VZCZCXRO2177
RR RUEHRG
DE RUEHSO #0018/01 0081657
ZNR UUUUU ZZH
R 081657Z JAN 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 6250
INFO RUEHBR/AMEMBASSY BRASILIA 7331
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC 2675
RUEHMN/AMEMBASSY MONTEVIDEO 2246
RUEHBU/AMEMBASSY BUENOS AIRES 2578
RUEHSG/AMEMBASSY SANTIAGO 1952
RUEHLP/AMEMBASSY LA PAZ 3168
RUEHPE/AMEMBASSY LIMA 1078
RUEHCV/AMEMBASSY CARACAS 0418
RUEHBO/AMEMBASSY BOGOTA 1462
RUEHRG/AMCONSUL RECIFE 3304
RUEHRI/AMCONSUL RIO DE JANEIRO 7698
RUEHAC/AMEMBASSY ASUNCION 2889
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000018 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR WHA/BSC, WHA/EPSC, AND EB/OIA 
STATE PASS TO USTR FOR CRONIN/SULLIVAN 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
NSC FOR FEARS 
USDOC FOR 4332/ITA/MAC/OLAC 
USDOC FOR 3134/USFCS/OIO 
USDOC ALSO PASS PTO/OLIA 
TREASURY FOR OASIA, DAS LEE AND JHOEK 
 
AID/W FOR LAC/AA 
 
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. 
 
 
 
SAO PAULO 00000018  002 OF 003 
 
 
¶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 
 
SAO PAULO 00000018  003 OF 003 
 
 
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