Investment rates are expected to stabilize at 15-16% of GDP, positioning Brazil near the end of IMF’s global rankings

07/23/2024

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Ernesto Revilla — Foto: Divulgação

After recent upticks in 2021 and 2022, Brazil’s investment rate is projected to stabilize at 15% to 16% of GDP from 2024 through 2029, positioning it among the bottom 20 of approximately 170 nations in the International Monetary Fund (IMF) rankings.

The IMF anticipates that Brazil’s investment rate will reach 15.9% of GDP in 2024, ranking it as the 20th lowest globally. This rate is expected to slightly decrease to 15.4% by 2029, pushing Brazil to the 19th worst position, up from the projected 18th in 2028. These figures fall below the projected rates for Latin America (19.7%) and emerging economies overall (32.4%) in 2029.

In contrast, Brazil ranked 24th worst last year with an investment rate of 16.1%. Following the economic rebound from the pandemic, the rates peaked at 19.5% in 2021 and 18.1% in 2022, placing Brazil at the 46th and 34th worst positions, respectively. The country’s lowest ranking since 2010 was 72nd place in 2011, when the investment rate nearly reached 22% of GDP.

Francisco Pessoa Faria, senior economist at LCA Consultores, said that, according to the IMF’s analysis, only 9% of countries are expected to have a lower Gross Fixed Capital Formation (GFCF, a measure of investment in GDP) than Brazil in the medium to long term.

Economists argue that an investment rate of around 15% of GDP, as projected by the IMF for Brazil, is insufficient and hovers near historic lows of about 14.5%, as seen in 2016 and 2017 following the recession that started in 2014. They believe that a healthier range would be between 17% and 19%.

Mr. Faria also notes that global figures are skewed by China’s performance. According to the IMF’s projections, the world’s average investment rate from this year to 2029 is 26.8%, but excluding China, it falls to 23.5%.

For emerging markets, the average drops from 32% to 26% when China is not considered. “Our comparison with the world is unfavorable, but it’s not as dire as it appears because China is skewing the data,” Mr. Faria explains.

Nonetheless, even with an IMF-projected rate of 18%, Brazil would still rank among the 20% of countries with the lowest investment rates. “This places us in the last quintile, with no immediate prospect for improvement,” Mr. Faria adds.

Felipe Camargo, senior economist for emerging markets at Oxford Economics, describes Brazil as having “a cascade of issues that contribute to reduced investment and subdued long-term growth.”

He projects Brazil’s investment rate to hover between 18% and 19% of GDP in the medium to long term, emphasizing that historical averages are insightful for projections as rates typically trend towards these averages over time.

According to Oxford Economics, Brazil’s investment rate average stands at 18.9% of GDP. Among the 20 emerging countries analyzed by the consultancy, this rate is only higher than that of Colombia (17.9%), Argentina (17.9%), Egypt (17.2%), and South Africa (15.1%). However, it trails behind countries like India (30%), Turkey (23.6%), Mexico (22.2%), Peru (21.9%), and Chile (21.7%). Notably, although Brazil currently leads Colombia, Oxford Economics forecasts Colombia’s investment rate to rise to 21.2% by 2030, while Brazil’s is projected at 18.7%.

Mr. Camargo explains that the investment rate mirrors the country’s savings rate and its current account, which encompasses trade, services, and income transactions between residents and non-residents. “When the current account is in deficit—as it is in Brazil and many emerging markets—it essentially means leveraging external resources to supplement the country’s internal savings for investment purposes.”

Brazil, according to Felipe Camargo, borrows relatively little from the international market. “When domestic savings are insufficient, a country needs to draw on foreign resources. Like Brazil, Colombia, Chile, and Peru also save relatively little and consequently import more capital,” he explains.

Mr. Camargo suggests that Brazil could afford a slightly larger current account deficit, which would utilize more of its substantial international reserves yet remain within healthy limits. “Brazil’s reserves are quite robust,” he remarks.

Despite these ample reserves, which surpass those of some previously mentioned nations, the Brazilian exchange rate remains more depreciated than it arguably should be. Mr. Camargo attributes this to Brazil’s poorer fiscal health and lower credit ratings. “This contributes to Brazil importing fewer capital goods. Lacking domestic production capabilities for these technologies, Brazil inevitably lags behind,” he observes.

