Brazilian coastline with mountains in the foreground

Is now a good time to invest in Brazil?

October 2016

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One year ago, Dilma Rousseff was Brazil’s president; Guido Mantega was finance minister; Eduardo Paes was Mayor of Rio and held majority support; Eduardo Cunha was speaker of the House; and Renan Calheiros chaired the Senate.

Today, Rousseff has been impeached;  Mr. Mantega arrested and investigated in connection with Operation Car Wash; the candidate backed by Mr. Paes as his successor lost the municipal election in Rio; Mr. Cunha was arrested for alleged corruption this week; and Mr. Calheiros is the next target for the Operation Car Wash investigations.

As seen by foreign observers, political instability has unarguably reached an alarming level in Brazil. Concerns that it could spill over into the economy are understandable. After all, how many more corporations and individuals may be singled out for investigation?

While this may make investors wary of Brazil, there are a few points that foreign observers should bear in mind:

There are still many excellent investment opportunities in Brazil, despite the political chaos.

There are plans to award concessions and to privatize sanitation services. Several companies are unable to access credit facilities and others have market presence but require restructuring. A number of attractively priced assets such as these are emerging in the local financial sector.

Operation Car Wash may attract uncertainty now, but will ultimately bring about needed structural reform.

Operation Car Wash and its offshoots have definitively become part of Brazil’s institutional process. Our country has to accept the negatives, address them, and move forward. The corrupt practices that we’ve seen in Operation Car Wash  trace all the way back to Brazil’s origins. This makes Operation Car Wash much more than a criminal investigation; it is an identity crisis for a Medusa-like country that could only look at its own face indirectly through mirrors or reflections for fear of being turned to stone. Operation Car Wash will be historic for Brazil because it makes the country examine the unspoken practices that have been endemic.

This soul searching will have a number of different consequences, but will include an inevitable reform of political parties, electoral arrangements, campaign finance, and relations between the public and private sectors. Political activity will be pursued under new types of relationships and democratic life will be governed by new rules. This will ultimately affect local and foreign investors. Is it an uncertain or treacherous outlook? Absolutely not.

Furthermore, Brazil is showing signs of commitment to fiscal responsibility. It is now being self-critical. Having fallen, it is picking itself up, licking off its wounds and righting its fiscal mistakes. The country has transitioned smoothly from a more right-leaning government to a more left-leaning one, and then back to the right again. It did not cross the boundary line – despite coming close – that leads to rabid populism; nor did it resort to the antiquated leftist agenda that is a characteristic of many Latin American countries.

The institutional risk of investing in Brazil is low.

The institutional risk of investing in Brazil today is infinitely lower than it has been for the past 20 years. When incorrect political and democratic decisions were made in the past, we rushed to get others to pay the bill, thus leading to even bigger and more costly blunders for the country in the long run. We have now learned our lesson. Brazil is not comparable to nations that create instability or confiscate foreign assets, nor does it resort to economic exploits to solve its problems.

Additionally, throughout Operation Car Wash, politicians have had their decisions to be challenged by economic agents, but they never allowed the quick-fixes that disastrously undermine a country’s credibility in the market. Investors have been preserved and this is an important sign of institutional maturity.

Of course, there are more challenges ahead. Brazil has to tackle political reform, campaign finance and the relationship between public and private entities. There will be no quick or easy solutions. Nor will the institutional agenda be righted soon, since Operation Car Wash’s anti-corruption investigations are ongoing and far reaching. However, rather than creating risk and generating uncertainties, these investigations are assuring investors that Brazil has developed strong nation-building institutions. Investing in Brazil is now much safer with ever more favorable prospects.

 

This article was written by Arthur Pinheiro Machado from Forbes and was legally licensed through the NewsCred publisher network.

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