Census of Foreign Capital in Brazil – 2010 and 2011 Results

Introduction and methodology

The Census of Foreign Capital in the Country (Census) has been carried out since 1996 by the Brazilian Central Bank in compliance with Law no. 4,131/1962. Its major purpose is to measure the stock of Foreign Direct Investments (FDI) in the country on December 31 of each base year, i.e., the fiscal year before the survey’s reference year.

Together with foreign assets statistics compiled through the Brazilian Capital Abroad (CBE) research, the results obtained through Census allow the calculation of the International Investment Position (IIP), which, associated with the balance of payments, compose of the chief statistics concerning the Brazilian foreign sector. All the aforementioned statistics are mandatory for countries participating in the Special Data Dissemination System (SDDS), an initiative of the International Monetary Fund (IMF) aimed to enhance the disclosure and transparency of economic data. Furthermore, data collected through Census make it possible for the country to participate in the Coordinated Direct Investment Survey (CDIS), which is carried out on an annual basis by the IMF with the purpose of measuring global FDI stocks and their distribution by investing and recipient countries.

Collection of information and compilation of results regarding the FDI stock in the Census 2011, base year 2010, and 2012, base year 2011, followed the guidelines of the IMF Balance of Payments and International Investment Position Manual 6th edition (BPM6) and the Organization for Economic Co-operation and Development (OECD) Benchmark Definition of Foreign Direct Investment (BD4). According to BPM6, direct investment arises when a non-resident investor owns equity that entitles it to 10% or more of the voting power in direct investment enterprises’ deliberative sessions and managers’ elections. Credit relationship between a direct investor and a direct investment company constitute stock of FDI under the modality of intercompany loan. Credit operations between enterprises controlled by a single investor, the so-called fellow enterprises, also constitute stock of FDI under the modality of intercompany loan.

In the period between 1996 and 2006, the Census was carried out every five years, and compulsory declaration included: (i) companies recipient of foreign credits and (ii) companies recipient of direct or indirect foreign investments, with direct or indirect non-resident participation in the company’s equity capital of at least 10% of shares or quotas representing voting power, or, at least, 20% of total paid-in capital.

As of 2011, the Census was split into two surveys: the 5-year Census (2011, base year 2010) and the Annual Census (2012, base year 2011), the latter targeted to large enterprises. Major methodology updating comprises the (I) adoption of market value as a criterion for the valuation of direct investment enterprises, because it is a more reliable indicator of an enterprise’s value in the case of eventual sale. This is the reason why the market value is the preferential criterion adopted in foreign accounts methodological guidelines. In the event that market value cannot be measured, it is replaced by the enterprise’s net worth; and (ii) the identification of both immediate and ultimate investors. Finally, enterprises headquartered in Brazil were allowed to respond the Census by consolidating information on their controlled companies also operating in the country. This procedure helped to rationalize the survey, thus reducing the cost of compliance and the number of respondents.

In the 5-year Census 2011, base year 2010, mandatory declaration included: (i) companies headquartered in Brazil which, on 12.31.2010, were indebted to non-residents with outstanding balance equal or exceeding US$1 million, and (ii) companies – including investment funds – with direct non-resident participation in the equity capital, in any amount. With regard to the Annual Census 2012, base year 2011, mandatory declaration included: (i) companies headquartered in Brazil, recipient of short-term commercial credits (with terms up to 360 days) granted by non-residents, with outstanding value, on 12.31.2011, equal or exceeding US$10 million; and (ii) enterprises – including investment funds – with direct non-resident participation in the equity capital, in any amount, and net worth equal or exceeding US$100 million.

Results

The 5-year Census 2011, base year 2010, registered 16,844 respondents, of which 13,858 FDI recipient enterprises. On 12.31.2010, the total FDI stock amounted to US$670 billion, equivalent to 31% of GDP. This FDI stock is US$9.5 billion higher than preliminary estimates released for 2011 (US$660.5 billion), and this difference is due to the process of validation of declared data. Out of the total FDI stock, US$587.2 billion refer to FDI – equity capital, corresponding to 27% of GDP, and the remaining US$82.8 billion to FDI – intercompany loans, corresponding to 4% of GDP. The stock of FDI – equity capital estimated through the Census is US$265.8 billion higher than the amount estimated through accumulated flows in the International Investment Position (IIP) referring to December 2009, US$321.4 billion. This difference is fundamentally explained by the adoption of a new investment valuation criterion, which takes into account the market value, in addition to the estimation of reinvested earnings.

