Since 2003, when Brazil’s economy and currency last hit bottom, there have been few cloudy days. Sure, there was a bit of a downpour in 2008 after the Lehman Brother’s panic. The real dropped precipitously, commerce slowed, and real estate investment froze. But after that brief deluge, sunny skies quickly returned. As a consequence, Brazil’s reputation as investment-worthy nation with the economic oomph to come back from true adversity was greatly reinforced. Since then Brazil has gained investment grade status in world financial markets.
Now we are seeing rain clouds gathering on the world economic horizon once again. Those interested in investing in or moving to Brazil should ask themselves whether this might not be the time to start planning to take advantage of the problems in distant economies and buy into Brazil at a discount.
Last week the real dropped to its lowest levels in seven weeks, R1.86—an 8.5% drop for the year. Bloomberg went so far as to report that it could drop to 2.40 before the adjustment was over. Referring to the uncertain global economic scenario Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores said that, “The situation in the global market is ugly. With the danger out there, nobody wants to buy the real.”
At the same time Brazil has reported a dramatic economic slowdown. The economy expanded at the slowest pace in two and a half years last quarter. In response, the government has vowed to bring interest rates down. Analysts expect that the policy makers could cut the COPOM by as much as 75 basis points at their next meeting, signaling the government’s anxiousness to stimulate the economy. Guido Mantega, Brazil’s finance minister told reporters that the government will do “everything possible” to reduce the cost of credit and spur the economy.
It’s clear that this situation will continue, and possibly worsen, until the European debt crisis, Chinese manufacturing slowdown, and the American deficit problems are realistically addressed. Is this unfavorable scenario a window of opportunity opening for those who hope to invest or live in Brazil?
One approach would be to consider that this is not a good moment to invest. Brazil is economically vulnerable and who is to say that it is not on the verge of an extended period of economic decline? That could be the case, especially if China, now Brazil’s largest trading partner, goes into a period of dramatically slower growth. If that happens Brazil’s export revenues—from such commodities as soy beans and iron ore—would drop and the Brazilian economy would suffer. That’s because commodity exports now account for nearly 12% of Brazil’s GDP, according to the national statistics agency.
On the other hand, this may be one of those rare windows of opportunity to buy into Brazil at a discount. Since 2003 there have been only two or three such windows of time when foreign investors could get into Brazil at 20% or more slashed off the usual price. All such windows have been short-lived. After the Lehman’s collapse, for example, the real dropped precipitously from 1.56 against the dollar to 2.40. The Bovespa stood above 70,000 in May of 2008 but plummeted to below 30,000 late in the same year. But by January of 2010 the Bovespa was up over 70,000 again. In other words, a 100% gain was not at all unusual during that 15 month period for those who had the courage and foresight to buy at the bottom.
The same was true of the real. While it took longer to fully recover, it rose consistently until it reached the 1.56 level and even went a little beyond early this year. For larger investors, the drop in interest rates might bring Brazilian rates into line with other developing countries for the first time and increase consumer and corporate lending alike.
Are we on the edge of another Brazilian precipice? Many analysts think we are. If so, bold investors will be looking to take advantage of a solid overall Brazilian economic scenario that goes into a temporary decline. While there’s never any guarantee that the past will repeat itself and any drop in Brazilian currency or stocks may not be followed by a dramatic recovery this time round, it might be worth considering the gains that could be made if it does.
For those who are looking for a way to move to Brazil and get into the dance of Brazilian life, get ready. In the next year the window of opportunity might once again open to purchase beautiful Brazilian property at a steep discount, minimize moving costs and other expenses, and lessen the threshold of investment required for an investors’ visa. Such opportunities have appeared only rarely in the period since 2003. Only time will tell, but the window might be about to slide open once again.
