Brazil seems a perfect match for Abu Dhabi

Mubadala's possible $13bn investment in the South American country may well prove a sign of things to come as the West's appeal wanes for Gulf investors.

The Ipanema beach in Rio de Janeiro. Sovereign wealth funds from the Gulf are now focusing on Bric nations such as Brazil. Vanderlei Almeida / AFP

The news this month that Mubadala Development was considering a US$13 billion (Dh47.74bn) investment in the Brazilian economy reflects the growing interest among big institutional investors in the so-called Brics countries.

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Last Updated: May 24, 2011

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Brics - Brazil, Russia, India, China and now South Africa - are seen as vigorous, young, high-growth markets, where the risk lies primarily in overheating rather than national bankruptcy.

The focus on Brazil in particular is of interest to market watchers, as it represents yet another chapter in the story of the global spread of Gulf sovereign wealth.

Whereas Gulf institutional investors have for the past several years been looking beyond the traditional European and North American markets, they have nonetheless previously restricted their focus primarily to South East Asia - a region with which the Gulf already has strong ties originating from trade and labour migration.

Latin America, by contrast, is literally the New World for Gulf investment.

Few pre-existing links exist between the two blocs (if one discounts the presence of Lebanese immigrants in both Latin America and the Gulf), and generally speaking, their economies "face" in different directions: Latin America towards the US and, increasingly, China; the Gulf towards Europe and South East Asia.

The fact that one of the UAE's primary investment vehicles is mulling such a significant capital investment in Brazil in a sense reflects the true globalisation of Gulf sovereign wealth: no longer tied to existing trade patterns, it follows only growth.

So what kind of growth is Mubadala, a strategic investment company owned by the Abu Dhabi Government, looking for in Brazil?

According to sources in the Brazilian government, potential areas of investment include oil and gas, aluminium, semiconductors, infrastructure and aerospace, while agribusiness may also be a possible avenue.

These fields all match areas of the global economy in which Abu Dhabi has been carefully building its capacity. Strategic acquisitions in many of these sectors in recent years mean that the authorities from the emirate have recruited sufficient expertise to begin expanding into new markets - a canny strategy that enables Mubadala to offer key benefits to the countries in question, as opposed to merely parking its money and repatriating the profits.

Indeed, it is Abu Dhabi's growing reputation for the long-term investment opportunity that is likely to see Mubadala's approach met with a kind eye. Already, the Brazilian government has returned the courtesy of Mubadala's earlier visit by sending its deputy minister for trade and development to Abu Dhabi to meet Sheikha Lubna Al Qasimi, the Emirate's Minister of Foreign Trade.

Despite the novelty of their relations, it is easy to see how Brazil and the UAE could make perfect partners from an investment perspective. Brazil is by no means short of potential investors. However, much of the money flowing into its economy is of a volatile and short-term nature - "hot" money originating in the fiscal easing by which developed economies have flushed their financial systems with liquidity in the hope of restarting domestic lending.

Unfortunately, in the absence of mechanisms to ensure that money remains in the domestic system, banks in the developed world have instead looked to plug their balance sheets by investing that cash in high-yield foreign currencies.

This trend has seen the Brazilian currency appreciate by 45 per cent against the dollar in the past two years: something that threatens to wreak havoc on the potential for growth in export-facing, high value-added industries.

Rather, the worry is that the opposite will occur: Brazil's cheap land will become a cash cow driving the deindustrialisation of the economy, as a renewed surge in global food prices pushes capital investment primarily into livestock and other low value-added exports (the country is also developing domestic capacity in iron ore, petroleum and soya).

In a bid to halt this trend, the government has followed a relatively aggressive monetary policy, both against speculation and appreciation, while entering into a war of words with the IMF over capital controls. Squeezed between an artificially weakened yuan (China is Brazil's biggest trade partner) and an artificially liquid dollar, the Brazilian economy remains in danger of overheating, with capital flooding into rapidly appreciating yet non-performing assets.

Stepping into this picture then is Abu Dhabi, which offers the possibility of long-term fixed capital investments in high value-added sectors - especially semiconductors, where Mubadala's part-acquisition of AMD has made it a significant player in a pivotal sector of the high-tech economy.

For Abu Dhabi's part, investing in an economy such as Brazil's makes perfect long-term sense: not only is the country the largest economy in Latin America (currently growing at about 7.5 per cent annually), its government has also made a substantial investment in education and skills.

Mubadala will arguably be looking to such countries as the next step in its growth strategy, having already acquired the technological know-how from high-tech firms in the West.

All this may be bad news for the increasingly sclerotic Old World, but for Brazil and Abu Dhabi it represents the possibility for a mutually beneficial long-term partnership. Fixed capital investments providing jobs and a high-tech profile will please the Brazilian authorities, while steady growth approaching double digits combined with a strategic foothold in one of the world's most important emerging markets will please Abu Dhabi.

Another benefit to both parties is a degree of shielding from the increasingly conflicting forces of the global economy: forces of growth in the East and decay in the West, the unforeseen interactions of which threaten to overwhelm those caught in the middle.

Mubadala's $13bn then could well be a sign of things to come.

Oliver Cornock is the regional editor of the Oxford Business Group