The Annual Census 2012, base year 2011, which is intended to be a sample, registered 3,176 respondents, nearly 19% of 2011 Census respondents. The declared stock of FDI – equity capital of surveyed enterprises totaled US$523.3 billion, 89% of the total value. By adding up the growth of the stock of equity capital[1], US$65.9 billion, the total stock of FDI – equity capital on 12.31.2011 amounted to US$589.2 billion, equivalent to 24% of GDP. The stock of FDI – intercompany loans totaled US$99.4 billion. Thus, the total FDI stock added up US$688.6 billion on 12.31.2011, corresponding to 28% of GDP, 2.8% up from the previous year.

The variation between the stock of FDI – equity capital in 2010 and 2011 is explained by three factors: (i) net FDI – equity capital inflows; (ii) price variation of direct investment enterprises, and (iii) exchange variation. The amount of FDI – equity capital flows totaled US$53.1 million[2] in the 2011 balance of payments. The estimate of price variation of direct investment enterprises, calculated only for enterprises that declared their market value on both surveys, added up US$5.3 billion. In 2011, the nominal exchange rate depreciation was nearly 13%, calculated in terms of end-of-period BRL X USD exchange rates. Thus, the exchange rate depreciation reduced the stock of FDI – equity capital, measured at current USD, by US$71.2 billion. Other variations explained the stock increase by US$14.9 billion[3].

According to the criterion utilized for the valuation of the stock of FDI – equity capital, the Census 2011, base year 2010, registered 1,584 direct investment enterprises that declared their market value, 11% of total respondents. According to the FDI stock, however, enterprises that declared their market value corresponded to US$266.5 billion, 45% of total FDI – equity capital declared. Out of this value, US$169.7 billion referred to 60 enterprises listed on a stock exchange and US$26 billion to 243 investment funds. The valuation according to market value corresponded to an increase of US$121.2 billion in the stock of FDI – equity capital as compared to the valuation according to net worth.

In the base year 2011, the valuation of enterprises at market value added up US$234.9 billion, 40% of total FDI – equity capital declared. Out of this value, US$149.3 billion referred to enterprises listed on a stock exchange and US$29.7 billion to investment funds. The valuation according to market value corresponded to an increase of US$89.9 billion in the stock of FDI – equity capital as compared to the valuation according to net worth in 2011.

The Census 2011, base year 2010, also details the degree of influence of non-resident investors in the direct investment enterprise. In the case of 6,195 enterprises, 45% of the total, non-resident investors held 100% of the voting power, i.e., 43% of total FDI – equity capital. Out of this, 4,830 were controlled by a single investor. In addition, in the case of 4,850 enterprises, non-resident investors held between 90% and 99.99% of the voting power, and, in the case of 1,336 enterprises, between 50.01% and 89.99% of the voting power, totaling, respectively, US$126.3 billion and US$173.8 billion of the stock of FDI – equity capital. Therefore, it is noteworthy that 89% of FDI – equity capital enterprises own more than 50% of the voting power held by non-residents. Portfolio investment enterprises, in which none non-resident investor holds more than 10% of the voting power on 12.31.2010, corresponded to US$281.6 billion, encompassing 1,799 enterprises.

The stock of FDI – equity capital in 2010 and 2011 was distributed by country of non-resident investors according to the criteria of immediate investor and ultimate investor. The distinction between immediate investor and ultimate investor aims to minimize likely distortions caused by tax havens and financial centers. The criterion of ultimate investor reclassifies the investor country on the basis of the control chain of the immediate non-resident investing enterprise.

