Brazil Needs Growth, Not Just Oil, to Attract Foreign Capital

(Bloomberg) -- As the dust settles from Brazil’s disappointing oil field auction, currency traders could be forgiven for wondering where the real is headed next. The answer depends on how much you’re willing to bet that economic growth is finally about to blossom.

The sale’s flop -- major producers including Exxon Mobil Corp. walked away without even lodging a bid -- frustrated investors because it slammed the door on what many had expected to be a lucrative source of foreign capital. Now that the fields have been sold, mostly to state oil producer Petroleo Brasileiro SA, there’s no ready signal that greenbacks are on their way.

Granted, the real’s collapse on Wednesday reflected the closing of tactical positions aimed at making a quick buck, not massive stops by long-term investors. And there never had been clarity on how much money raised through the auctions would have come from abroad. While traders expected at least some inflows after the sale -- helping explain why one analyst termed it a “total disaster” -- few foresee the real plunging into a death spiral from here.

Instead, traders are more likely to concentrate on what should be the single biggest factor when it comes to luring foreign money: economic growth. That’s where Brazil stands out from peers. Its most obvious rivals are anything but solid.

Mexican policies under President Andres Manuel Lopez Obrador are far from clear, giving investors a reason to steer clear despite the nation’s relatively high interest rates. Argentina just elected a new leader who supports capital controls. Even Chile, once an island of stability in Latin America, has been shaken by weeks of violent protests (its peso slid to a 16-year low on Tuesday). Brazil, meantime, may be pointed in the right direction after the government managed to finally overhaul its bloated pension system and the central bank slashed interest rates to zero.

Three new constitutional amendments delivered to Brazil’s Congress on Tuesday by President Jair Bolsonaro and Economic Minister Paulo Guedes may take time to pass, but encompass all that investors are seeking. Heading the administration’s agenda: reducing of the size of the government by improving rules to sell state-controlled companies and making the federal budget more flexible.

Given an absolute lack of yield in the international markets, then, it’s probably just a matter of time for the foreign capital to start flowing.

• NOTE: Davison Santana is an FX strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice
• Some information comes from FX traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly

To contact the reporter on this story: Davison Santana in Sao Paulo at dsantana6@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Alec D.B. McCabe

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