RECORD BRAZILIAN INVESTMENT OUTSIDE BRAZIL

UNCLAS SECTION 01 OF 03 SAO PAULO 000018

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E.O. 12958: N/A
TAGS: EINV ETRD ECON EFIN BR
SUBJECT: RECORD BRAZILIAN INVESTMENT OUTSIDE BRAZIL


SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY

Summary
--------------


1. (U) 2006 marked the first time in Brazilian financial history
that Brazilians invested more overseas during the year than
foreigners invested in Brazil. This phenomenon is due in large part
to the internationalization of Brazilian companies, which are
becoming global players as they search for ways to reduce costs and
become more competitive. It also reflects Brazil's continued
balance of payments surpluses in recent years. The Central Bank
recently released figures projecting USD 18.3 Billion in Foreign
Direct Investment (FDI) in Brazil in 2006, compared to a record USD
26 Billion in Brazilian Investment Overseas (IBD). Although a
single multi-billion dollar transaction distorts these statistics to
a degree, the overall trend is clearly towards greater Brazilian
investment overseas. It's unclear what the overall impact of this
will be on Brazil, a lower-middle income country that needs greater
investment at home as well. End Summary.



2. (U) For the first time in its financial history, Brazilians and
Brazilian companies are investing more overseas than the country is
receiving in foreign investment. According to information from the
Brazilian Institute of Geography and Statistics (IBGE),between
January and September 2006 Brazilian investment overseas totaled USD
7.8 Billion, a 226 percent increase over the USD 2.4 Billion
invested during the same period in 2005. Projections indicate that
Foreign Direct Investment (FDI) in Brazil will close out the 2006
calendar year at approximately USD 18 Billion and Brazilian
Investment Overseas (IBD) will exceed USD 26 Billion. This
turnaround was propelled by the recent USD 18 Billion acquisition of
the Canadian mineral company Inco by Brazilian mineral giant Vale do
Rio Doce, which is leading the way in internationalizing its
investments, along with other Brazilian companies such as Petrobras,
Gerdau Steel and Odebrecht (engineering and large construction
projects). Petrobras, for example, invested USD 3.9 Billion
overseas from January through September 2006, an increase of 110
percent over its 2005 foreign investment level for the same period.


Growing Brazilian Investment Overseas
--------------


3. (U) Brazilian Investment Overseas (IDB) has been on the rise the
entire year. Claudia Dionisio of the Office of National Accounts at
IBGE observed that for the first time, this growth is not tied to
the external balance of goods and services, but to the drop in
external debt and the rise in interest rates for capital financing
overseas. She added that since 2002, when Brazil began to have
financing capability, the external balance was the principal
component of growth. Although the positive external balance is no
longer a principal component in generating GDP growth, it remains
the principal component in generating the capacity for growth.
Dionisio added that the main factor causing this upswing was the
reaction to the lowering of the basic interest rate, which was 18
percent in 2005 but has since fallen to 13.25 percent. This reduced
the attractiveness of domestic financial investments. Adriana
Beringuy, also of the National Accounts Office at IBGE, observed
that the rise in Brazilian financial activities overseas is related
as much to trading of stocks and bonds as to the driving momentum of
Brazilian companies in their desire to become more international.



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4. (U) The gross savings rate in relation to GDP has also
registered high rates for the 3rd quarter at 25.2 percent, higher
than the 24.3 percent in the same quarter of 2005. This is the best
rate since 1995, with the exception of 3rd quarter 2004. Eustaquio
Reis, an economist at the Institute of Applied Economic Research
(Ipea),commented that the increase in both investment and savings
rates are positive signs, but probably not sufficient to sustain a 5
percent growth rate in the economy for the coming year. According
to Reis, the increase in savings is tied to the change in the
balance of trade since 2000, when Brazil emerged from its trade
deficit and began developing a surplus, which in 2006 is expected to
be around USD 45 billion. He commented, "The business community
produced more and then exported and saved the income it earned."
For 2007, the Central Bank projects a 5 percent increase in
Brazilian exports which should total 145 billion USD. Imports are
projected to be USD 110 Billion, which will lead to a trade surplus
of about USD 35 billion.

