Russell Bedford International – Business World Magazine – Autumn 2010 - Article: The New Brazil – An Emerging Investment Opportunity

Brazil has morphed from the country destroyed by the hyperinflation of the seventies and eighties, through economic stagnation in the early nineties, into one of the new global economic powerhouses. Much of the economic recovery was a result of Fernando Henrique Cardoso’s 1994 Real Plan (Plano Real). This sought to stabilise the Brazilian economy, control the inflation that had blighted the economy for so long and strengthen Brazil’s financial institutions.

Lula da Silva’s current regime has continued these programmes and presided over an inexorable rise in living standards and the growth of the middle class. Brazil now carries the status of the ninth largest economy in the world and, according to the International Monetary Fund (IMF), is responsible for 60% of South American production. This bodes well for the future and presents attractive investment opportunities.

Where to invest?

According to data published by the Brazilian Central Bank (BACEN), direct foreign investment has grown since 2003 at an average annual rate of around 35%. During this time, investment increased from US$10.14bn to US$45.06bn by 2008 before falling to US$25.95 billion in 2009 because of the global financial crisis. These investments were mainly directed at major projects in areas such as energy, water, gas, telecommunications, finance and infrastructure. Brazil’s profusion of natural resources has also proved attractive to investors. In the energy field, less than 30% of the hydroelectric capacity has been explored and almost all the electricity is from renewable sources. The Belo Monte and Santo Antonio hydroelectric developments will further increase Brazil’s energy infrastructure and are being built in a way that is sensitive to the surrounding environment.

As for fossil fuels, Brazil ranks tenth in the list of major oil producers and is petroleum self-sufficient. Recent discoveries in the pre -salt layer could raise Brazil to the elite group of major oil exporters.

Brazil also has vast agricultural resources and is famous as the world’s largest coffee exporter. What is not so well-known is that Brazil is also the largest beef, sugar and orange juice exporter. Brazil is also the world leader in ethanol production and supplies the fuel to power 95% of the world’s flex-fuel motor cars.

Cue major infrastructure development

The pace of change in Brazil has been so quick that the country’s infrastructure has struggled to keep up. Add to this that Brazil hosts both the 2014 FIFA World Cup and the 2016 Olympic Games and it is clear there will be much construction happening during the next few years. Brazil doesn’t have the resources on its own to fund this development, so new investment is required. The Brazilian Development Bank (BNDES) estimates that US$180bn is needed by 2013.

Easing the flow of investment

Brazil has done its homework and the regulatory framework and taxation structure is in place to allow the free flow of investment. Brazil has a modern legal structure and in 2010 is imposing new accounting standards that accord with the International Financial Reporting Standards (IFRS). This increases protection for international investors.

The capital markets have evolved at a pace and have consolidated following the creation of BM&FBOVESPA, which resulted from the merger of São Paulo’s Stock Exchange and the Brazilian Mercantile and Futures Exchange. This makes BM&FBOVESPA the largest stock exchange in Latin America. This expansion of the capital markets is founded on a regulatory environment that demands good corporate governance and transparency.

An example of the atmosphere of maturity in the Brazilian markets was when Banco Santander (Brasil) achieved the world’s largest initial public offering in 2009, raising US$8bn. It is also worth recognising that Brazil has signed up to the World Trade Organisation’s multilateral trade rules. Brazil has also implemented the requirements of the Trade Related Aspects of Intellectual Property Rights (TRIPS), offering international levels of intellectual property protection.

The future is bright

The outlook for Brazil is one of growth and prosperity, and the steps the country is taking look set to lift Brazil to the global economic elite within a relatively short time. Little wonder that foreign investors are viewing Brazil as the next big investment opportunity.

For more information, contact Carlos Tortelli on carlos.tortelli@consult.com.br and Ricardo Acastro Egg on ricardo.egg@consult.com.br . Alternatively, visit the websites www.rbai.com.br , www.consult.com.br and www.russellbedford.com .