Brazil is the second largest economy in the Western Hemisphere behind the United States, and the ninth largest economy in the world (in nominal terms), according to the World Bank. The United Nations Conference on Trade and Development (UNCTAD) named Brazil the sixth largest destination for global Foreign Direct Investment (FDI) flows in 2019 with inflows of $72 billion, which increased 26 percent since Brazil announced its privatization plan that same year. In recent years, Brazil received more than half of South America’s total incoming FDI and the United States is a major foreign investor in Brazil. According to the International Monetary Fund (IMF), the United States had the second largest single-country stock of FDI by final ownership (UBO) representing 18 percent of all FDI in Brazil ($117 billion) behind only the Netherlands’ 23 percent ($147.7 billion) in 2019, the latest year with available data, while according to the Brazil Central Bank (BCB) measurements, U.S. stock was 23 percent ($145.1 billion) of all FDI in Brazil, the largest single-country stock by UBO for the same year. The Government of Brazil (GoB) prioritized attracting private investment in its infrastructure and energy sectors during 2018 and 2019. The COVID-19 pandemic in 2020 delayed planned privatization efforts.
The Brazilian economy returned to an expansionary trend in 2017, ending the deepest and longest recession in Brazil’s modern history. However, the global coronavirus pandemic in early 2020 returned Brazil to recession after three years of modest recovery. The country’s Gross Domestic Product (GDP) dropped 4.1 percent in 2020. As of March 2021, analysts forecast growth of 3.29 percent for 2021. The unemployment rate was 13.4 percent at the end of 2020. The nominal budget deficit stood at 13.7 percent of GDP ($196.7 billion) in 2020 and is projected to end 2021 at around 4 percent depending on passage of the 2021 budget. Brazil’s debt to GDP ratio reached a new record of 89.3 percent in 2020 with National Treasury projections of 94.5 percent by the end of 2021, while the Independent Financial Institution (IFI) of Brazil’s Senate projects 92.67 percent and the IMF estimates the ratio will finish 2021 at 92.1 percent. The BCB lowered its target for the benchmark Selic interest rate from 4.5 percent at the end of 2019 to 2 percent at the end of 2020, and as of March 2021, the BCB anticipates the Selic rate to rise to 5 percent by the end of 2021.
President Bolsonaro took office on January 1, 2019. In late 2019, Congress passed and President Bolsonaro signed into law a much-needed pension system reform and made additional economic reforms a top priority. Bolsonaro and his economic team have outlined an agenda of further reforms to simplify Brazil’s complex tax system and the onerous labor laws in the country, but the legislative agenda in 2020 was largely absorbed by response to the COVID-19 pandemic. However, Brazil advanced a variety of legal and regulatory changes that contributed to its overall goal to modernize its economy
Brazil’s official investment promotion strategy prioritizes the automobile manufacturing, renewable energy, life sciences, oil and gas, and infrastructure sectors. Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, there are restrictions in the health, mass media, telecommunications, aerospace, rural property, and maritime sectors. The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property.
Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil. Foreign investors also cite concerns over poor existing infrastructure, relatively rigid labor laws, and complex tax, local content, and regulatory requirements; all part of the extra costs of doing business in Brazil.
|TI Corruption Perceptions Index||2020||94 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2020||124 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||62 of 129||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2019||USD 81,731||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2019||USD 9,130||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
6. Financial Sector
Capital Markets and Portfolio Investment
The Brazil Central Bank (BCB) embarked in October 2016 on a sustained monetary easing cycle, lowering the Special Settlement and Custody System (Selic) baseline reference rate from a high of 14 percent in October 2016 to a record-low 2 percent by the end of 2020. The downward trend was reversed by an increase to 2.75 percent in March 2021. As of March 2021, Brazil’s banking sector projects the Selic will reach 5 percent by the end of 2021. Inflation for 2020 was 4.52 percent, within the target of 4 percent plus/minus 1.5 percent. The National Monetary Council (CMN) set the BCB’s inflation target at 3.75 percent for 2021, at 3.5 percent for 2022 and at 3.25 percent at 2023. Because of a heavy public debt burden and other structural factors, most analysts expect the “neutral” policy rate will remain higher than target rates in Brazil’s emerging-market peers (around five percent) over the forecast period.
