Interest, exchange rate expectations may have favored flow of reverse investment in Q3, which reached $10.6bn
11/14/2022
Reverse investment, the sum of the funds sent by subsidiaries abroad to their headquarters in Brazil, pointed to a positive flow between July and September this year, after five consecutive quarters with a negative balance. $10.6 billion were sent in the period, the highest value since the fourth quarter of 2016 which registered $11.1 billion.
Among the economists’ explanations for this flow are the companies’ attempt to anticipate electoral uncertainties; the interest rate differential between Brazil and abroad; the perspective, at that moment, that there could be an appreciation of the Brazilian Real later on, which ended up not materializing, and the record payment of dividends by companies such as Petrobras.
Overall, the Brazilian net reverse investment is positive. Since the first quarter of 2021, however, this account has become negative, with the headquarters in Brazil sending more money to their subsidiaries around the world. Data from the Central Bank show that in the third quarter of 2021, the net result was negative by $2.5 billion, a loss similar to that recorded in the second quarter of this year, before the return to positive flow.
In 2022, the flow became positive from June to July, when a negative balance of $255.7 million turned to a positive $1.2 billion. In August, it advanced to $3.5 billion and, in September, it reached $5.9 billion. The Central Bank says it sees the movement as a natural process of normalization to what happened before the pandemic, but experts consider that the very abrupt change of direction draws attention.
Part of some experts thinks that the movement may be related to the payment of dividends by Petrobras. “The company’s financial situation has improved a lot in recent years, and profitability was super high in 2022. This allowed Petrobras to adopt a more aggressive policy in distributing profits,” says Antonio Madeira, an economist at MCM Consultores.
In addition to this is the “help” that President Jair Bolsonaro (Liberal Party, PL) asked the state-owned companies, pressing to move ahead with the distribution of those dividends, to resolve the expenses contracted during the frustrating campaign. “There was a meeting of interests: Petrobras had the capacity, and the government needed the resources,” says Mr. Madeira.
In July, Petrobras announced a record payment of R$87.8 billion in dividends for the second quarter, which were paid in August and September. “Petrobras has a lot of cash abroad, and these funds may have made the dividend payment operation feasible,” says the economist.
The oil company has already announced the payment of another R$43.6 billion in dividends related to the result of the third quarter of 2022, which will happen in December and January 2023. This way, the positive balance of the reverse investment will possibly happen again, “but not in the same proportion,” says Mr. Madeira.
Last Friday, Itaú Unibanco revised its projection for direct investment in Brazil (IDP) – line of balance of payments (record of all transactions between Brazilian residents and the rest of the world) which includes reverse investment – to 3.6% of GDP in 2022 from 2.9%. According to the bank, the IDP “continues at a high level, although at the margin very influenced by intercompany loans from the subsidiary to the parent company (probably explained by the reverse investment cash from local companies to pay dividends),” says the bank’s team in a report.
According to Mr. Madeira, one cannot rule out also some contribution of the interest differential between Brazil and abroad in the recent change in reverse investment. “The high-interest rate here is a high opportunity cost for you to keep dollars abroad. High interest in Brazil is a factor that stimulates the inflow of reverse investment,” he says.
There was also a prospect of an appreciation of the Real against the dollar at that moment, the economist from MCM Consultores recalls. The dollar went to a level closer to R$5, R$5.10 in August and mid-September from almost R$5.50 in the second half of July but has now returned to R$5.30.
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Livio Ribeiro — Foto: Leo Pinheiro/Valor
For Livio Ribeiro, associate researcher at the Brazilian Institute of Economics (FGV Ibre) and partner at the BRCG consultancy, although the interest rate differential between Brazil and abroad is high, this was a scenario that was already in place. “I think it is a weaker argument. It was a very unusual [reverse investment] movement that we haven’t seen in a while. It’s a puzzle that I’m still putting the pieces together,” he says.
According to Mr. Ribeiro, companies may have brought forward the repatriation of capital due to the electoral cycle. “Not because of risk aversion, but because of the uncertainty of the direction the debate would take after the election, there was a discussion about changing the taxation of dividends. I think this is a reasonable hypothesis,” he states.
As the reverse investment falls into the category of intercompany loans, it is also impossible to know what companies will do with the repatriated capital, Mr. Ribeiro observes. “It’s not necessarily going to be productive. It is an exchange of financial flow, it is launched as a direct investment in the country, but it has little or nothing to do with buying a machine, for example,” he says.
*By Anaïs Fernandes, Larissa Garcia — São Paulo, Brasília
Source: Valor International