Investment in Brazil seems to have slowed lately, but it is not the amount of investment that is worrying economists. Rather, officials are worried about the type of investments. As much as two thirds of the rise in investment in the first quarter of 2013 may have come from the construction of heavy trucks instead of capital spending on improving Brazil’s old and crumbling infrastructure.
According to economists at Bradesco Asset Management, Brazilian businesses spend more on trucks in just one year than the government plans to invest in new railways in a decade. While the increased output from truck makers boosts investment, Brazil is trailing behind all of the other major economies in Latin America.
Brazil’s Struggling Economic Model
Investment rose 4.6% in the first quarter of 2013 compared to the fourth quarter of 2012. While this low level of investment is a sign that Brazil’s economy remains sluggish, Brazil’s Finance Minister believes that the financial model is working.
However, according to Alberto Ramos, an economist at Goldman Sachs, Brazil’s 10-year long economic model of stimulating consumption while neglecting investment in its infrastructure has resulted in low growth and rising inflation.
Implications for Foreign Investors
In the face of its disappointing economic growth, Brazil has made huge efforts to attract foreign investment. For instance, this past June Brazil did away with a 6% tax on foreign investors who buy Brazilian bonds in the domestic market. There have also been several rounds of tax cuts over the past two years that have benefited the construction, engineering, railway, and shipping sectors.
But seeing the low level of Brazil’s investment in its infrastructure and the difficulties Brazilian businesses are having with investing in and completing projects, foreign investors have a lot to be concerned about. That’s because foreign investors have fewer business and political connections to help them navigate regulations, secure permits, and cut through the dense forest of red tape.
The Future of Investment in Brazil
The good news is that President Dilma Rousseff has a plan to boost investment. She has identified the infrastructure investments that Brazil desperately needs. She’s also setting an accelerated agenda to make up for decades of ignoring Brazil’s infrastructure. In 2012, she announced more than $100 billion in concessions for the construction of private roads, rails, and ports.
Many are not very optimistic because these types of concessions typically get lost in the slow-moving bidding and permitting processes. Still, foreign investors should continue to look for opportunities to participate in Brazil’s continuing efforts toward the economic growth it enjoyed before the global economic slowdown.
