Successfully investing in Brazil

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last updated on 27 May 2020 | reading time approx. 3 minutes

  

 

 

How do you assess the current economic situation in Brazil?

The long discussed and urgently needed pension reform was passed by the Congress before the end of 2019. This was one of the most important positive signals that the economy needed for recovery. Over the next 10 years, it will save around 800 billion Brazilian Real in public spending and significantly ease the strain on the budget.

 
However, it is clear that the pension reform alone is not enough to boost the economy. Finance Minister Paulo Guedes is aware of this and the government is trying to initiate further important reforms such as tax reform and administrative reform.

 

A comprehensive administrative reform is intended to control public spending, in particular with new rules for civil servants' careers. It is also urgently expected that the pension reform will be implemented for civil servants in the federal states and municipalities who were left out in the pension reform of 2019. Unfortunately, communication between the government and Congress does not work optimally due to polemical statements by the president.

 

Besides the important reforms, there are other positive signals. For example, Brazil's key interest rate has been lowered to 4.25 per cent (as of 9 March 2020). After Turkey, this makes Brazil the country that has cut its interest rates the most. Brazil, which has always had one of the highest key interest rates in the world, is thus approaching an internationally customary interest rate. This will have an important impact on investors and consumers. Loans from Brazilian banks are no longer unaffordable, as they were before.

 

The trade agreement between the European Union and Mercosur was approved after 20 years of negotiations and must now be ratified by the respective countries. This trade agreement represents a huge opportunity for investors in Brazilian companies, as import costs will be significantly reduced.  On the other hand, Brazilian products will experience many new market opportunities. Inflation is under control. After 2019 already closed with an inflation rate below 4 per cent, the Brazilian central bank expects an inflation rate of 3.20 per cent in 2020.

 

How would you describe the investment climate in Brazil? Which sectors offer the largest potential?

The Brazilian government has set itself the objective of increasing economic development opportunities for companies and reducing bureaucracy. These initiatives have been enthusiastically received by entrepreneurs.

 

As already mentioned, loans have become less expensive as a result of the interest rate cuts, and the real estate sector and thus the construction industry is already noticing increased demand. The automotive industry also benefits from lower interest rates. A weak Brazilian Real and thus high import costs advantage national production. In particular, automotive suppliers with local production have a competitive lead. The government is also pursuing extensive privatization projects. The Partnership Programme for Investments (PPI – „Programa de Parcerias de Investimentos”), which was already adopted in 2016 under President Temer, intends to implement infrastructure projects in cooperation between private and public companies.

 

What challenges do German companies face during their business ventures into Brazil?

Now, the high currency fluctuations are the biggest challenge for entrepreneurs. The Brazilian real is the currency that has lost the most value worldwide in the last weeks of March. After Donald Trump banned air traffic between Europe and the USA, the dollar for the first time exceeded the magic mark of  5.00 Brazilian Real to 1.00 United States-Dollar. Worse than a high exchange rate, however, are their fluctuations. A high exchange rate can be expected, but high fluctuations cannot be calculated. Many Brazilian subsidiaries of German companies that depending on import and resale are experiencing high exchange rate losses, as the import costs cannot be passed on to the customers or cannot be passed on in full.

 
On the other hand, exports from Brazil are of course attractive in times of a weak Brazilian real.

 

What effects does the political environment have on German Companies?

The economic measures and objectives of the government are business-friendly, so that companies already existing in Brazil benefit from them. Despite the positive signals and reforms mentioned above, investors continue to observe the government's political developments. Negative headlines in the international press, particularly in the environmental protection sector, are damaging Brazil's reputation.

 

In your opinion, how will Brazil develop?

At the moment international crises (keyword: Covid-19) are disrupting the recovery of the Brazilian economy. It is therefore all the more important that the outstanding but urgently needed reforms are implemented by the government and Congress. Unfortunately, the recovery of the Brazilian economy, which seems so close, has moved a little further into the future.

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