In 2020, the ratio of public debt to GDP reached 89.3 percent according to BCB, a new record for the country, although below original projections. Analysts project that the debt/GDP ratio will be at or above92 percent by the end of 2021.
The role of the state in credit markets grew steadily beginning in 2008, with public banks now accounting for over 55 percent of total loans to the private sector (up from 35 percent). Directed lending (that is, to meet mandated sectoral targets) also rose and accounts for almost half of total lending. Brazil is paring back public bank lending and trying to expand a market for long-term private capital.
While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is a traditional source of long-term credit in Brazil. BNDES also offers export financing. Approvals of new financing by BNDES increased 40 percent in 2020 from 2019, with the infrastructure sector receiving the majority of new capital.
The São Paulo Stock Exchange (BOVESPA) is the sole stock market in Brazil, while trading of public securities takes place at the Rio de Janeiro market. In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form B3, the fourth largest exchange in the Western Hemisphere, after the NYSE, NASDAQ, and Canadian TSX Group exchanges. In 2020, there were 407 companies traded on the B3 exchange. The BOVESPA index increased only 2.92 percent in valuation during 2020, due to the economic impact of the COVID-19 pandemic. Foreign investors, both institutional and individuals, can directly invest in equities, securities, and derivatives; however, they are limited to trading those investments on established markets.
Wholly owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil. Auditors are personally liable for the accuracy of accounting statements prepared for banks.
Money and Banking System
The Brazilian financial sector is large and sophisticated. Banks lend at market rates that remain relatively high compared to other emerging economies. Reasons cited by industry observers include high taxation, repayment risk, concern over inconsistent judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead, as well as persistently high real (net of inflation) interest rates. According to BCB data collected for final quarter of 2019, the average rate offered by Brazilian banks to non-financial corporations was 13.87 percent.
The banking sector in Brazil is highly concentrated with BCB data indicating that the five largest commercial banks (excluding brokerages) account for approximately 80 percent of the commercial banking sector assets, totaling $1.58 trillion as of the final quarter of 2019. Three of the five largest banks (by assets) in the country – Banco do Brasil, Caixa Econômica Federal, and BNDES – are partially or completely federally owned. Large private banking institutions focus their lending on Brazil’s largest firms, while small- and medium-sized banks primarily serve small- and medium-sized companies. Citibank sold its consumer business to Itaú Bank in 2016, but maintains its commercial banking interests in Brazil. It is currently the sole U.S. bank operating in the country. Increasing competitiveness in the financial sector, including in the emerging fintech space, is a vital part of the Brazilian government’s strategy to improve access to and the affordability of financial services in Brazil.
On November 16, 2020, Brazil’s Central Bank implemented a twenty-four hour per day instant payment and money transfer system called PIX. The PIX system is supposed to deconcentrate the banking sector, increase financial inclusion, stimulate competitiveness, and improve efficiency in the payments market.
In recent years, the BCB has strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to reflect risk more accurately. It also established loan classification and provisioning requirements. These measures apply to private and publicly owned banks alike. In December 2020, Moody’s upgraded a collection of 28 Brazilian banks and their affiliates to stable from negative after the agency had lowered the outlook on the Brazilian system in April 2020 due to the economic unrest. The Brazilian Securities and Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.
Foreigners may find it difficult to open an account with a Brazilian bank. The individual must present a permanent or temporary resident visa, a national tax identification number (CPF) issued by the Brazilian government, either a valid passport or identity card for foreigners (CIE), proof of domicile, and proof of income. On average, this process from application to account opening lasts more than three months.
