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Gregg Wassmansdorf

Government corruption has hit Brazil hard, causing political instability and a plummeting currency. While still Latin America’s largest economy, the country has an uphill climb to restore investor confidence, writes Gregg Wassmansdorf.

It is difficult to be optimistic about Brazil’s near-term economic prospects. The largest economy in Latin America by a wide margin, the country struggles to fulfil hopes it could be a reliable and powerful engine of growth, domestically or regionally. Expectations of growing FDI should also be tempered as its challenges are deeply rooted and social, economic and political in nature.

Brazil made substantial progress during the 2000s advancing its economy and improving social conditions with rising education levels and incomes. This positive momentum was also indicated by inbound investment figures. Brazil achieved its largest average FDI project size in 2008 for both capital investment and jobs created, and experienced its largest annual number of FDI projects (524) in 2011, according to fDi Markets.

Since then, however, FDI has been in freefall. The number of companies making investments and the number of investment projects announced annually have both dropped by roughly two-thirds over the past six years, across virtually every sector.  

This should not come as a surprise, given Brazil’s recent political history, as shown by an internet search for Operation Car Wash. Several of Brazil’s previous presidents have been indicted, an estimated $19bn of public funds have been diverted to private interests, more than 800 plea bargains have been made to reveal unscrupulous government and political party actions, and, by one estimate, only 15 of 550 politicians were determined ‘clean’ in one set of construction contract scams.

Brazilians are understandably angry at the political situation, and challenged by a currency whose value has halved in the past seven years and unemployment rates of about 12%. The World Bank Group’s newly published Global Investment Competitiveness Report 2017-18 reinforces an important fact that is relevant to interpreting Brazil’s next steps. Firms considering investing overseas value political stability and a business-friendly regulatory environment above all other factors, including market size.  

Historically, the largest volume of FDI into Brazil has come from the US (the leader by far), the UK, Germany, Spain and Italy, plus many other sources. Doubtless many companies will continue to see opportunity in Latin America’s largest economy – they will make investments and create jobs. Speaking from personal project experience in Brazil, business opportunities and warm, talented people await. 

Yet FDI will continue to be a proxy measure of the political environment in Brazil. Citizens, business leaders and politicians should not expect a major economic lift from FDI until corruption is rooted out and relative political stability restored.  

Gregg Wassmansdorf is senior managing director, consulting, at Newmark Knight Frank, a global real estate services firm. He is a member of the Site Selectors Guild. 

E-mail: gwassmansdorf@ngkf.com 

This article is sourced from fDi Magazine
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