Brazil keeps attracting foreign capital as investors seek safe heaven

Despite the $81.6 billion current account deficit (3.6% of GDP) in the 12 months ending in April, one trend provided a positive surprise: the stability of Foreign Direct Investment (FDI) between $60 billion and $65 billion in 12 months for at least the preceding three years. Analysts interviewed by Valor point out factors ranging from the high global liquidity to the crisis in Russia among the factors supporting the appetite of long-term investors.

The FDI level has remained stable even more recently, when market expectations about the economy were quite volatile because of low growth and other negative economic indicators. The Central Bank's weekly Focus Survey, or instance, show FDI forecasts for 2014 have been at $60 billion for the last eight weeks.

Foreign direct investments are a source of external financing less exposed to quick capital flights in case of crises and, therefore, an important indicator of a country´s external solvency. José Carlos de Faria, Deutsche Bank chief economist in Brazil, says the factors that continue boosting foreign direct investment to Brazil are various: the strongest is the relatively high global liquidity due to monetary easing policies in developed countries. Although foreign investors might face a weaker local economic growth than expected, Mr. Faria says, it’s still higher than the expansion showed by countries in which these companies are based, mainly in Europe.

In talks with foreign firms, Mr. Faria says many recognize that the economic outlook for Brazil is not the best, but they have decided to invest in the country because "they are sitting on a pile of money and simply do not know what to do with it." Despite this abundant liquidity, the economist points out that foreign investors actually have a long-term vision when looking at the Brazilian economy, driven especially by the fact that the country has a large consumer market.

Data from KPMG, one of the world’s largest independent auditing firms, confirm the thesis. From January to March this year, the Brazilian market registered 193 mergers and acquisitions, with 45% of these transactions being purchases of Brazilian companies by foreigners. In the same period last year, that share was 40% out of 192 transactions. The percentage is well above the one seen in 2008, before the worsening of the world crisis, with 663 mergers and acquisitions in the Brazilian market, and 28% of them related to purchases of Brazilian companies by foreigners.

"Brazil had a faster recovery than other countries and has become a destination for foreign investors in every kind of business," says Luis Motta, partner at KPMG in Brazil who leads merger and acquisition research. Mr. Motta recognizes that the worsening economic fundamentals in 2013 had an impact on the overall M&A market, with a smaller participation of foreign investors — they accounted for 44% of total transactions in last year compared to 49% in 2012. "But despite the deterioration, Brazil is a large market with very strong spending power among classes C and D,” Mr. Motta explains. "Growing 2% given the country’s size is not negligible and generates business opportunities," he adds.

Mr. Motta says that foreigners’ appetite remains strong, although deal prices today are a little smaller. Still, he points out that of the 27 deals in information technology in the year, 13 were headed by foreigners; international investors also purchased 13 companies out of the 20 transactions in Internet and e-commerce; in the service industry, foreigners were present in five deals out of nine in the segment. "If we the current scenario does not face a disruption, such as a recession, for example, the volume is likely to remain," Mr. Motta says.

Alejandro Vollbrechthausen
Alejandro Vollbrechthausen, president of Goldman Sachs in Brazil, believes that to understand foreign direct investment flows to Brazil one should remember that the country is embedded in a broader context of potential destinations for capital allocation, including South Africa, Indonesia, Russia and Mexico. To Mr. Vollbrechthausen, the geopolitical mess Russia and Ukrainian separatists got in has brought uncertainties and many investors have rushed to protect themselves from any surprise by reallocating their funds to country like Brazil.

"In this case, especially investors focused on emerging markets did not resort to US Treasuries or German Bunds. I would say Latin America was the region that most benefited from this and, within it, Brazil," Mr. Vollbrechthausen points out. "Russia is much targeted at various commodities and countries such as Brazil and Mexico have a similar profile," he adds.

Both Messrs. Vollbrechthausen and Faria also evaluate the real’s devaluation in recent months has had a major role in this game. For Mr. Faria, the trend ends up helping to attract more funds into the country, since Brazilian assets get cheaper. Mr. Vollbrechthausen says much of the FDI flow coming to Brazil is driven by opportunities for adjustments in relative prices. "In terms of direct investment, when looking at relative prices, opportunities in Brazil are good. We can see those prices have rebounded a lot in the last two months," he explains.

Even local analysts do not seem so pessimistic when it comes to expectations for the FDI flow to Brazil. The market median in the Central Bank’s Focus report indicates that the country is expected to receive $60 billion in direct investments in 2014, dropping to $55 billion next year. Deutsche Bank follows market expectations for this year, but estimates a larger volume of $65 billion FDI for 2015.

For the Goldman Sachs president, Russia’s problems will take time to resolve and this keeps opportunities in Brazil. "Flows are likely to continue more or less stable," he says. Mr. Motta, with KPMG, says that if the current economic scenario remains, Brazil will keep attracting foreigners. "The Cup has advanced some deals and others will occur later. No one will give up making a long-term investment in Brazil because it’s the Cup year,” Mr. Motta adds.

• Tweetar