2009 Brazil investment guide, By Jonathan Ball
Investment International presents a concise and informative guide to investment in Brazil. Incorporating material kindly provided by Experience International
Stunning natural beauty, year round sunshine in many parts of the country and a friendly population together with a stable political and economical climate, makes Brazil one of the top tourist and investment destinations in the world.
Brazil is not only the largest economy in South America, but it is also one of the ten largest economies in the world. A stable political system, falling unemployment, low inflation, firm currency and strong economic growth have all attracted significant foreign investment into the country and stimulated the development of major real estate projects.
Significant government investment in the country’s infrastructure, thriving tourism, beautiful scenery, exciting culture and reasonable prices are only a few of the many factors that contribute to the attractiveness of investment in the Brazilian property market.
Brazil genuinely offers a unique investment opportunity. It is the fifth largest country in the world covering nearly half of South America having an area of 85 million square kilometres and over 7,300 km of coastline. Brazil is famous for its rainforest which is renowned for its distinctive and unique habitat and the northeastern coast, which is a series of undulating dunes and cliffs with breathtaking scenery and beaches ranked among the best in the world.
Brazil is free from hurricanes, floods, storms, earthquakes and tsunamis. The climate is quite varied; in the south, the weather is subtropical with heavy torrential rain while in the northeast, it is dry with a higher temperature, a gentle sea breeze and over 300 days of sunshine a year.
Brazil Key Statistics
Population growth rate: 0.98% (2008 est.)
Government type: Federal Republic
GDP: $1.269 trillion
GDP growth rate: 4.5%
GDP per capita: $9,700
Labour workforce: 99.47 million
Inflation rate: 4.1%
Current account balance: $10 Billion
Industrial production Growth: 4.5%
Agriculture products: coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef
Main industries: Textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery and equipment
Brazil is a peaceful country that enjoys a stable democratic political system, with no political enemies, no ethnic or cultural conflicts and no threat of terrorism or civil unrest. Brazil’s democratic institutions have enabled the international and domestic markets to maintain their confidence in Brazil’s political system. President Lula da Silva is a progressive leader who has since 2003, implemented effective economic polices and new successful social reforms that placed Brazil among the high ranking countries in the
UN Human Development Index.
The Brazilian economy is the biggest in Latin America and the microeconomic conditions have never been as promising for investment as they are today. A recent study by the World Bank now ranks Brazil as the 10th largest economy in the world and reported that the Brazilian economy has remained stable as a result of prudent macroeconomic management, firm fiscal and monetary policies and good debt management.
The Brazilian government has over the last few years successfully adopted effective macroeconomic policies that resulted in controlled inflation, improved productivity, positive balance of trade, large international reserves, stable currency and impressive export performance. It has also implemented programs that improved fiscal control, significantly encouraged investment and enabled a steady reduction in the prime interest rate over the last few years to a level that supports a sustainable economic growth.
The rate cuts of the past five years brought down the policy interest rate (SELIC rate) from over 20% to just over 11.00%. Last year, Brazil’s Central Bank gained further confidence when it decided to temporarily pause the series of consecutive rate cuts in its last meeting to assess the impact of passed rate cuts and other macro-economic stimuli. The growth in the economy has also resulted in reduced unemployment and an increase in average earnings. This growth is expected to continue, according to the OECD (Organisation of Economic Cooperation and Development), which predicts a Brazilian GDP1 growth rates above 4 % in the next three years. This is well above the ten year average of 2.5%.
Gross Domestic Product
There has been a steady reduction in the prime interest rate over the last few years to a level that supports a sustainable economic growth.
The Central Bank of Brazil has reported that conditions were favourable for continuing growth and stable interest rates with no apparent threat of inflation because of supportive exchange rate trajectory and as the various economic indicators are below inflationary levels.
With strong economic expansion, stable currency and nominal interest rates falling to record lows, the consensus is for continued growth. Deutsche Bank predicts that the Brazilian financial and economic outlook remains strong due to the improved economic stability and declining interest rates.
The Brazilian government efforts have been applauded internationally with the OECD reporting that considerable progress has been made in recent years in achieving macroeconomic stability and restructuring of the Brazilian economy. Productivity has risen and the implementation of a series of structural reforms has been successful. In 2007, Standard and Poor’s rating services raised its Brazil longterm sovereign credit rating and long-term local currency credit rating. Confidence of foreign investors has increased considerably as the economy has shown strong, stable and sustained growth over the last few years which resulted in FDI (Foreign Direct Investment) pouring into the Brazilian economy at unprecedented rates and is expected to continue in the foreseeable future as all economic indicators point towards sustainable and robust growth.
