Foreign Direct Investors Keep Faith in Crisis-Plagued Brazil

07/26/2017 - 10h19

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JOE LEAHY

ANDRES SCHIPANI

"FINANCIAL TIMES"

When Israeli property executive Mia Stark arrived in Brazil in 2013, the country's economy was already beginning its long slide into what would become its worst recession in history.

Undeterred, the Brazil chief executive of Israeli shopping centre group Gazit Globe bought control or stakes in seven properties in prime locations in the biggest city in Latin America's largest country, investing R$2bn ($635m) over the past four years.

Gazit has since turned round the properties it controls, which range from Light, a historic mall, to a shopping centre in the flash upmarket district of Morumbi, Ms Stark claims.

"When we came to Brazil, we didn't know what we were going to face," Ms Stark says. As the economy deteriorated, shrinking more than 7 per cent over the past two years, she says her management team made a conscious decision. "We said: 'You know what? Instead of negativity, let's find deals'."

Hardy foreign long-term investors have sustained Latin America's largest economy as it has suffered not only the recession but one of the most tumultuous political periods in its history.

The country's former leftwing president, Dilma Rousseff, was impeached last year for budgetary violations while her successor, Michel Temer, has been indicted for corruption. Mr Temer is fighting the charges, which have threatened to derail a reform programme by his centre-right government designed to restore Brazil's sinking public finances.

Yet foreign direct investors have continued to pour money into Brazil. The country received $78.93bn in FDI at the height of the recession in 2016 - the seventh highest such inflow in the world, according to World Bank data.

Analysts say this resilience - the central bank reported net FDI in the 12 months to the end of May of $80.7bn - is partly due to net inflows into mergers and acquisitions.

Brazilian companies and assets have been more attractive after a depreciation of the country's currency, the real, against the dollar, to about half of its value since it reached its highs in 2011.

Local shareholders and companies also have been keen to offload assets due to financial distress caused by the recession or the corruption investigations.

"At the end of the day, compared with other countries Brazil has been receiving a lot of FDI for a relatively long period of time because there is a bunch of assets for sale," says David Beker at Bank of America Merrill Lynch.

The main corruption probe, known as "car wash", has forced asset divestments from groups ranging from state-owned oil company Petrobras to construction business Odebrecht, whose businesses have been devastated by allegations they participated in political bribery schemes.

The next in line for asset sales is JBS, the world's largest meatpacker, which is at the centre of the corruption allegations against Mr Temer.

Brazilian M&A last year totalled $46.6bn, of which nearly $37bn was made by foreign investors, according to data company Dealogic. China was the biggest source of investment, with nearly $12bn of deals including a $9bn acquisition of an electricity company, followed by the US and Canada each with about half this amount.

"Some of the local . . . assets are cheap and many investors that have a medium- to long-term strategy see this as a good opportunity to gain a foothold or increase their existing footprint in the Brazilian economy," says Alberto Ramos at Goldman Sachs.

However, economists caution that just under half of the money reported as FDI was inter-company loans between overseas companies and their Brazilian arms, and reinvested profits. Some of these inter-company loans were in effect currency trades to take advantage of Brazil's high real interest rates, while others could be to recapitalise struggling subsidiaries.

"Only about 20-25 per cent of FDI inflows into Brazil is greenfield investment, that is money for building factories and ports and airports," estimates Neil Shearing, chief emerging markets economist with Capital Economics.

Indeed, building new projects in Brazil remains as difficult as ever due to the country's red tape and the political volatility, investors say. Even Ms Stark of Gazit says she prefers to avoid developing sites from the ground up because of the bureaucratic challenges.

"If you think you are smarter than the locals and will find plain vanilla deals, you're in the wrong place," she says.

Copyright The Financial Times Limited 2017