Foreign investment in Brazil drops nearly 30% after 2022 record

The flow of foreign capital into Brazil’s productive sector fell 28.3% in the first four months of 2023 compared to the same period last year.

The balance of the so-called direct investment in the country (IDP) between January and April of this year, the first of the current administration of Luiz Inácio Lula da Silva (PT), was US$ 24.3 billion, against US$ 33.9 billion in interval equivalent to 2022, the last year of Jair Bolsonaro’s (PL) mandate. The values ​​are net, that is, capital outflows are already discounted.

Considering only the month of April, the most recent data consolidated by the BC, the net inflow of foreign investments was US$ 3.3 billion, compared to US$ 11.1 billion in the same month of last year – a decrease of 70.3% .

Despite the significant difference from one year to the next, analysts consulted by the People’s Gazette believe that the drop in the flow of capital from abroad is unrelated to the change in government and, therefore, in economic policy. In their assessment, the country continues to be a good alternative destination for investments in global terms.

“The first relevant comment is that the basis for comparison is very high”, says economist Rodolfo Margato, from XP Investimentos. He recalls that the IDP balance for 2022, of US$ 90.6 billion, was the best nominal result in ten years, which surprised all the projections made by market operators.

In January of last year, the Focus bulletin pointed to a consensus estimate of US$ 59 billion in net IDP by the end of the year among representatives of financial institutions.

“It is not a reflection of a greater fear of the government. We do not perceive a change in the interest of the initiative of global players in this sense, at least not in a sufficient volume to explain this reduction in accumulated terms for the year”, explains Margato.

“Of course, economic conditions, GDP growth, interest rate dynamics, inflationary persistence or not, these macro variables end up entering into decision-making. But I would say that there is a reflection via the conduct of economic policy indirectly, but not directly, ”he adds.

The volume of capital that entered the country in the form of participation in a national company and intercompany loans in 2022 reflected a moment of economic recovery after the brake caused by the new coronavirus pandemic.

In 2020, the first year of the health crisis, the net IDP in Brazil was US$ 37.8 billion. In 2021, the balance of foreign investments was US$ 46.4 billion.

In 2023, factors such as the lower profitability of companies and the prospect of more moderate economic growth in the country mean that the expectation for the indicator will be lower. The market median, captured by the latest edition of the BC’s Focus bulletin, projects an IDP flow of US$ 80 billion by the end of the year.

International context also weighs on foreign investment

The international context also weighs for a reduction in foreign investment, says Luis Afonso Lima, director-president of the Brazilian Society for the Study of Transnational Companies and Economic Globalization (Sobeet).

“We have an external environment that does not favor investments worldwide. Investment flows don’t like economic downturns, they don’t like interest rate hikes, and they don’t like geopolitical conflicts, which is exactly what’s happening right now. We have a combination of factors that go in the opposite direction of the increase in long-term direct investment flows to countries”, he says.

One of the sectors that would be most affected in the flow of foreign investment is oil extraction and refining, due to commodity prices abroad. “As this sector here corresponds to almost a third of total direct investments, we are especially exposed to this downward movement in prices”, explains Lima.

Despite this, the level at which the net PDI in 2023 is projected is above the historical average – excluding 2022, it would be the best result since 2014.

“In our scenario, US$ 80 billion of IDP, equivalent to 3.7% of GDP at the end of this year, continues to run well above the current account deficit, which would be US$ 40 billion, or 1.9% of GDP ”, says Margato, from XP. “It is healthy external financing when the IDP runs above the current account deficit.”

The market’s expectation for the coming years, according to the Focus bulletin, is to maintain the same level of investment, around US$ 80 billion. XP, in turn, projects a net IDP of US$ 75 billion for 2024.

“If we look at the coming years, even if we have a slightly lower projection for the next one, in terms of potential GDP, as we usually say, I think the IDP continues to rise. Not at a strong but consistent growth rate,” says Margato.

Among the reasons for Brazil to attract investments in the coming years would be the potential of agribusiness and, mainly, the generation of renewable energy, an issue that should gain relevance in the long term.

“Unfortunately, we missed the technology bandwagon; Asian countries passed in front of us. the nearshoring [estratégia de multinacionais levarem a produção para mais próximo dos mercados onde os produtos serão vendidos], which is an issue that is helping Mexico, for us it is also a little further away. I think that what we can highlight is exactly that, alternative energy sources”, says Sobeet’s president.