Foreign investor worries about Lula’s direction – 05/27/2023 – Market

President Luiz Inácio Lula da Silva (PT) encouraged foreign investors with the speech that Brazil would become more socially and environmentally fair, without neglecting fiscal responsibility and respect for established rules.

However, the months went by, and tempers cooled in the face of a succession of contradictory signs from the government, say experts from the most diverse areas who live with money holders abroad.

For those who work with infrastructure, an area that demands billions of dollars in the long term, the surprise was the isolation of Marina Silva, Minister of the Environment, in the first divergence.

Sector specialists say the arm wrestling set up by the Minister of Mines and Energy, Alexandre Silveira, in an attempt to impose oil and gas exploration on the equatorial margin, the strip between Amapá and Rio Grande do Norte, passing through the mouth of the Amazon River, is inexplicable. .

“Marina, after Lula, is the symbol of Brazil’s commitment to this agenda, and pushing her to the sidelines in a discussion about oil in the Amazon is shooting herself in the foot with a cannon”, says Claudio Frischtak, partner at the consultancy Internacional de Negócios Inter B.

The government’s green agenda hopes to attract foreign capital to the sector. According to Frischtak, it has been some years since Brazil has attracted new long-term foreign investors. Only those who are in the country invest.

Proof of this, he explains, was the rebidding of Natal airport (RN), in April. He had two interested parties when he could have had four. The winner was the Swiss Zurich Airport International, which already operates in four other airports in Brazil.

There are other implications, says lawyer Eduardo Felipe Matias, a specialist in international law.

“We’re not even going to get into the technical merits of the project. It’s in the Amazon, the place that attracts international attention. This arm wrestling politicizes the issue and is a banana peel for the government,” he says.

“To weaken Marina is to give ammunition to those who oppose the Mercosur-European Union agreement, putting contributions from other countries to Funda Amazônia at risk, worsening the image of the Brazil brand and compromising investments by funds, companies and supply chains.”

Calling Brazil’s international image into question is also abusing the country’s already fragile position in the investment world, say experts.

Asian countries remain preferred by foreign investors, says Cesar Masry, head of emerging markets and global investment at Goldman Sachs. Nobody ignores Brazil, but it is down.

“There is a certain hesitation on the part of global investors in relation to Brazil”, says Masry. “Political risks are still significant, the macroeconomic environment is fragile, requires reforms, and inflation is high, although it has subsided.”

RACE AFTER CRASH WITH CENTRAL BANK

In this context, attacks on the president of the Central Bank (BC), Roberto Campos Neto, are seen as an additional component to scare away capital.

“Last year, there was a breath of optimism among foreigners, and we saw a good inflow of money on the Stock Exchange with the expectation and, later, the confirmation of the election of a more pragmatic Lula”, says economist Evandro Buccini, managing partner of the manager. of Rio Bravo resources.

“But the attacks on BC fueled skepticism, and investors are now waiting.”

A TradeMap survey shows that foreigners actually entered the B3 with force in October, December and January. In February, precisely the month that Lula opened fire on Campos Neto, withdrawals began, and the foreigner has not returned until now.

The annual balance up to May is positive, but it would be negative by R$ 1.9 billion if it weren’t for the increase in January, says Einar Rivero, from TradeMap. From January to May 22 of this year, R$ 10.7 billion in foreign funds entered the Stock Exchange. In the same period last year, it was R$ 51.5 billion.

FDI (Foreign Direct Investment) followed a similar path. It has been falling slowly since August last year, when it totaled US$ 10 billion (R$ 50 billion). It plummeted from US$ 7.6 billion (R$ 38 billion) in March to US$ 3.3 billion (R$ 16.5 billion) in April.

The international consultancy Kearney also caught oscillations. It makes a ranking of the 25 most attractive countries for foreigners. Brazil did not appear on the list in 2021, nor this year. Last year, it ranked 22nd.

In 2023, Kearney launched a list of the most attractive emerging markets. Brazil ranked 7th out of 25 nations, one position ahead of Mexico but behind India, United Arab Emirates, Qatar, Thailand and Saudi Arabia.

Kearney’s partner in Brazil, Sachin Mehta, says that the survey took place in January and he is not sure if that would be the country’s position today.

“The survey showed concern about political instability, the regulatory and fiscal environment, with infrastructure, and these elements were kind of frozen at the beginning of the year, without us knowing where it is going. The vote on the framework may reduce part of the uncertainty about the fiscal issue “, he states.

“Foreign investors interested in Brazil are also concerned when the government changes because there is always the expectation of regulatory change, and they wait for what will come.”

In this regard, analysts are unanimous in stating that the signs are bad.

The government changed, for example, the Sanitation Framework, and is now trying to prevent Congress from overturning the changes. The use of precatories in concessions and grants to reassess the instrument, in turn, was suspended.

Another norm under review is the tie-breaking vote at Carf (Administrative Council of Tax Appeals), a body that judges cases of taxpayers who feel aggrieved by the tax administration.

WAITING FOR STABILITY THAT DOESN’T COME

“The issue of legal uncertainty in Brazil is omnipresent and frightening for foreign investors”, says Piero Minardi, president of ABVCap (Brazilian Association of Private Equity and Venture Capital).

Private equity and venture capital are types of private risk investment, applied directly to companies, often via funds. The result comes from the growth of the business itself and the sale of company shares on the Stock Exchange.

Since 2004, says Minardi, this type of capital has been in 60% of the companies that entered into an initial stock offering (IPO, its acronym in English) on the B3. Azul, Droga Raia, CVC and Hering are examples.

Over the past six years, however, these foreign funds have been leaving the country.

“There was a combination of factors, such as exchange rate devaluation, recession and reduced growth”, says Minardi. “But what bothered the most was a reinterpretation by the Federal Revenue, in 2018, of the tax exemption that had been valid since 2006. Some assessments were even retroactive. Foreign investors look at this and their hair stands on end.”

The volume of foreign investment is one of the thermometers of global confidence in Brazil. The indicator changed levels in Lula’s first two terms, a period of boom in commodities, specific reforms and a fiscal policy with surpluses in primary results.

In April 2008, the country achieved investment grade, the good payer seal, attracting higher figures. The peak occurred in 2011. It was US$ 102 billion (R$ 511 billion), according to the criteria of the Central Bank.

From then on, the country entered a tumultuous period. In 2015, it lost its investment grade status and began to suffer from political and economic instability. Many investors await the end of this phase.

PRESIDENCY REAFFIRMS COMMITMENT TO ENVIRONMENT AND GROWTH

Sought after by the report, the Presidency of the Republic highlighted that the federal government works to encourage the attraction of investments and reaffirms the commitment assumed during the campaign with the environmental agenda.

“The protection of the Amazon Forest and other Brazilian biomes, actions to combat climate change and work aimed at the transition to a green, sustainable and low-carbon economy and with an increasingly clean energy matrix are on the central agenda,” he said. in note.

The effort of the Lula administration, he added, is already recognized by important nations, which have returned to contributing to the Amazon Fund, stopped since 2019 and reactivated by means of a decree on January 1st. There are already announcements of contributions from the United Kingdom, the United States and Germany.

The note also states that the current management has been acting systematically to redirect Brazil towards a path of growth, with a balanced budget, robust finances and lower interest rates for Brazil to return to fiscal and social growth. Among the measures already announced, the new fiscal framework and the tax reform stand out.