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Brazil prospers from global interest

Brazil outpaced Britain as the world’s sixth largest economy last year, partly owing to a rise in foreign direct investment, particularly in services and especially by America and Spain.

The growing importance of Brazil can be reflected by how far the country has advanced in attracting foreign direct investment (FDI).

According to the latest World Investment Report, issued by the United Nations Conference on Trade and Development (UNCTAD, August 2011), FDI inflows to Latin America’s largest economy in 2010 were the fifth highest in the world.

Preliminary data for 2011 suggests that these inflows have continued to be strong, especially in equity capital and the manufacturing sector. Intra-company loans and Greenfield projects have also attracted high levels of FDI.

To gain insight into the external sector of the Brazilian economy the central bank carries out a statistical study every five years. (Strategy continues below)

Although the final results of the most recent analysis will not be released until the second quarter of 2012, the monetary authority has published some preliminary data, which makes interesting reading.

In addition to including intra-company loans as part of FDI (before 2005 they were classified as external debt), the central bank calculates the country of origin of the investment by including the nationality of the owner of the invested capital.

Previously, the figures only included the operational origin of the capital. Now, it is possible to learn the primary source of the invested resources, thus avoiding the distortions created by operational vehicles in tax havens.

According to data from the Brazilian central bank, the country attracted total FDI of $661 billion (£420 billion) during 2005-10, a steep increase from the previous five-year period.

Equity capital accounted for the bulk of this amount, contributing $580 billion.

Although this figure will have been boosted by the strength of the local currency it is still an impressive number. To put it in perspective, the stock of FDI equity capital as a share of GDP widened to 28% from 18%.

The list shows a country breakdown of the largest foreign investors in Brazil during the 2005-10 period. America tops the rankings, followed by Spain, which is not too surprising given the latter’s close historical ties to the continent.

The two entries that stand out are Brazil in fourth place and the arrival of China in the table for the first time. Brazil’s $48 billion total is attributed to the amount that non-resident companies with Brazilian shareholders invest in the country.

Given that China is Brazil’s biggest trading partner, a position previously held by America up to 2009, we expect the most populous nation in the world to make further gains.

Although these figures only go up to 2010, China stepped up its investments in Brazil last year, as exemplified by a $4.5 billion deal to invest in high-tech industries.
”The stock of foreign direct investment equity capital as a share of GDP widened to 28% from 18%”

With Chinese companies investing in non-raw material sectors, this helps to balance the Brazilian economy as well as highlighting the growing importance of emerging markets for both inflows and outflows of FDI.

FDI by sector shows a bias towards services, as opposed to agriculture and commodity-based industries. Financial services and supporting activities have the largest share (16.9% of the total). No other sector reached 10%.

The expectation that the Brazilian economy will continue to grow at a faster pace than the global economy in coming years should further strengthen its appeal to overseas investors.

Latest estimates suggest the Brazilian economy grew by 3.1% last year, overtaking Britain as the world’s sixth largest economy and is forecast to expand by 3.5% in 2012, according to figures from the Centre for Economics and Business Research, December 2011.

With a population close to 200m, a buoyant consumer sector and a stable banking system, Brazil is likely to continue to feature as a major beneficiary of investment inflows over the next decade

Sorce: Dean Newman @FundWeb
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