The Brazilian agriculture and farming industry has also attracted significant international investment. While private bankers and investment funds have been buying aggressively in the Brazilian stock and bond markets creating considerable demand for the Brazilian real which has doubled in value against the dollar over the last five years.
FDI (Foreign Direct Investment) pouring into the Brazilian economy at unprecedented rates and is expected to continue in the foreseeable future as all economic indicators point towards sustainable and robust growth.
The Brazilian currency has been one of the best performing currencies in the last couple of years which has assisted in the reduction of interest rates and the improvement of export revenue from the sale of Brazilian commodities and agricultural products.
The rising Real has also enabled the Brazilian Central Bank to build up its foreign currency reserves to record levels which has provided further support to the Brazilian currency. A survey based on data from the International Monetary Fund (IMF) shows that 2007, was a year of records in Brazilian foreign trade and FDI. Brazil has accumulated more dollars than any other emerging country in the world with its Foreign exchange reserves jumping 110.77% - the equivalent of $ 94.7 billion.
Brazil has accumulated more dollars than any other emerging country in the world with its foreign exchange reserves jumping 110.77%.
Brazil has not only paid its IMF and Paris Club debts, but also continued to buy back its external market debts while eliminating the dollar component of its internal debt. The Brazilian Treasury reported continuing fiscal and current account surpluses and reserves six times higher than a year’s worth of external market debt repayments.
With all these positive developments, Brazil was able to issue bonds in its national currency, the real, for which demand has wildly exceeded supply, enabling billions of dollars to flow into the country.
This surge in financial market activity has resulted in increased private sector bank lending and a surge in domestic private bond issuance with domestic Brazilian corporations being able to tap into the international bond and loan markets because of much lower country risk factor, resulting in even better growth prospects and economic prosperity.
Brazil has a wealth of natural resources and because of favourable agricultural climate and massive areas of rich fertile agricultural land, it is a world leader in the production and trade of many important commodities such as ethanol, coffee, soybeans, oranges and sugarcane. The recent sharp increase in commodity prices and the integration of China, a major buyer of commodities, into the world economy have provided a further boost to the Brazilian economy and balance of trade.
Looking at long term growth, a Goldman Sachs study predicted that Brazil will be one of the top five economies in the world by 2050 and Deutsche Bank confirmed that on the long run the demographics of Brazil favour strong economic growth because of the predicted increase in its working population.
Fabio Kanczuk, professor of economics at the Universidade de São Paulo said that Brazil will be attracting large investments from companies interested mainly in the domestic market and the Times newspaper reported that several leading UK city financiers recommended Brazil as it represented very good value for investors.
Is Brazil immune to a US-style recession?
Deutsche Bank believes the emerging markets in general and Brazil in particular will weather the storm that’s hitting the US and other economies for the following reasons:
1. Significantly improved external solvency
2. External liquidity remains abundant
Brazil is one of the major economies in the emerging markets and the continued strong growth in its economy is likely to attract further foreign investment.
3. Internal Demand
Further growth in Brazil is mainly fuelled by domestic demand, rather than external demand.
4. Improved macroeconomic policy regimes
Improved external solvency, liquidity and effective macroeconomic policies have resulted in Brazil being less sensitive to external demand conditions.
5. Credible fiscal policies
The Brazilian government has put in place sustainable policies which resulted in lower inflation, external solvency and sustainable public debt dynamics.
Brazil is also protected from a world energy crisis as it no longer depends on any external petroleum supplies because of its large production of ethanol, and as 85% of its total energy needs are met from renewable energy resources.
This protects it from oil price fluctuations in the international market, helps it to control inflation and substantially reduce any external supply problems that could seriously affect its growth and disrupt its industrial production.
Brazil is sending out strong signals that it has embarked on a prolonged period of economic stability with strong prospects for sustainable growth. The present economic conditions in Brazil demonstrate very favourable conditions for investment, owing to a number of important factors which include:
• Inflation at an all-time low
• Falling interest rates and stable currency
• Political and economic stability
• No restriction on foreign investors for exporting profits or disinvestment of capital
• Solid democratic government institutions, credible macroeconomic management and respect for foreign
companies’ rights and agreements
• Firm fiscal policies and the gradual reduction of the Brazilian prime rate
• Continuing reduction of public debt
• Projected strong economic growth
• Significant increase in the number of commercial transactions
• Positive balance of trade
• Better bond rating
• Strong industries which include commercial airplanes and cars manufacturing, steel industry (8th largest producer in the world), chemical industry (7th in the world), shoe and leather industry (3rd in the world) and the textile industry
•Energy and oil self-sufficiency
• Home to the largest forest industry in Latin America
• Large reserves of iron, manganese, tin and gold and over 1/3rd of the world’s water reserves
• Excellent railway and water systems
• Large number of airports and harbours
• Modern telecommunication systems
• Brazil has 22% of the world’s arable land
• The Brazilian economy represents almost half of Latin America’s GDP.
