Foreign investment: Brazil is now ‘ugly mirror image of Mexico’ in beauty parade

April 17, 2013 12:08 am

Foreign investment: Brazil is now ‘ugly mirror image of Mexico’ in beauty parade

By Joe Leahy in São Paulo

Brazil has become used to being top of the class rather than the dunce at the back as far as rating agencies have been concerned in recent years.

So it was with some surprise it recently received a slap on the wrist from Fitch, which warned that the country’s difficulties in kick-starting its flagging economic growth were “weighing” on its rating.

“With a slower growth trajectory, making inroads into fiscal consolidation becomes harder,” said Shelly Shetty, a Fitch analyst.

It is not that Brazil is facing any kind of crisis. It still has one of the world’s largest foreign exchange reserves, at about $377bn, a sound financial system and a government and central bank still more or less committed to targeting inflation and maintaining a floating exchange rate.

It is just that Brazil, the original currency warrior accustomed to discouraging capital inflows during the boom years between 2009 and 2011, now finds itself in a different world in terms of foreign exchange and capital markets trading.Brazil was a vocal critic of loose monetary policy in the US and other developed countries. This, it said, unleashed a flood of money in its direction, strengthening its exchange rate and making domestic industry uncompetitive. But the longer-term challenge looks increasingly like being how to attract flows rather than repel them.

While Japan’s recent shift to easier monetary policy and likely continued quantitative easing by the US Federal Reserve are expected to boost flows to emerging markets in the near term, competition among developing countries for investors’ attention is increasing.

It is in this beauty parade that Brazil, with economic growth of less than 1 per cent last year and a deteriorating current account, is looking less attractive to portfolio and foreign direct investors compared with countries such as Mexico, which are engaging in political and economic reform.

“The years of accelerated foreign direct investment (FDI) flows are gone,” says Flavia Cattan-Naslausky of RBS. “Those were very much aligned with the commodity boom, and now I think that FDI has a lot more to do with positive momentum in both the economic and the political spheres,” she says. “That’s certainly why Mexico is in focus and, unfortunately, Brazil is the mirror of Mexico, and it’s the ugly mirror image.”

The Brazilian real-US dollar exchange rate tells the story. From a strongpoint of nearly R$1.50 to the dollar in mid-2011, when foreign portfolio investor interest in Brazil was strongest, the currency slipped to R$2.10 in December last year before returning to around R$1.98 in recent months.

The central bank maintains that the exchange rate is determined by markets. But analysts suspect that, since investor interest eased off in mid-2011, the Brazilian real-dollar value has been partly guided by policy makers.

With the pressure of appreciation gone, the government at first experimented with a weaker exchange rate to try to boost industry, but it was later forced to bring it back to below R$2 per dollar to contain rising inflation.

The forces weakening the Brazilian real are expected to continue into this year, with David Beker, Latin American economist at Bank of America Merrill Lynch, forecasting the current account deficit will rise to 3.1 per cent of gross domestic product this year from 2.4 per cent a year earlier.

He said 12-month net FDI hit a peak at $76.3bn in September 2011, “with momentum declining ever since”.

“Fewer FDI inflows and a wider current account deficit support the idea of a weaker Brazilian real in the medium term, consistent with our R$2.19 fair value,” Mr Beker said in a research note

The Brazilian government, however, still has a number of tricks up its sleeve to try to revive interest in its markets. Among these are potentially lifting its financial transactions tax, known as IOF, from fixed income markets.

Indeed, the real strengthened markedly earlier this month when rumours swirled that the 6 per cent IOF on foreign inflows into domestic fixed income markets and on short-term foreign loans to Brazilian firms was about to be abolished.

But many commentators believe the government will not be in a rush to relax its currency controls while it wrestles with the greater problems of inflation and low growth.

The government would prefer to see a weaker rather than a strong currency to help domestic industry. With Japan’s version of quantitative easing under way and the central bank expected to soon increase interest rates to tackle inflation, lowering the IOF now might result in too strong an appreciation of the real.

“We don’t see the government moving on a decision to partially remove capital controls quickly,” Chris Garman, an Eurasia Group analyst, said in a report.

That may be so in the near term, but in the new post-currency war world, Brazil will have to begin thinking more seriously about how to maintain its attractiveness to outside investors.

After all, those pesky foreign currency inflows are required to fund the current account deficit and much-needed investment in a country that is to play host to the World Cup in 2014 and the Olympics two years later.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: