The state of play: FDI in Brazil

At the end of July, the Banco Central do Brasil announced that, in June 2020, net foreign direct investment (FDI) flows maintained the trend that has been observed since March.

There were net returns to the country (divestments) of $2.9bn, a result influenced by negative reinvested earnings of $2.5bn, and net returns on equity participation (excluding reinvestments) of $1.1bn.

In the first half of 2020, these net returns totalled $15.6bn, compared with net investments of $11.2bn in the same period in 2019.

In June, after four months of net outflows, portfolio investments in the domestic market saw total net inflows of $2.4bn, of which $1.9bn was in debt securities, and $432m in shares and investment funds.

In the first six months of 2020, there were net outflows of $31.3bn and net inflows of $9.1bn. In the 12 months to June, the net outflow of portfolio investments in the domestic market totalled $47.9bn.

The central bank says that, in April, FDI amounted to only $234m, 95% less than the same month in 2019 when inward FDI amounted to $5.1bn.

As of late August, Brazil had 3.4 million confirmed cases of Covid-19, and more than 110,000 deaths. President Jair Bolsonaro has downplayed the virus, despite having contracted the disease himself, in a stance that is very much in keeping with his populist rhetoric.

A good start to the year

Before the virus hit, Brazil was performing impressively in terms of attracting FDI. However, the likelihood of the country picking up this pace again in the near term seems doubtful.

According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2020, in 2019 FDI flows to Latin America and the Caribbean (excluding financial centres) increased by 10% to $164bn. FDI rose in Brazil, Chile, Colombia and Peru, with much of this growth coming in the commodities sector, although investment in utilities and services increased as well.

Brazil ranked sixth among the top 20 host economies for FDI destinations in 2019, with inflows of $72bn, a 20% increase on the 2018 figure. Investors into the country were mainly attracted by the oil and gas extraction and electricity industries.

As a consequence of the Covid-19 outbreak, the sales of assets, privatisations and new investments in production and exploration are likely to suffer delays.

First-quarter data for Brazil shows that foreign equity investment in oil and gas extraction dropped by 77% when compared with the first quarter of 2019. The number of announced greenfield projects for oil and gas extraction and mining projects fell by 25% and 40%, respectively, across the same time period, according to UNCTAD.

UNCTAD data on announced greenfield investments in Brazil shows a decline of 36% in the number of projects in the first quarter of this year when measured against the first quarter of 2019. Brazil reported direct equity investment flows at almost half of last year’s quarterly average in the first three months of 2019.

Overall, UNCTAD reports that Latin America and the Caribbean is expected to experience the largest regional decline in investment inflows globally, with a projected drop in FDI of between 40% and 55% in 2020.

“Much of the FDI in the region is concentrated in extractive industries, which make up a significant share of total FDI in Argentina, Brazil, Chile, Colombia and Peru,” the report concludes. “The combination of collapsing oil prices and the demand shock, due to the pandemic affecting prices of most commodities, is driving down FDI forecasts in this region more than elsewhere.”