When Israeli property executive Mia Stark arrived in Brazil in 2013, the country’s economy was already beginning its long slide into what would become its worst recession in history. Undeterred, the Brazil chief executive of Israeli shopping centre group Gazit Globe bought control or stakes in seven properties in prime locations in the biggest city in Latin America’s largest country, investing R$2bn ($635m) over the past four years. Gazit has since turned around the properties it controls, which range from Light, a historic mall in São Paulo`s charming but gritty downtown area, to a shopping centre in the flash upmarket district of Morumbi, Ms Stark claims. “When we came to Brazil, we didn’t know what we were going to face,” Ms Stark said. As the economy deteriorated, shrinking more than 7 per cent over the past two years, she said her management team made a conscious decision. “We said: ‘You know what? Instead of negativity, let’s find deals.’” Hardy foreign long-term investors such as Gazit have sustained Latin America’s largest economy as it has suffered not only the recession but one of the most tumultuous political periods in its history.
The country’s former leftist president, Dilma Rousseff, was impeached last year for budgetary violations while her successor, Michel Temer, has been indicted for corruption. Mr Temer is fighting the charges, which have threatened to derail a reform programme by his centre-right government designed to restore the country’s sinking public finances. Yet foreign direct investors have continued to pour money into Brazil despite these challenges. The country received $78.93bn in FDI during the height of the recession in 2016 — the seventh highest such inflow in the world, according to World Bank data.
Analysts said this resilience — the central bank reported net FDI in the 12 months to end-May of $80.7bn — was partly due to net inflows into mergers and acquisitions. Brazilian companies and assets were more attractive following a depreciation of the country’s currency, the real, against the dollar, to about half of its value since it reached its highs in 2011. Local shareholders and companies were also keen to offload assets because of financial distress caused by the recession or due to the corruption investigations.
These were often snapped up by foreigners. “At the end of the day, compared with other countries Brazil has been receiving a lot of FDI for a relatively long period of time because there is a bunch of assets for sale,” said David Beker, Brazil economist with Bank of America Merrill Lynch. The main corruption probe, known as Operation Car Wash, has forced asset divestments from companies ranging from state-owned oil company Petrobras to construction company Odebrecht, whose businesses have been devastated by allegations they participated in political bribery schemes.
The next in line for asset sales is JBS, the world’s largest meatpacker, which is at the centre of the corruption allegations against President Temer. Brazilian mergers and acquisitions last year totalled $46.6bn, of which nearly $37bn were made by investors from foreign countries, according to data company Dealogic. China was the biggest source of investment, with nearly $12bn of deals including a $9bn acquisition of an electricity company, followed by the US and Canada each with about half this amount. “Some of the local . . . assets are cheap and many investors that have a medium to long-term strategy see this as a good opportunity to gain a foothold or increase their existing footprint in the Brazilian economy,” said Alberto Ramos, economist with Goldman Sachs. However, economists cautioned that just under half of the money reported as FDI was inter-company loans between overseas companies and their Brazilian arms and reinvested profits. Some of these inter-company loans were effectively currency trades to take advantage of Brazil’s high real interest rates while others could be to recapitalise subsidiaries struggling with the recession.
“Only about 20-25 per cent of FDI inflows into Brazil is greenfield investment, that is money for building factories and ports and airports,” estimated Neil Shearing, chief emerging markets economist with Capital Economics. Indeed, building new projects in Brazil remains as difficult as ever due to the country’s red tape and the political volatility, investors say. Even Ms Stark of Gazit said she preferred to avoid developing sites from the ground up because of the bureaucratic challenges, although she has done it on occasion. Instead, her strategy was to stay lean and to focus on each deal — her management team of 20 people has grown little even as the company has expanded by nine times in terms of its assets over the past few years. Her focus was properties that had “great assets” but were badly managed within a seven-kilometre radius of central São Paulo — an area that is the epicentre of the continent’s biggest economy. “If you think you are smarter than the locals and will find plain vanilla deals, you’re in the wrong place,” she says. “Nothing is easy.”