He also points to taxation as another crucial factor influencing investment rates across countries. “Much of a country’s investment is driven by its corporate sector. Heavier taxation and higher operational costs reduce corporate profit margins, which in turn dampens investment activity,” Mr. Camargo says.

In Brazil, the linkage between imports and investment is notably weak, observes Mr. Camargo. He suspects that the importation rates are lower partly because of how the ICMS (similar to Value-Added Tax) is applied to imports. “For those importing heavy equipment like ships, machinery, and the like into Brazil, the ICMS calculation basis exacerbates costs significantly. Not only do they face steep import taxes, but also a high ICMS rate on those taxes,” he explains.

While Mr. Camargo acknowledges that the proposed tax reforms won’t reduce Brazil’s overall tax burden, he believes they could make a significant impact by simplifying the tax structure. “Removing compounded taxation should indeed facilitate more investment,” he suggests. Companies could improve profit margins and enhance productivity. “This would allow companies to focus more on their core operations rather than spending resources on navigating complex tax regulations, potentially leading to more investments in essential machinery and equipment,” he adds.

However, Mr. Camargo cautions that without fiscal adjustments to control spending, it remains challenging to implement tax cuts. “This is the balance we are currently managing. It’s essential to align public policies to address this efficiently,” he remarks.

Echoing a broader perspective, Ernesto Revilla, chief economist for Latin America at Citi, attributes Brazil’s low investment rates to the lingering effects of the severe economic downturn the country underwent in 2015 and 2016.

“Then came the pandemic, and Brazil faced weak demand. So, for about the last eight years, Brazil has been trapped in a vicious cycle where strong growth is absent because there’s insufficient investment, and there’s insufficient investment due to the lack of strong growth,” observes Mr. Revilla.

He argues that breaking this cycle hinges on Brazil’s continued efforts on two fronts: reinforcing macroeconomic fundamentals, particularly fiscal policies, to instill confidence in long-term investors, and crafting a growth-centric narrative to assure sectors of the potential returns on their investments.

“This is a pervasive issue in the Latin American economy. With each change in government comes policy shifts, creating a level of uncertainty that long-term investors typically shy away from,” he notes.

Mr. Revilla emphasizes that fiscal sustainability is crucial for robust and enduring economic development, though it alone is not sufficient. “There’s a concern that an escalating debt trajectory could drive interest rates higher, and high interest rates are a significant barrier to investment,” he explains. He also highlights the importance of stable “rules of the game” and a favorable regulatory environment to encourage investment.

In Mr. Revilla’s view, Brazil stands as the most promising of the region’s emerging markets for attracting investment in the medium to long term.

“Brazil’s diverse economy is a significant advantage in today’s complex global environment, where supply chains are being restructured,” he notes. “While Mexico also has a favorable geographic position, the recent elections there have unfortunately heightened uncertainty.”

However, Mr. Faria of LCA, who authored a study for Valor comparing Brazil’s investment rate with that of Organization for Economic Cooperation and Development (OECD) countries, is less optimistic. He highlights that Brazil’s major disparities lie in construction and research and development investments. “And there seems to be nothing substantially new on the horizon that could drive significant progress in these sectors in the coming years,” he remarks.

Mr. Faria also points out that the government’s room to maneuver is limited, especially with interest rates expected to remain high.

“Examining OECD nations and distinguishing between government and private investment—including companies that are not state-dependent, like Petrobras, and households—it’s evident that the government’s contribution to GDP has significantly deteriorated in recent years. Achieving an investment rate comparable to that of other countries is challenging without revitalizing public sector investment capabilities,” explains Mr. Faria.

Mr. Faria said that, unfortunately, there are no indications that this will change soon. He highlights that all projections suggest an ongoing increase in the country’s debt-to-GDP ratio. “Society has prioritized substantial social assistance—which is commendable in itself—but the critical question remains: How will the government fund increased investments? It seems unlikely, particularly in a country where the appetite for spending is high but the willingness to fund that spending is low. The numbers just don’t add up,” he states.

He also notes a lack of incentives for efficient expenditure, significant imbalances such as in the salaries of the judiciary and military pensions, bleak prospects for labor productivity enhancements—including the impacts of Covid-19 on the training of future workers—and limited opportunities to engage in more Public-Private Partnerships (PPPs).

“In my view, if Brazil continues on its current path, that might be the best we can expect; growth will remain sluggish, with no significant prospects for improvement,” he concludes.

*Por Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/