Flow, exchange rates, and a bit of caution

Year after year, we return to write about capital flow indicators in Brazil. First, because we believe it is an important variable for anyone working with foreign exchange (among other things, of course!), but also because it is a topic that requires constant updates and evaluation. We live in a globalized world with significant capital flows—financial transactions such as buying and selling company stocks, bonds, and currencies. Transactions occurring in real time are now part of the daily lives of financial institutions and, increasingly, of individuals. Most of the time, these operations are conducted in dollars, meaning they directly impact the exchange rate; there is no way around it. The greater the capital flow (i.e., dollars) coming into Brazil, the lower the exchange rate, and the reverse is also true. It is the basic law of economics: the higher the supply, the lower the price, and vice versa! ‍

                                           
But let’s get back to the flow and look at what happened in the recent past (which feels like a long time ago, but that’s okay). 2024 was a year marked by uncertainty and volatility due to geopolitical issues involving wars in Eastern Europe and the Middle East, in addition to various other conflicts in regions such as Myanmar, Sudan, and Syria. Consequently, there was a certain instability in global investment flows, driven by the lack of predictability these conflicts imposed. To give you an idea, according to data from UNCTAD, the United Nations Conference on Trade and Development (see report), global Foreign Direct Investment (FDI) flows fell by 8% in 2024, excluding financial flows through European conduit economies. However, if we include these economies, global FDI reached approximately US$1.4 trillion, an 11% increase compared to 2023. For developing countries (hello, Brazil), FDI fell by 2% in 2024, marking the second consecutive year of decline and justifying part of the devaluation that these countries' currencies experienced that year (see chart).

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But what about now in 2025? Regarding Brazil, based on available information, counterintuitively, our exchange rate appreciated by a little over 7% in the first quarter of the year, even though the flow remained in the red and the country recorded the largest outflow of dollars in history! No less than US$15.8 billion left our economy (see chart). It is as if an entire block of international revelers had left the parade before the samba school even started playing—a total mood of discouragement. #helloautumn, leaves falling, capital flowing out...

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The real highlight came in March, when we saw a withdrawal of US$8.3 billion, driven mainly by the financial channel, which was responsible for a reduction of more than US$12 billion. However, the trade flow tried to hold the line with a net inflow of US$4.5 billion, but it was like trying to "cover the sun with a sieve": it wasn't enough to offset the entire financial outflow. As a result, we closed the month in the red. To put it in perspective, at the height of the pandemic in March 2020, the outflow was lower than what we are seeing today, at just over US$6.6 billion. Consequently, we have accumulated an outflow of nearly US$40 billion over the last twelve months—that is a lot. Curiously, the exchange rate appreciated in the most recent data (see chart)—normally, this relationship is inverse.

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But what can we expect for the rest of the year, given the many adversities 2025 is already presenting? In our view, the outlook is moderately positive, although still surrounded by internal and external challenges. The expectation of stable global economic growth and the potential reduction of interest rates in some economies may favor the entry of foreign investment into the country, especially in sectors linked to infrastructure, renewable energy, technology, and agribusiness.

It is worth noting that Brazil remains an attractive destination for Foreign Direct Investment (FDI), driven by its vast domestic market, wealth of natural resources, and projects linked to the energy transition—which is perhaps the biggest topic of the moment! The resumption of major infrastructure projects and the strengthening of local production chains should also stimulate new contributions, especially if there is progress in improving the regulatory environment and legal certainty.

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However, factors such as exchange rate volatility, fiscal uncertainties, political risks, and competition with other emerging markets may limit the intensity of this movement. Furthermore, the global geopolitical scenario and potential reconfigurations in international supply chains, due to the trade war between the US and China, will likely continue to influence investor decisions. To boost capital flow, Brazil will need to maintain a reform agenda, ensure macroeconomic stability, and promote public policies that encourage sustainable, long-term investment.

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Conclusion: Although the first quarter of 2025 began with a significant challenge regarding capital inflows, the outlook for the rest of the year still holds some optimism—but with the caution that the current moment demands. Brazil continues to have the potential to attract investment, especially if it advances in structural reforms and knows how to seize the opportunities of the new green and technological economy. In a global scenario full of uncertainties, success in reversing the dollar outflow and regaining investor confidence will depend, more than ever, on our ability to promote stability, predictability, and a more competitive business environment. We will keep monitoring!

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