Successfully investing in Brazil

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last updated on 8 June 2022 | reading time approx. 4 minutes

  

 

 

How do you assess the current economic situation in Brazil?

Brazil’s economy will probably be one of the main beneficiaries from the current global changes and the geopolitical weight of Brazil as – relatively speaking – reliable partner appears now to even grow in a more and more polarized world. While many countries in the world facing a post-pandemic situation of unexpected high inflation and also a change in the political climate, due to the War between Ukraine and Russia, Brazil has become – relatively speaking – an economically attractive environment. The approved reforms, and the government's ability to manage the country's economic situation during the pandemic, put Brazil in a favorable position to maintain its growth path and attract foreign investment.
 
Increasing exports, higher foreign investments, the reduction of unemployment rate, and the return of economic growth rates are beginning to exceed the prior expectations of the economists. Hence, Brazil is supposed to return to the growth path in the next years according to the latest forecasts of the Brazilian Central Bank. 
 
For example, Brazil ended March 2022 with the creation of 136,189 formal jobs and this is the third consecutive month that the country has seen growth in the creation of new jobs. This will impact the unemployment rate, which is expected to decrease to 10.6 per cent in 2022; compared to 11.7 per cent in the prior year.
 
According to the latest forecast of the Brazilian Central Bank the inflation rate is expected to normalize and to return to 4 per cent within the next 2 years, which should be followed by a decrease on the interest rate as well. This movement should impact positively on the credit market, which along with a more solid job market should be crucial to a stronger national demand scenario and for the economic growth. 
 
After 2 years among the most devalued currencies in the world, the Brazilian Real is one of the phenomena of appreciation in 2022. The Brazilian currency has the best performance of the year compared to other currencies. 
 
Brazil is taking advantage of the current international investor portfolio rotation. As a result, there is a greater inflow of foreign capital into the country, which is also basically driven by the comparable high risk free interest rate SELIC (12.75 per cent) and the positive real interest rate. 

 

How would you describe the investment climate in Brazil? Which industries have great potential?

Capital inflows to Brazil by foreign investors have grown substantially in the first quarter in 2022. With the international scenario marked by high inflation and an unstable political climate, due to the war in Ukraine, Brazil has become an attractive market with many growth opportunities, particularly for long-term and advanced investors with innovation and new technological ideas. Brazil is currently the hot spot for the reallocation of investments and is a beneficiary from the current withdrawing of capital from companies, industries or regions that could be negatively affected by the war or because of impacts from sanctions against Russian corporations.
 
The major industries in Brazil like agrobusiness, iron and steel production, automobile assembly, petroleum processing and chemicals production are remaining attractive. The technologically based industries have been the most dynamic in recent years but have not outpaced traditional industries so far. However, Brazil is recently ranked among the top five economies with the highest start-up rate in the world and is the only Latin American nation listed in the ten leading global unicorn markets. Therefore, the start-up business is becoming more and more important role in the country. 
 
Due the international increase in commodity prices, and as they are the main driver of Brazilian exports, they can bring benefits and good returns to their investors. With the appreciation of the real against the dollar, exports tend to be more viable for Brazil in the current context. The war in Ukraine is making the value of commodities volatile all over the world and is affecting many Eastern European countries that supply these goods, thus bringing a certain optimism to the current Brazilian scenario, which, even though it is a more closed economy, at the current moment continues with the production of its commodities in continuity without major impacts. The commodities scenario is currently unbalanced, with more demand than supply, thus being a possible investment advantage in Brazil today.

  

What challenges does a German entrepreneur face when engaging in Brazil?

High exchange rate fluctuations still represents a one of the major challenges for businessmen, especially importing companies, find it difficult to pass on exchange risk to Brazilian customers and, thus, generate exchange losses. Realistic product pricing, taking into account all taxes and currency fluctuations, seems to be an important criterion for success.
 
The envisaged tax reform was not realized as expected. Hence, Brazil still has one of the most complex tax regimes in the world for indirect taxes, which should be considered by German entrepreneurs for the engagement in Brazil. On the upside, dividends remain tax free in Brazil.
 
For envisaged transactions in Brazilian companies German entrepreneurs usually should engage interdisciplinary advisers to avoid risks regarding quality of financial information as well as tax and labor exposures for the last 5 years.
   

What effects does the political environment have on German entrepreneurs?

 The current year will be impacted by the coming elections in October 2022. The discussions are still marked by political polarization between current President Bolsonaro and former President Lula. German entrepreneurs tend to detach themselves from such political polarization.
 
So far, a “Third Way” has not yet shown signs of being viable, and the most likely scenario is that the two aforementioned candidates represent the majority of the votes in dispute. The economic proposals presented differ between the two possible candidates. On the side of the current president, Jair Bolsonaro, reforms were made with a more liberal bias during the last 4 years. Lula, on the other hand, presents proposals consistent with a statist agenda that aims to regain state control over the economy.
  

In your view, how will Brazil develop?

As the biggest and economically most important country in South America, Brazil could be one of the beneficiaries from the current war in Europe. The Brazilian economy will be gaining from the current trend of rising energy and commodity prices. The current geopolitical shifts and increasing attractiveness for foreign investments will also increase Brazil’s weight in the world.

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