• The country presents massive opportunities because of the size of the domestic market (191 million people)
• Brazil is nowadays one of the world’s 20 major exporters, selling $137.5 billion in products and services to other countries
• Brazil has the fifth largest purchasing power in the world
Brazil has it all but it’s not until recently that it has been discovered by foreign investors. The number of tourists visiting Brazil has increased considerably from about 2.5 million in 1997 to over 9 million today. The relaxed pace of life, warm climate and absence of wars or political threats are attracting investors and holiday makers to Brazil like never before.
Brazil reveals an incomparable diversity of landscape and culture and many attractions that make Brazil a top tourist destination.
• Plenty of sunshine
• Breathtaking scenery and un-spoilt nature
• Amazing culture
• All year round warm and sunny tropical climate
• Endless beautiful sand beaches
• Excellent access
• Good infrastructure
• Welcoming population
• Low cost of living
• Famous football culture
• Exotic food and drinks
• Vast rainforests
Brazil caters for all tastes from lively and fascinating cities to amazing night life, exceptional festivals, interesting wildlife, beautiful beaches, great outdoors, quiet and charming rural villages as well as friendly and most pleasant population.
The Property Market
A combination of strong and sustainable economic growth, low inflation, stable currency, oil self-sufficiency, increased exposure to the international markets, significant FDI and flourishing tourism have all drawn in substantial investments into Brazil’s real estate industry with the influx escalating under the prevailing favourable conditions.
This activity is further intensified by:
• Cheap labour and inexpensive building material
• Undervalued real estate prices in certain areas of the country offering outstanding growth potential
• Active government incentives for foreign investment which include simplified buying procedure, 100% foreign land and property ownership, a registration process that ensures a free and clear title, low taxes and fees associated with purchasing and owning
property and no restrictions over the transfer of profits or capital
• Low interest rates
• No visa requirements for most Europeans for visits of up to 6 months
• The Brazilian Real is still favourable at the moment making it cheap for foreign investors to buy Brazilian property
• A surge in the number of tourists with over 10 million short term tourists during 2008 (Embratur the Brazilian Tourist Authority)
• A sharp decline in US interest rates which translates into lower financing costs in emerging markets and improvement in capital appreciation prospects
• Brazil’s population is expected to grow to about 220 million by 2020; an increase of about 30 million over a short period of time
• The Ministry of Tourism invested over the last few years over R$ 1,7 billion (US$1.1 billion) in tourism related projects and infrastructure and is planning to invest more
Active government incentives for foreign investment which include simplified buying procedure, 100% foreign land and property ownership, a registration process that ensures a free and clear title, low taxes and fees associated with purchasing and owning property and no restrictions over the transfer of profits or capital.
Where to invest and why
As the population density of the central and western parts of Brazil is very low, real estate investment is mainly focused on the most populated areas which are dotted along the eastern coast of the country. The southern parts of the eastern coast where the main cities of Rio de Janeiro and Sao Paulo lie, have over the last decade, witnessed a considerable surge in real estate investment and prices, however, it is now the Northern parts of the eastern coast that are witnessing significant domestic and international interest.
The Northeast of Brazil has the following states: Alagoas, Bahia, Ceará, Maranhão, Paraíba, Pernambuco, Piauí, Rio Grande do Norte and Sercipe. The region has over 51 million inhabitants and 3,300 km of coastline.
Research by ADIT Nordeste (Association for the Real Estate and Tourism Development in the Northeast of Brazil) has revealed that the Northeast will, in the medium term, be one of the most important second home and tourist destinations in the world.
Why the Northeast?
Location & accessibility
• The Northeast has the safest cities in Brazil
• The Northeast has witnessed a massive increase in the number of affordable European charter and scheduled flights
• Flying time to the Northeast has been cut in half through direct flights from Europe: The Northeast is only seven hours from mainland Europe (Lisbon) and just over 9 hours from London
• Sunny and stable weather all year long with no seasonal fluctuation, and very little rain and on average over 300 days of sunshine a year
• Year round average temperature of 28 to 31C with a pleasant sea breeze and low humidity. Temperatures rarely fall below 20°C
• There is virtually no risk of floods, hurricanes, storms, tsunamis or earthquakes
• The Northeast has pure and clean air, largely free from pollution