foreign portfolio investment in Brazil, it is crucial to take a closer look at the legal system. FPI In Brazil is typically encouraged and is given the same privilege as domestic investments.
Brazilian law generally does not set a minimum capital requirement for foreign investments. There are a few exceptions, such as proving solvency to enter particular markets like healthcare insurance or participating in public tenders. In addition, legal representatives of foreign firms or individual investors must have a minimum capital to be granted permanent residence.
Except for some economic sectors, foreign investments are not subject to prior review or verification by the Central Bank.
Using the Central Bank Information System’s Electronic Declaration Register (RDE), foreign capital entering Brazil is electronically recorded. All investments available to citizens on the Brazilian capital market may also be made by foreign investors (individual or institutional), i.e., portfolio investments in Brazil. To do this, investors intending to venture into FPI in Brazil must employ:
- A legal representative is responsible for informing Brazilian authorities of the necessary investor information and registering the investor in the Central Bank’s RDE system.
- A tax representative will pay all taxes on behalf of the investor due to the transactions.
- A Brazilian Securities and Exchange Commission-registered authorized local custodian (CVM).
- A local broker who can execute the trades on behalf of the investor.
Advantages of Foreign Portfolio Investment in Brazil
Brazil’s political unpredictability and reliance on commodities make it riskier than established markets. Thus, investing involves a trade-off between return and risk, as in most developing markets. However, as previously discussed, foreign portfolio investment in Brazil has steadily increased. There are several parameters to consider when investing in the Brazilian market.
Brazil is well known to foreign investors for its abundant natural resources. Soybeans are Brazil’s top export; as of September 2020, they accounted for about 14% of all exports and totaled $33.2 billion, according to the Observatory of Economic Complexity (OEC). Aside from its vast offshore oil deposits, the nation also produces more ethanol than all of Asia and Europe. It is the world’s second-largest iron ore producer, behind Australia, with $20.5 billion in exports.
With these resources, it can produce a wide range of industrial and consumer goods on a budget and act as a significant raw material provider to nations like China, the United States, and Argentina, its three main export markets. Brazil’s exports to China are valued at $64.3 billion, while the United States and Argentina are far behind at $29.3 billion and $15 billion, respectively.
Brazil’s economy is likewise fairly steady. Brazil has developed into a top-tier economy with a developing technology sector and an inward emphasis that should lessen its reliance on commodities after taking measures toward fiscal stability and liberalizing its economy in the 1990s.
Notabale International Trade Agreements
Foreign portfolio investment in Brazil also enjoys the added protection of International Trade Agreements. The newly constructed Free Trade Agreement between the European Union and the Mercosur, which went into effect on June 29, 2019, during the G20 Summit, can be seen as an unprecedented step toward economic success for Brazil. By boosting exports and imports, allowing the exchange of ideas and technologies, and bringing Brazil closer to Europe, the subsequent lowering of import tariffs and barriers will enhance both economies. Additionally, it suggests a political alliance and is hence all-inclusive. It will boost regional economic stability and boost investor confidence. It has so far been hailed as an essential step in attracting FPI in Brazil.
Brazil is also a member of the World Trade Organization (WTO). Therefore, the following accords apply to its territory:
- General Agreement on Tariffs and Trade (GATT).
- General Agreement on Trade in Services (GATS).
- Technical Barriers to Trade Agreement (TBT Agreement).
- Sanitary and Phytosanitary Measures (SPS Agreement).
- Agreement on Trade-Related Investment Measures (TRIMs).
- Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).
General Risks and Concerns About Foreign Portfolio Investment in Brazil
Foreign portfolio investment in Brazil comes with its own set of risks. Brazil has a long history of political uncertainty, a critical risk of investing there. Numerous officials were implicated in criminal activity in 2015 and 2016 that involved the partially state-owned oil corporation Petrobras. In August 2016, former president Dilma Rousseff was impeached and found guilty due to these scandals. Due to the sanctions imposed on the companies implicated in these scandals, some of their commercial chances have been reduced, creating openings for foreign businesses to come in and continue where they left off.
Brazil, too depends substantially on foreign financing but is more dependent on exports than industrialized nations like the United States. The economy has suffered as a result of the decline in commodity prices. The government is rebuilding the economy with foreign investment. FPI in Brazil at this time could pave the way for the growth and development that Brazil shows such potential.
Conclusion
Brazil’s GDP growth has increased by roughly 1.3% since 2016. Brazil had a new recession in 2020 as a result of COVID-19. Though Brazil accounts for 35% of the region’s GDP, the country’s economy showed signs of expansion and was crucial to the development of the Latin American economy.
According to Bloomberg, the Brazilian economy recovered swiftly, with exports and domestic demand increasing by 9.47% from July to September 2020 compared to the prior months. Foreign portfolio investment in Brazil has stood the test of time, and it is predicted to continue to do so, if not show further growth and development.
Brazil has remained resilient in the face of uncertainty, and if history is any indication, the market will continue to thrive. Foreign investors have the chance to profit from Brazil’s expanding market as the country recovers from the economic effects of COVID-19, particularly given the country’s low-interest rates. Brazil’s lucrative industries include real estate and agricultural products, including coffee, sugar cane, corn, and soybeans. By participating in these industries, Brazil increases the size of its domestic market and, in turn, the global market.