Foreign Exchange and Remittances
Brazil’s foreign exchange market remains small. The latest Triennial Survey by the Bank for International Settlements, conducted in December 2019, showed that the net daily turnover on Brazil’s market for OTC foreign exchange transactions (spot transactions, outright forwards, foreign-exchange swaps, currency swaps, and currency options) was $18.8 billion, down from $19.7 billion in 2016. This was equivalent to around 0.22 percent of the global market in 2019 versus 0.3 percent in 2016.
Brazil’s banking system has adequate capitalization and has traditionally been highly profitable, reflecting high interest rate spreads and fees. Per an October 2020 Central Bank Financial Stability Report, despite the economic difficulties caused by the pandemic, all banks exceeded required solvency ratios, and stress testing demonstrated that the banking system has adequate loss-absorption capacity in all simulated scenarios. Furthermore, the report noted 99.9 percent of banks already met Basel III requirements and possess a projected Common Equity Tier 1 (CET1) capital ratio above the minimum 7 percent required at the end of 2019.
There are few restrictions on converting or transferring funds associated with a foreign investment in Brazil. Foreign investors may freely convert Brazilian currency in the unified foreign exchange market where buy-sell rates are determined by market forces. All foreign exchange transactions, including identifying data, must be reported to the BCB. Foreign exchange transactions on the current account are fully liberalized.
The BCB must approve all incoming foreign loans. In most cases, loans are automatically approved unless loan costs are determined to be “incompatible with normal market conditions and practices.” In such cases, the BCB may request additional information regarding the transaction. Loans obtained abroad do not require advance approval by the BCB, provided the Brazilian recipient is not a government entity. Loans to government entities require prior approval from the Brazilian Senate as well as from the Economic Ministry’s Treasury Secretariat and must be registered with the BCB.
Interest and amortization payments specified in a loan contract can be made without additional approval from the BCB. Early payments can also be made without additional approvals if the contract includes a provision for them. Otherwise, early payment requires notification to the BCB to ensure accurate records of Brazil’s stock of debt.
Brazilian Federal Revenue Service regulates withholding taxes (IRRF) applicable to earnings and capital gains realized by individuals and legal entities resident or domiciled outside Brazil. Upon registering investments with the BCB, foreign investors are able to remit dividends, capital (including capital gains), and, if applicable, royalties. Investors must register remittances with the BCB. Dividends cannot exceed corporate profits. Investors may carry out remittance transactions at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing payment of applicable taxes.
Under Law 13259/2016 passed in March 2016, capital gain remittances are subject to a 15 to 22.5 percent income withholding tax, with the exception of capital gains and interest payments on tax-exempt domestically issued Brazilian bonds. The capital gains marginal tax rates are: 15 percent up to $874,500 in gains; 17.5 percent for $874,500 to $1,749,000 in gains; 20 percent for $1,749,000 to $5,247,000 in gains; and 22.5 percent for more than $5,247,000 in gains. (Note: exchange rate used was 5.717 reais per dollar, based on March 30, 2021 values.)
Repatriation of a foreign investor’s initial investment is also exempt from income tax under Law 4131/1962. Lease payments are assessed a 15 percent withholding tax. Remittances related to technology transfers are not subject to the tax on credit, foreign exchange, and insurance, although they are subject to a 15 percent withholding tax and an extra 10 percent Contribution for Intervening in Economic Domain (CIDE) tax.
Sovereign Wealth Funds
Brazil had a sovereign fund from 2008 – 2018, when it was abolished, and the money was used to repay foreign debt.
10. Political and Security Environment
Strikes and demonstrations occasionally occur in urban areas and may cause temporary disruption to public transportation. Brazil has over 43,000 murders annually, with low rates of completion in murder investigations and conviction rates.
Non-violent pro- and anti-government demonstrations have occurred periodically in recent years.
Although U.S. citizens usually are not targeted during such events, U.S. citizens traveling or residing in Brazil are advised to take common-sense precautions and avoid any large gatherings or any other event where crowds have congregated to demonstrate or protest. For the latest U.S. State Department guidance on travel in Brazil, please consult www.travel.state.gov.