Following some recent tough economic times, Brazil has come to be seen as a high-risk market for investors.
In 2015, Foreign Direct Investment (FDI) in Brazil declined rapidly. In fact, between May and June 2015, FDI fell by over one billion dollars Why are investors seemingly turning their backs on Brazil? The downturn seems be the result of investor caution over infrastructural instability: Brazil’s legislative framework doesn’t reassure investors and a series of political scandals coupled with a troubled oil and gas industry has made investors wary.
According to the UK government, the risks associated with investment in Brazil were outlined as:
- Economic recession in 2015
- Unpopular government due to austerity cuts, political scandal, bribery and corruption
- Economic and social inequalities
- Threat of terrorism
- High crime rate (street crime eg muggings) and also serious organised crime
- Intellectual property rights are restricted to the country of origin
These are all contributing factors to the lack of investment and they are likely to take time to resolve. Does this mean that Brazil will be closed to risk-averse investors for the foreseeable future?
The opportunities in Brazil that may mark a turnaround
Despite the obvious risks, the UK Trade and Investment (UKTI) has identified Brazil as a high-growth market GDP growth is expected to achieve 7% in the Brazilian markets this year – that’s an alluring perspective for any investor. So should investors be considering Brazil?
Generally speaking, the Brazilian services industries – mainly financial, airport and business – offer the best prospect of a return. The retail and consumer goods market is also a potential area for investment.
The Latin American Private Equity and Venture Capital Association recently reported that a US-based venture capital firm has set up a fund with a $2bn target aimed at financing expansion and buyouts in Brazil, Mexico and Argentina. The fund targets areas where high growth is expected. This is certainly an interesting development for any investor keeping an ear to the ground.
Other opportunities to keep an eye on
Since 2014, the Brazilian real has fallen 40% against the dollar. The Brazilian government has increased its commitment to agriculture as a result and so this is a good prospect. Legislation was introduced in 2014 to encourage foreign investment in Brazilian farmland and Brazil quickly became the world’s second-largest importer of beef following an agreement with the US.
Less than 15% of Brazil’s population in the age category 16-24 is in secondary education. The swiftly-growing Brazilian middle class wants to find more opportunities for its children and the Brazilian government is actively encouraging investment in the educational sector in response to this new demand.
It is claimed, by 2035, Brazil could theoretically be contributing 30% of the world’s oil supply. That oil hasn’t gone anywhere and is simply waiting to be tapped. Royal Dutch Company plans to send the majority of a $5bn dollar investment to Brazil following its acquisition of the British oil group BG Energy.
With the large-scale investments of capital by foreign firms, Brazil seems ripe with untapped potential for the investor searching for a good opportunity. There are other possibilities, too, for businesses to expand in Brazil.
Opportunities for business expansion in Brazil
For businesses looking to open a branch in Brazil, there are various administrative hurdles. The better option may be to arrange a joint venture with a Brazilian operation or to simply start with a simple eCommerce venture to test the waters. This allows you as a business to tap into the Brazilian middle class and gauge the value of that newfound spending power without the risks of setting up a physical site in an unfamiliar location.
For a start, the recent World Cup and the upcoming Olympic games could be worth billions to Brazil. With 40 million Brazilians recently out of poverty, the Brazilian middle class is higher than ever before. And as a developing nation, Brazil has a lot of potential – the natural resources, young population and a growth in manufacturing means that more Brazilians are getting wealthier and therefore have greater spending power than ever before. Lastly, it’s a country of significant size and population, offering a sizeable market to businesses and investors.
Foreign businesses looking at expanding to Brazil can also protect themselves by using local expertise to act as their agent. Local distributors are better protected by Brazilian legislation and they will have a much better understanding of the local markets. A local expert will also have great contacts and there is case law protecting you as a business owner in the event that you need to terminate the agreement.
What’s the verdict?
Brazil is still a risk, despite the burgeoning middle class, investment of capital and pledges by the Brazilian government. It’s also a tricky bureaucratic environment to operate in, with a lot of cumbersome legislation and tax rules to work within. That’s why it’s the perfect time for commerce professionals to dominate the Brazilian market without needing to negotiate the notoriously tricky arrangements for setting up a physical presence for your business in Brazil.