A few months have passed since Brazil’s recent tremendous political earthquake: The local public opinion turned sharply in a completely different direction, and Brazil’s former president Luiz Da Silva (Lula) rose to power once again.
Was this shift good for the Brazilian economy? The results speak for themselves: A few weeks ago, the Brazilian Bureau of Statistics (IBGE) reported a 1.9% increase in GDP in the first quarter of the year. That’s the highest growth rate since the end of 2020, well above the figures for the last quarter of 2022 (then a 0.2% drop in GDP was recorded), and higher than forecasts that had predicted an increase of 1.3% in GDP. So, is this a sign you should invest in Brazil now?
My name is Ofir Bar, an investor with about a quarter of a century of experience in worldwide markets. Of course, The case of the Brazilian economy intrigues me: Brazil is one of the most economically powerful countries in the world, but for many years, it has failed to fulfill its potential to the fullest. But now that COVID is behind it, and a new president is running things, is Brazil headed toward a brighter financial future? Let’s dive in and find out.
Optimistic times
It’s hard to imagine a more optimistic time period for Brazil than this one. Rising domestic consumption, increasing exports, booming tourism and vast investment in infrastructure are starting to show results. Adding in political stability will (hopefully) make Brazil a rather good choice for investors.
Being among the largest economies in the world will serve Brazil well if it continues the positive trend it’s currently undergoing. It’s rich in natural resources like oil, minerals, and timber, and it supplies 10% of the world’s food. Moreover, it has one of the largest reserves of nickel in the world (essential for powering electric vehicles).
The housing market of Brazil also shows signs of optimism. Currently, the average price of a city center apartment in Brazil is ~1700$, compared to ~4600$ in the US. The demand for properties in Brazil is on the rise: Last year alone, housing prices grew by 6.16%. No wonder so many investors find this country interesting these days. Moreover, the cost of living in Brazil is very low, about a third of the cost of living in the US. In addition, the local Real’s exchange rate is really low at the moment, meaning you can buy more in Brazil with less money. Tempting, isn’t it? But let’s not jump to conclusions quite yet.
Remnants of a notorious past
For many years now, Brazil has suffered from a notorious reputation as a corrupt country – and it’s still trying to level out its way from this reputation. Despite major progress in recent years, corruption may still deter investors from placing some chips on the South American powerhouse. After all, the current president himself was once charged with corruption and spent about 2 years in prison. Those undeterred by this fact must implement high-end anti-corruption measures, promote ethical business practices and keep an eye out for risks of emerging corruption in order to lower the chances they will affect their investments.
Sadly, Brazil also has lots of import barriers that may make it unattractive for investors: The high import taxes can increase the cost of incoming goods, making it difficult for businesses to get the resources they need from across the land or seas in order to remain competitive in the global market. Moreover, the costly bureaucratic processes and the complex regulations do not make life easier for investors even in 2023.
During times of harsh economic conditions in the past, many skilled Brazilian workers migrated away from their homeland. And now that working remotely is so customary, some of those who can probably see no reason to return to their home base. That’s why companies operating in Brazil must invest in training programs to improve the local workforce. This may not just cost you more capital than you initially thought you’d need to spend, but also postpone results.
Stability ahead?
Brazil has gone through quite a lot in recent years: COVID has severely affected it economically, and it still does. Also, the political instability it has been suffering from in recent years undermined its social consolidation. Is this South American powerhouse back on track? Is it worth investing in it, before too many investors jump in?
In my humble opinion, I believe that for now, it’s better that small investors wait a bit longer to see whether the new president succeeds in creating further stability and growth. Till then, I still think that at the moment, investing in Brazil is for the more experienced investors.
