Despite a spike in corporate optimism following the election of Jair Bolsonaro, investment in Brazil is in marked decline.
“We are not going to close down shop but we are measuring risk,” said a senior executive for a global consumer brand that has been in Brazil for more than half a century. “Until we see something happening, we won’t really put more money into Brazil.”
Amid concerning levels of policy paralysis in the former army captain’s rightwing administration, economists point to such comments as a key factor underpinning the country’s current economic malaise.
With a potential return to recession now looming, questions are being urgently asked about why investment remains so anaemic and what can be done to fix it.
“One factor that has been missed amid the growing debate about the weakness of Brazil’s economy is the continued slump in investment and, more worryingly, the fact that there is little prospect for a recovery,” analysts at Capital Economics said.
Economists fear that lethargic investment by both companies and government has trapped Latin America’s largest economy in a cycle of fragile growth and left it susceptible to the external shocks.
Brazil’s economy shrank in the first quarter of the year for the first time since 2016, and April and May indicators suggest Brazil’s economy continues to limp along. The country is forecast to grow by less than 1 per cent this year, according to a recent central bank survey.
“The reason why we are stuck in this low-growth equilibrium is investments. When it comes to investments, the recession never ended. We are still in an investments recession,” said Tony Volpon, chief economist at UBS in São Paulo.
Data show that fixed investment contracted 1.7 per cent in the first quarter. As a percentage of gross domestic product, investment in Brazil has declined from 20 per cent in 2013 to about 15 per cent last year, according to official Brazilian statistics.
Mr Bolsonaro swept to power on pledges to deliver a liberal economic agenda of deregulation, privatisations and a crucial pensions reform from his Chicago-trained economic tsar Paulo Guedes. Since his January inauguration, however, the outlook has darkened as continued political infighting between the president and the nation’s powerful congress weighs on the broader business climate.
Moreover, the administration is riddled by scandals, and the president appears focused more on identity politics and digital soapboxes than policymaking, exemplified by the resignation of the head of the free-market national development bank amid accusations of ideological disloyalty.
“There is a total lack of confidence from investors in the country. There is some serious cautiousness looming over Brazil,” said António Domínguez, a Brazil-based senior executive at shipping group Maersk.
A leading business confidence index run by the Getúlio Vargas Foundation, an academic institution, dropped to less than 92 points last month, down from 97.5 when the president was inaugurated in January. Businessmen, diplomats and economists say companies are holding off investing until there is greater certainty.
“Investment decisions are particularly sensitive to country-risk perception. In the Brazilian case, there is a clear correlation between the worsening of short-term risk assessment measured by confidence indexes and the standstill in investment decisions,” said Carlos Langoni, director of the World Economy Center at FGV.
With proposed savings of $250bn over 10 years, a key pension reform meandering through Congress is aimed at improving Brazil’s precarious fiscal position and is seen as a catalyst for any changes to the investments outlook. “This wave of uncertainties is being fed by political factors — when the pension reform will be approved by the Congress and what will be its final fiscal dimensions,” added Mr Langoni.
Optimistic lawmakers expect the reform to pass by September. William Jackson, chief emerging markets economist at Capital Economics, says Brazil’s fiscal weakness explains why investment has been so anaemic, with public sector capital spending 27 per cent lower in the first quarter than in the same period last year.
“Given that the government continues to struggle with its fiscal accounts, the next wave of investment will probably have to come from the private sector,” said Mario Mesquita, chief economist at Itaú Unibanco. But the private sector in Brazil has its own concerns, including dealing with Brazil’s byzantine business regulations as well as excess industrial capacity left over from the swingeing 2015-2016 recession.
“Companies don’t have to rush to invest. There is a lot of spare capacity [already],” said David Beker, chief Brazil economist at Bank of America Merrill Lynch in São Paulo. In addition, most businesspeople, economists and policymakers agree that, following the pensions overhaul, there needs to be an upheaval of Brazil’s cumbersome tax system and stifling red-tape to entice corporate investment and jump-start economic growth.
Mr Mesquita argues that “we must first deliver the adjustment that is necessary for survival — namely, the pension reform — before we open the way for other improvements that would ultimately allow us to invest and grow faster”, he said.
To many, the successful passage of the pension reform, even if watered down, will create confidence, boost optimism and spark a surge in investment.
“The government’s economic agenda is music to our ears, but we don’t really see it happening now, which is increasingly worrying,” a senior banker in São Paulo said.