Record capital flight, high Brazil risk, peak exchange rate, foreign investment down

+The country urgently needs a shock of political realism at the center of government to avoid economic collapse.

There’s no shortage of data pointing to investors’ discredit of Brazil and the disastrous foreign policy and attitudes of its President – ruining investors’ confidence in the country, which is, after all, our greatest asset for resumption of economic growth and generation of employment.

Brazil’s resumption of economic growth depends on two assets: investment from the private sector and the confidence of international investors in general. The indispensable condition to attract both is: confidence.

If investors don’t have confidence in the government, in the rules of the game, in contracts being obeyed, the money migrates to more reliable and predictable countries. Dealing with a certain degree of inconsistency and capriciousness of governments and institutions is part of the risk (and also the opportunity) of investing in a country with an enormous domestic market and potential for growth. But there are limits. As the economist Affonso Celso Pastore expresses it in his article, “Brazil has almost always had current account deficits, which have always been exceeded by capital inflows.”

Pastore notes that this positive trend, of various decades, in which a surplus in capital inflows more than offsets current account deficits, has ceased to exist in the last 12 months – when Brazil reported a deficit of US$50 billion.

Country risk – as measured by credit default swaps (CDSs) – has increased by 250% in this period; and the dollar exchange rate has skyrocketed, reflecting the largest volumes of capital flight from Brazil since 1995. The São Paulo stock exchange (‘B3’) has also reported record capital flight: R$ 77 billion in 2020 alone.

These numbers portray how Brazil and the disastrous foreign policy of President Bolsonaro have fallen into international discredit. The country’s erratic leadership and its president’s irresponsible statements have ruined investors’ confidence in the country.

This means: we have lost the greatest asset we had for recovery of economic growth, and generation of employment in the country: the confidence of private-sector capital.

To rebuild Brazil’s reputation and credibility, Bolsonaro will have to rapidly change the conduct of foreign policy, his personal attitude and his political stance. This is the only responsible alternative remaining to him.

The irresponsible alternative would be a disaster for the country. It would mean riffing on the neo-‘liberal’ policy of an Economy Minister Paulo Guedes: increasing public spending, adopting an expansionary fiscal policy, and stimulating the economy through increased in public investment.

This option would lead Brazil to bankruptcy.

As Pastore warns, “We know how this story ends: in the limit, to staunch the depreciation of the exchange rate and sale of reserves, we would go back to capital controls. Just look at Argentina. There is an iceberg close to us, and the risk of collision is high.”

There is still a tiny window of opportunity open for resumption of a policy of common sense, but there needs to be a shock of reality at the center of the government, to pull it from its ideological torpor and place it firmly on the path of political realism.

 

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