In 2010, according to the criterion of immediate investor, the Netherlands were the major investor country in Brazil under the FDI – equity capital modality, with a stock of US$163.3 billion, or 27.8% of total, encompassing 838 enterprises. Dutch investments were concentrated on the manufacturing industry, US$92.5 billion, and financial activities, US$29.1 billion. As immediate investors, the United States responded for US$108.1 billion, or 18.4% of total stocks, encompassing the majority of direct investment enterprises, 2,910. U.S. investments were predominant on financial activities, extractive and manufacturing industries, with respective stocks of US$30.1 billion, US$30 billion and US$23.2 billion. Spain was the third largest immediate investor in 2010, with US$72 billion, 12.3% of the total, encompassing 1,088 enterprises, highlighting investments on the manufacturing industry, financial activities and extractive industry, totaling, respectively, US$20.3 billion, US$18.8 billion and US$10.8 billion. In 2011, these countries persisted as major immediate investors, with FDI – equity capital stocks totaling US$160.9 billion, US$103.2 billion and US$82.3 billion, respectively, highlighting Spanish FDI growth in the sector of information and communication, which rose from US$10 billion to US$22.7 billion.

According to the criterion of ultimate investor, the stock of FDI – equity capital of the Netherlands totaled US$14.9 billion in 2010 and US$13.1 billion in 2011, encompassing 610 enterprises in 2010. Luxembourg and Cayman Islands, with respective total stocks of US$41.2 billion and US$36.4 billion in 2010 and 2011, according to the criterion of immediate investor country, moved to US$15.6 billion and US$16.1 billion in the period under analysis according to the criterion of ultimate investor country.

In 2010, the United States hosted the largest number of ultimate investors in Brazil, totaling US$109.7 billion, or 18.7% of the total stock, encompassing 2,891 enterprises. U.S. investments were predominant on the manufacturing industry and financial activities, totaling US$45.9 billion and US$32.2 billion, respectively. As ultimate investor, Spain was responsible for a FDI – equity capital stock of US$85.4 billion, or 14.5% of the total stock, encompassing 971 enterprises, highlighting investments on financial activities and information and communication, with respective total stocks of US$42.6 billion and US$10.8 billion. The third most important ultimate investor in 2010 was Belgium, with US$50.3 billion, or 8.6% of the total stock, encompassing 113 enterprises, and investments concentrated on the manufacturing industry, US$47.3 billion. In 2011, the United States responded for US$115.3 billion, Spain, US$77.1 billion, and Belgium, US$54.9 billion. As ultimate investor, the Brazilian stock amounted to US$46.2 billion and US$35.7 billion in 2010 and 2011, respectively, in view of non-resident investor enterprises in the country being controlled by Brazilian companies.

Statistics concerning the allocation of FDI total stocks by economic sectors were compiled according to the activity importance for the direct investment company’s sales or earnings. Each enterprise or holding in Brazil is allowed to declare up to five economic activity sectors.

The stock of FDI – equity capital in 2010 was mainly allocated in the sector of services, totaling US$258.1 billion, followed by the industry, US$236.4 billion, and the crop, livestock and mineral extraction, US$92.8 billion. In that year, the largest FDI – equity capital stock was associated with the segments of financial services and auxiliary activities, US$99.2 billion, or 16.9% of the total stock, encompassing 911 enterprises. Even though no particular activity was responsible for more than 10% of the total stock, it should be highlighted the segment of beverages, US$52.4 billion, 8.9% of total and 46 enterprises; oil and gas extraction, US$49.6 billion, 8.4% and 117 enterprises; and telecommunications, US$40.6 billion, 6.9% and 174 enterprises. In 2011, respective totals were: financial services and auxiliary activities, US$86.6 billion, 14.8% of total; beverages, US$63.8 billion, 10.9%; telecommunications, US$53.6 billion, 9,1%; and oil and gas extraction, US$46.1 billion, 7.9%.

The stock of FDI – equity capital in the industrial sector was also distributed by federation unit[4], on the basis of respondent’s fixed asset allocation. The enterprise’s value was not necessarily allocated in one single federation unit, since fixed assets may be distributed throughout several states. In 2010, the leading FDI – equity capital states were São Paulo, US$99.9 billion, 42.3% of total; Rio de Janeiro, US$31.4 billion, 13.3%; and Minas Gerais, US$25.1 billion, 10.6%.