Foreign Direct Investment in Brazil
--------------
Remains Strong
--------------


5. (U) From January through November of 2006, FDI totaled USD 16.29
Billion, or the equivalent of 1.92 percent of GDP, with a
performance that was better than forecast by the market. Even the
Central Bank FDI registered 2.67 Billion for November 2006, more
than double that of the same period in 2005. According to economist
Sergio Vale of MB Associates, FDI in November was propelled by
investment in the cellulose, paper and telecommunications sectors.
The Central Bank showed that FDI in the cellulose and paper sector
totaled USD 1.25 Billion in November 2006 while telecommunications
totaled USD 780 Million. Altamir Lopes, Head of the Economic
Department at the Central Bank, also was surprised at the results of
November 2006 and projects that for December, the flow of foreign
capital into Brazil will continue to grow, and should reach 2
Billion USD by the end of December. Thus, the Central Bank has
adjusted its FDI projection for 2006 from USD 18 to 18.3 Billion,
which will be a 20 percent increase over the USD 15 Billion in FDI
in 2005.


6. (U) The success of Brazil's efforts to attract FDI has had a
parallel effect on the amount of money remitted overseas. In
November, remittances from Brazilian earnings and dividends sent
overseas by multinational companies and foreign investors amounted
to USD 763 million. For the year through November the amount was
USD 13.27 Billion, compared to USD 10.44 Billion for the same period
in 2005. Octavio de Barros, director of macroeconomic research at
Bradesco Bank, stated that it is only logical that the more
foreigners invest money in the country and the better their
investments perform here, the more earnings they will have to send
back to their home countries, thus raising the IBD amount.

Tourism Reflects Similar Investment Pattern
--------------


7. (U) A greater amount of money flowing overseas from Brazilians
is also reflected in the spending patterns of U.S and Brazilian
tourists while on vacation. Through November of 2006, foreign
tourists in Brazil spent USD 3.92 Billion, compared to 3.86 Billion
in the same period of 2005, according to the Central Bank. The
Ministry of Tourism states that this is a record for tourism
spending. However, the spending of Brazilian tourists in the U.S.
is even greater, with USD 5.25 Billion spent through November, as
compared to 4.72 Billion in the same period of 2005. This accounts

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for a negative balance of 1.33 Billion in 2006 and 825 Million USD
in 2005.


8. (U) The companies leading the Brazilian charge overseas have
primarily, although not exclusively, been Brazilian commodity giants
such as Companhia Vale do Rio Doce (CVRD),which is acquiring
Canada's Inco mining in an 18 billion dollar deal. Gerdau Steel has
made recent large acquisitions in the United States as well. These
companies have been riding the recent commodity price boom and are
flush with cash. But not all Brazilian overseas investment is by
commodity firms, by any stretch of the imagination. In 2005, for
example, Brazilian aircraft manufacturer Embraer established a
facility in Harbin, China to assemble its strong-selling regional
jets.


9. (U) Comment: Brazilian companies, in their quest for greater
competitiveness and profit internationally, are increasing their
investments outside Brazil. This increased investment has resulted
in Brazil's annual overseas investments surpassing FDI in Brazil for
the first time. Outgoing investment was strong throughout 2006, but
received a major boost from the 18 Billion USD purchase of Canadian
Inco mining company by the Companhia Vale do Doce Rio in the fall,
perhaps signaling the beginning of a new wave of Brazilian companies
expanding outside Brazil's borders to become international partners
in the global economy. While a desire to expand overseas and
diversify their investments no doubt drives many of these companies'
decisions, there are also practical considerations such as seeking
market access and cutting costs. Brazilian businesses, for example,
often complain that the GoB's failure to pursue a free trade
agreement with the U.S. hinders their efforts to access the U.S.
market. They also complain loudly of restrictive labor rules and
high taxes on the Brazilian economy. To some extent, their
increased overseas investments also reflect these factors. End
Comment.


9. (U) This cable was coordinated with Embassy Brasilia.

McMullen