After Record Year of Foreign Investment Brazil Braces for Slowing Down in 2012

Euro and dollar Foreign direct investment (FDI) is expected to reach a new record this year in Brazil. From January to August, FDI inflows have exceeded US$ 44 billion, according to the Brazilian Central Bank. The country, however, should not remain unscathed by the turmoil that plagues the international economy, and in 2012 there may be a slowing down of foreign investment.

“Unfortunately, Brazil will not be able to escape this unfavorable scenario,” said president of the Brazilian Society of Studies on Transnational Corporations and Economic Globalization (Sobeet), Luis Afonso Lima. “We may be better off than other countries, but we will suffer, perhaps belatedly, as we did in 2009,” he added.

The reason is that investment made this year usually concern projects announced earlier, i.e. prior to the worsening of the European debt crisis and the rising risk in global financial markets.

According to the September edition of the Sobeet Bulletin, announcements of new foreign investment in Brazil are decreasing over the last few months, and have been around the world since early 2011. The practical effects will be felt next year.

“There was a significant decrease in FDI announcements in the first few months of the second half, and that is bad news,” said Lima. “The intensity of the crisis surprises us with each new day,” he said.

His analysis reflects a worldwide trend that has been pinpointed by the United Nations Conference on Trade and Development (Unctad). In a document issued this Tuesday (October 18), the organization stresses that after having posted strong growth during the second quarter, the number “the sudden worsening of the debt crisis in Europe and the United States in the second half of 2011 has truncated the growth of cross-border merger and acquisition sales in the third quarter and is likely to dampen enthusiasm for major acquisitions in the last quarter of the year.” Mergers, acquisitions and new enterprises are the main types of FDI.

To the Unctad, uncertainty stemming from the current scenario has already had a negative effect on global FDI flows from the first to the second half, reflecting the lower number of new announcements seen since the beginning of the year. As in Brazil, announcements have only begun to decrease more recently, but the actual decline in inflow should only take place in 2012.

“My conclusion is not very optimistic, on the contrary it is rather pessimistic,” said Lima, though he underscores that generally speaking, emerging countries are faring better than developed ones, as shown by FDI flows worldwide. The group of developing economies and transitional ones (the former Soviet bloc) is receiving more funds than wealthy nations.

Lower Interest Rate

The Brazilian Central Bank’s Monetary Policy Committee (Copom) ended its seventh regularly scheduled meeting of the year yesterday (Wednesday, October 19) with a unanimous decision to lower the country’s benchmark interest rate, the Selic, by 0.5 percentage points, to 11.50%.

It was the second consecutive reduction of 0.5 percentage points (the first, in a decision by a vote of 5 to 2, was at the end of August). The next Copom meeting is scheduled for November 29 and 30, and the market now expects another reduction.

The Selic started the year at 10.75% and by July, after increases in five consecutive Copom meetings, had risen to 12.50%.

In a note following yesterday’s meeting, the members of Copom justified their decision mentioning the need to “mitigate the effects of a more restrictive global environment,” a reference to the economic crisis, especially in the United States and Europe.

The note also explained the measure as part of an effort to reach their inflation target in 2012 (inflation, running over 7%, will be above the target ceiling this year).

Anba

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