One of Brazil’s leading financial newspapers, Valor Economico, reported today that Brazil remains a highly sought-after destination for investments, according to the findings of several surveys that measured global confidence in various markets. This report comes after Fitch Ratings and Standard & Poor cut their rating for the country’s bonds to BB+ from BBB- with a negative outlook. Moody’s also placed Brazil on review for downgrade and the International Monetary Fund recently revised its growth forecast for Brazil this year to -3.5 percent. But despite these negative indicators, investors do not seem deterred. Therefore, the report’s findings suggest that Brazil’s economic problems appear to be cyclical in nature. They also support Geopolitical Future’s model that predicts Latin America will attract more foreign direct investment in 2016 due to its relative stability compared to many parts of Eurasia, which are currently facing severe and ongoing crises.
According to the Valor Economico report, recent surveys conducted in late 2015 by consulting companies AT Kearny, Ernst & Young and KPMG all show investors still have a strong interest in Brazil. In AT Kearney’s global confidence index, Brazil ranked sixth among the world’s most popular destinations for FDI. An Ernst & Young survey indicated 5 percent of global investors consider Brazil the most attractive market and 27 percent consider the country among the three leading destinations over the next few years. KPMG’s survey of potential investors from developed economies (U.S., Europe and developed parts of Asia) named Brazil, India and China as the most attractive to global investors.
The pressing question regarding Brazil’s economy is whether or not the current economic downturn is cyclical or structural in nature. A cyclical decline would mean that the current economic problems are part of the economy’s normal expand-contract behavior, which helps to weed out inefficient businesses after a strong period of growth. In this scenario, a return to growth is possible within a year or two. A structural problem arises from flawed practices and systemic issues in an economy. Recovery in this case only becomes possible after a major overhaul and restructuring.
That a strong interest in Brazil as a destination for FDI still remains indicates the downturn is likely cyclical in nature. The Valor Economico report notes that while confidence and perceived risk may have shifted, Brazil has not been written off. Furthermore, investors’ main interest lies in buying assets which already exist in the country – multinationals, sovereign and private-equity funds, and forced sales. In general, investors are savvy about markets in which they plan to inject money and aim to buy assets when they are very cheap; in other words, towards the bottom of a cyclical downturn. If investors believed the Brazilian economy had structural issues, they would not consider it an investment destination. The Central Bank of Brazil’s bulletin Focus forecasts FDI will reach $55 billion in 2016. Though down from $63.37 billion in 2015, this estimate still makes it the leading recipient of FDI in the region, followed by Mexico.
The recent survey results confirm Geopolitical Future’s model that there is a growing distinction between the future of the Eastern and Western hemispheres. We expect the Western Hemisphere to be relatively stable compared to the Eastern Hemisphere, which is currently facing major crises, ranging from the conflict in Syria to mounting debt in some European states. Our model also notes that a byproduct of this stability will be the increased attractiveness of markets in the Americas. Due to this relative stability, there is a higher likelihood that the economic challenges in parts of Latin America, including Brazil, are part of the normal business cycle and not structural. Therefore, investors’ behavior should be taken as a strong indicator that Brazil’s economy will eventually recover. In this case, the investment community is clearly signaling that Brazil’s economic downturn is cyclical.