Investment in Brazil will fall in the decade for the first time since the 1980s, study says | economy

It will be the first drop in investment in a ten-year period since 1980, known as the lost decade.

The investment is yet another test that highlights the country’s economic weakness in the current decade. Another Ibre survey already pointed out that the Gross Domestic Product (GDP) for the period 2011 and 2020 will be the worst in the last 120 years, at least.

In recent years, the poor performance of investments has concentrated from 2014 onwards, a period from which the Brazilian economy faced a severe recession until 2016, observed a triennium of slow recovery and, now in 2020, has been impacted by the coronavirus pandemic, which put the country back into recession.

“Brazil has lost two decades in the last 40 years, so that explains why the country is experiencing this scenario of weak growth,” says Marcel Balassiano, a researcher at the Ibre / FGV and one of the authors of the survey. The economists of Ibre Claudio Considera and Juliana Trece also participated in the study.

To calculate the investment data for the current decade, Ibre used the investment performance projection contained in the Central Bank’s inflation report. The expectation is a drop of 6.6% this year.

If there were no crisis caused by the pandemic, investment performance would remain weak. In the inflation report for December last year, therefore, before the pandemic began, the expectation was a 4.1% increase for investments, which would lead the current decade to show an average drop of 1.2%.

“The coronavirus aggravated the situation. But without the disease, Brazil would continue with this problem (of low investment),” says Juliana.

• Investments fell 15.4% in the 2nd quarter compared to the first 3 months of the year
• The Brazilian economy should ‘contract’ by 5.8% in 2020, estimates the IMF

Uncertainties make investments difficult

The investment rate is measured by the Gross Fixed Capital Formation (GFCF), which determines everything invested in machinery, durable goods, increased production capacity and civil construction.

THE Advancing in this component of GDP is essential for the country to reap more sustainable and robust growth in the coming years and thus increase the wealth of its population, economists say.. More since 1980, the average advance of the investment rate in the country is only 0.5% per year.

“Brazil made the decision to stay, it did not make the decision to grow, to distribute income,” says Considera. “The country has been growing at 1% per year for three years, it is practically the advancement of the population. It is the per capita income growing to zero ”.

More than a weak rear-view mirror, there is the question of whether Brazil will be able to regain the strength of investments in the future.

The country faces a series of uncertainties. The biggest is in the tax area. With the pandemic, government debt is expected to approach 100% of GDP this year, a level considered high for an emerging economy like Brazil.

The main question in the fiscal area is whether the government will maintain the spending ceiling, which limits spending growth to the inflation of the previous year. In the market reading, a possible deterioration of the public accounts can lead to a flight of investors from the country, which would cause a depreciation of the exchange rate and a consequent increase in the basic interest rate, now at 2% per year.

Higher interest rates make it difficult for companies to obtain credit for new investments.

“There is a fear that the trajectory of public debt will cause even more problems,” says Considera. “Failure to comply with the cap brings a lot of insecurity to investors. And the situation of foreign capital, which is more to go out than to enter, can get even worse.”

• Foreign direct investment between January and August is the lowest since 2009

There is also a long and old agenda of structural reforms that Brazil must address, such as the tax, to improve the business environment. “The reforms are in the direction of attracting investment. It is essential that they are carried out,” says Considera.

In addition to aggravating the macro scenario, the pandemic affected the financial health of the largest companies in Brazil, with the increase in indebtedness, which also becomes an obstacle to the resumption of investments.

In the first semester, the relationship between the net debt of companies and equity reached 73.5%, according to a survey by the Institute for Industrial Development Studies (Iedi). This means that, for every R $ 1 in partner money, companies have almost R $ 0.74 in financing.

In the first half of 2019, this ratio was 58.7%.

“This is a scenario that makes investment very difficult. We must remember that there are two close crises and that there was already a good increase in corporate debt in the previous crisis,” says Iedi’s chief economist, Rafael Cagnin. “The first wave of indebtedness has not yet been completely digested by companies.”

The Iedi survey was conducted with 240 non-financial companies

Influence of interests and infrastructure auctions

The resumption of investments in the country implies a scenario of low interest rates, which reinforces the need to liquidate public accounts, and the resumption of infrastructure auctions.

In the last recession, between the end of 2014 and 2016, the scenario to improve investments was considered even more difficult, assesses the director of ASA Investments, Carlos Kawall. At the time, interest rates were higher, and Operation Lava Jato wreaked economic havoc on many of the largest construction companies in the country.

“The 2% interest rate is helping a real estate recovery, for example,” says Kawall. “Real estate financing is one of the few modalities (of credit) that suffered little or hardly suffered the crisis and soon recovered.”

Since taking office, the economic team has always argued that the participation of the private sector should lead to the resumption of investments in infrastructure in the country. But in almost two years, the government has managed to get little out of the newspaper.

In January this year, the economic team expected to auction at least six state-owned companies.

“The scenario is good for the infrastructure. The resumption of the auctions takes place on another basis (in relation to the Dilma government). This time, with the right appeal,” says Kawall. “The only problem is that it is a slow process, since the whole regulatory part takes time.”

• Government auctions are now promising for 2021 and 2022

Videos: See the latest economic news