Brazil’s Central Bank has revealed that foreign investors have reduced the amount of capital they are investing in Brazil from US$12.4 billion to US$7.5 billion in the first six months of 2012, representing a drop of 40%.

External investors have been disappointed after the weaker performance posted by Brazil in the past two years, and analysts say government fiscal policy altering the exchange rate of Brazil’s currency, the real, has eroded investors’ bank balances and led to a change in the mood of the market.

President Dilma Rousseff is set to unveil a new stimulus package this week, expected to include tax relief and reduced energy bills for industries, as well as privatization schemes for roads, railways and airports.

However despite previous interventions from the government – including slashing interest rates and increasing access to cheaper loans – official predictions for 2012 growth have been cut from 4.5 to 3.0%, and some are predicting as low as 1.5%.

Brazil’s main stock exchange – the Ibovespa – has taken a tumble in the past few months. (Image: Yahoo Finances)

Some in the Brazilian media have described the fiscal policies as “a bucket of cold water” in investors’ faces.

However, it appears the story isn’t this simple: economists are divided as to whether the foreign capital exodus is based on facts concerning the slowdown of the Brazilian economy due to reduced demand for commodities from China, and the rippling effects of the Europe economic crisis and general lacklustre mood of the world economy, or whether it’s got more to do with an overly negative, pessimistic impression of Brazil’s economy by foreign investors.

Some are saying that foreigners have humoured the Brazilian economy long enough, and are seeking an alternative: Mexico – dubbed by some as the “New Brazil”. Its main stock exchange skyrocketed over 17% this year alone.

However, Brazil’s main São Paulo-based Ibovespa stock exchange has had 4.15% wiped off its dollar value year-on-year, after a noticeable exodus by foreign investors began some four months ago – now totalling nearly US$1.8 billion in lost shares.

Read more on this in my business article for The Rio Times here.