Can investment in Brazil react? The reasons to believe and doubt

One of the frustrations with the 2023 Gross Domestic Product (GDP) was the 3% drop in productive investment. In the same period, economic activity grew 2.9%. It was the second consecutive year in which disbursements on machinery, equipment and civil construction – grouped under the heading Gross Fixed Capital Formation (GFCF) – performed worse than that of the economy as a whole.

Economists expect an improvement from now on, albeit timid. XP’s expectation, for example, is a 1.3% growth in investment in 2024 and 2.8% next year. “The worst moment seems to be behind us, although the short-term scenario remains challenging”, say economists at the brokerage.

There are signs of recovery in investment. The production of trucks and buses increased 28.7% in the first two months of 2024 compared to the same period last year, as pointed out by the National Association of Motor Vehicle Manufacturers (Anfavea). Imports of machinery and equipment grew 7.3% between January 2023 and 2024, as indicated by the Brazilian Association of the Machinery and Equipment Industry (Abimaq).

Another positive sign comes from the automobile industry, which since the end of last year announced investments of R$86 billion in the country until 2032. One of the consequences could be the increase in investments in fixed assets. “The sector has a strong multiplier effect on the rest of the economy”, highlights Helena Veronese, chief economist at B.Side Investimentos.

Check out the factors that can contribute to an increase in productive investment in the country below. And also those that can hinder this progress:

What favors the expansion of investment in Brazil

Three factors, in the assessment of analysts interviewed by People’s Gazettecan stimulate a greater volume of investments in the economy:

• resources from the National Bank for Economic and Social Development (BNDES);
• accelerated depreciation measures; It is
• stronger recovery in the construction industry, driven especially by the low-income real estate segment.

BNDES resources

The federal government recently launched a plan to “reindustrialize” the country. One of the instruments will be the BNDES, which announced the allocation of R$300 billion by 2026 for this purpose.

The bank’s real disbursements (above inflation) to Brazilian industry are at historic lows at the development institution. “We believe that disbursements will increase from now on, but there is high uncertainty about the net impact on the credit market”, highlights the brokerage’s analysis team.

The concern, however, is focused on the long term: an increase in the release of public resources, such as those from BNDES, could reduce the effects of monetary policy, limiting the space of the Central Bank’s Monetary Policy Committee (Copom) to reduce declines. at the Selic rate. In this way, those who do not have access to the development bank will end up paying higher interest rates to compensate for the Selic’s “loss of power” over the total credit market.

Accelerated depreciation

Accelerated depreciation works as an anticipation of revenue for companies, by allowing the value used to purchase machinery and equipment to be deducted from future Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) declarations. ).

On Tuesday (19), the Chamber of Deputies approved a government project granting this tax incentive to companies in sectors that will be defined later, by decree. The proposal still needs to be analyzed by the Senate.

According to XP, under normal conditions, the deduction would occur gradually over 25 years, following the rate of depreciation of capital assets. In the government’s proposal, approved by the Chamber, the rebate on equipment purchased this year could be carried out in just two years – half in the first and half in the second.

Resumption of civil construction

One factor that can stimulate investment in the productive sector is the resumption of civil construction due to the fall in interest rates, reduced production costs and solid demand in several regions.

“Recent signs suggest that the increase in the real estate segment aimed at low-income families may be more intense than initially expected”, highlights the brokerage. Last year, the value of sales grew 55.1%, reaching R$26 billion, as highlighted by the Brazilian Association of Real Estate Developers (Abrainc).

What hinders the advancement of investment in Brazil

On the other hand, three factors can affect the growth of investments in the economy:

• headwinds on the global stage;
• uncertainties in the conduct of economic policy, including in the tax area; It is
• contractionary monetary policy for longer.

Headwinds on the global stage

The broker recalls that external conditions were relatively favorable for the country. However, a series of factors can hinder investments: one of them is the escalation in geopolitical tensions. In addition to the war between Russia and Ukraine, there is the conflict between Israel and the terrorist group Hamas in the Gaza Strip, which began in October.

Uncertainties in the conduct of economic policy

There is also an increase in uncertainty about the conduct of monetary policy in the largest global economies, which has increased risk aversion in recent weeks. The result is that the currencies of emerging countries have devalued. In the case of Brazil, the dollar was once again traded in the R$5 range.

The persistence of this scenario could worsen projections for the import of machinery and equipment and, consequently, investment dynamics. “The risks of recession in central economies come and go, also leaving the outlook for raw material prices more uncertain”, highlights XP.

Another concern regarding the progress of investments comes from the fiscal situation, even with projections of improvement in the primary result (the difference between what the country collects and spends, excluding expenses with interest on public debt).

The continuous increase in public debt in the coming years is expected to maintain risk premiums on domestic financial assets. This situation is reinforced by concerns about parafiscal policies, such as the greater release of BNDES credits.

“These elements increase the perception of risks, reducing business confidence and, consequently, affecting investment decisions. Furthermore, uncertainties surrounding government measures that increase the tax burden may discourage investors, at least in the short term” , highlights the broker.

An alternative to minimizing these impacts, according to Helena Veronese, chief economist at B.Side Investimentos, is for the government to try to pursue the goal of zero deficit in 2024 as much as possible – although she does not believe that this will be achieved.

Veronese points out that this behavior could help increase the confidence of both consumers and businesspeople.

Research by the Brazilian Institute of Economics of Fundação Getulio Vargas (FGV Ibre) shows that consumer confidence is at its lowest level since May, even with the good situation of the job market and inflation under control. This is because the weight of debt still seems to limit families’ purchasing capacity.

At the same time, less encouraging forecasts about demand caused business confidence to record its first drop in nine months.

Contractionary monetary policy for longer

One factor that may make it difficult to make investments is the rate of reduction in the Selic rate. The expectation is that the rate will reach 9% per year by the third quarter. This level is considered by many economists as neutral, that is, it does not impact the economy positively or negatively.

There are, however, risks that the current interest rate reduction cycle could end sooner than expected, with a higher final rate. This could occur in a scenario of more resilient inflation, stronger than expected domestic activity, worsening global environment and exchange rate depreciation.

On Wednesday (20), by reducing the Selic by 0.5 percentage points, the Central Bank sent a message in this direction. Instead of saying they anticipated further half-point reductions “at the next meeting,” as they had been doing, committee members narrowed that horizon to “at the next meeting.”

Investment rate should not advance much

Analysts interviewed by People’s Gazette point out that it is unlikely that the investment rate will have a significant evolution in the next two years. Last year, according to IBGE, it corresponded to 16.7% of GDP. For 2025, XP Investimentos’ forecast is 17.2%.

Growth, however, is insufficient to solve the long-standing problems of the Brazilian economy, says the president of the board of trustees of the Fundação Instituto de Pesquisas Econômicas (Fipe), Simão Davi Silber: “[Nos níveis atuais e projetados] the investment rate does not allow us to replace what is aging”.

According to analysts interviewed by People’s Gazettethe ideal for emerging countries like Brazil would be for the investment rate to be between 20% and 25% of GDP, to enable greater growth without increasing inflation and to meet the growing needs of society.

Another problem highlighted by Silber is that the country’s productive capacity has not been growing. It is a trend that has been present since at least 1996. Since then, economic activity has expanded by 83.4%, while GFCF – which measures productive investment – ​​has increased by 64.6%.

The Brazilian economy, therefore, has been driven more by consumption than by investment; and without the latter, the ability to continue growing is increasingly compromised.