Investing in Brazil
The Fed announced two months ago that they would drop America’s key interest rate to .25% giving America the unique distinction of having the lowest interest rates in the world. In addition, although Congress is still wrangling, they will soon pass one of the largest spending bills in the history of the nation, wrapped up in a bow and called economic stimulus. Although, it sure smells like pork. These two events have one key thing in common - printing more money. In fact, the United States will begin printing money at an unprecedented rate, not just in the history of our nation, in the history of the world.
Ultimately, I believe these policies will fail. Furthermore, their policies are designed to promote consumption and penalize savings. I refuse to fall into this trap. I believe that saving money is always prudent, and in these economic times, even more so. There in lies the dilemma. If I want to save money, where should I do that?
Why Brazil?
In the United States, it is a non starter. Option 1 is to leave my cash in the bank. The good news is that theoretically, one should never lose the principle. The only exception is if the bank goes bankrupt and one has more than $100,000 in the account. But on the other hand, the interest is very close to zero. Option 2 is to place the money in the stock market. I have now figured out that the stock market is NOT for financial security. It is a high risk place where lots of money can be made and also lost. The stock market is for high net worth individuals and not average investors saving towards retirement.
There has to be a better place to invest one’s money. Which leads me to Brazil. Brazil has the highest interest rates in the world. Right now, Brazil is paying a little over 1% per month or slightly over 13% per year in interest. Just like the United States, the interest is paid monthly. I sold all of my stocks in May 2008, and now I have moved a good portion of those proceeds to Brazil. Here is the amazing thing. At 1%/month, the interest on my savings far exceeds my living expenses. In fact, even when my two children are in college, the interest will exceed our expenses.
This is fantastic, but it is also ironic. When I left Gateway, I also had a pile of cash, but there was no true risk free way of gaining interest that would bear any meaningful fruit. The rest of this blog will focus on all the things that I have learned about investing in Brazil.
I have two banks in Brazil, HSBC and Banco do Brasil. At this point, the primary bank is HSBC. My account is broken into three distinct pieces, checking, certificate of desposit, and investment funds. The investment funds are essentially a composite of the American definitions of money market funds and mutual funds. Note: to my knowledge, there are not a lot of brokerage firms such as Charles Schwabb and Lehman Brothers. Most of these type of transactions are handled through the banks.
I set up two separate investment funds in HSBC. My instructions were that the funds be extremely conservative and at no time did I want to risk losing any principle. They identified two funds, but there was one big stipulation. The funds had a minimum investment of R$300,000 and R$500,000. In my case, this was not an issue, but I can see that these minimums might be an issue for others that want low risk investments.
The fund operates just like a money market fund in the United States. I can get on line and immediately move money from the fund into my checking account. Unlike the United States, taxes are deducted immediately when the money moves from the fund to the checking account. Secondly, taxes are automatically deducted twice a year from the fund if no money is withdrawn.
Taxes
The tax rates in Brazil are substantially less than income taxes in the United States. Much closer to American capital gains taxes. The maximum tax rate for interest is 22.5%, and the minimum is 15%. The rates slides the longer the money is left in the fund. The first six months are taxed at 22.5% and after two years, the rates falls to 15%. This is amazing! The Brazilian tax code encourages people to save money, which is 180 degrees from the United States, where the goal is to spend it as fast as you make it. I also confirmed that the Brazilian income tax rate is roughly half American taxes, but that is for another day.
My second account is the certificate of deposit. The CDB (the Brazil acronym for CD) is different than the American version. The American version is a promise to keep the money in the bank for a fixed period of time. The CDB can be withdrawn at any point and any time. In this way, it behaves almost identically to the fund. The only caveat is that it is a little more difficult. I have to call the bank to transfer the funds to my checking account, rather than doing an online transfer.
CDB has a huge tax benefit. Unlike funds where taxes are deducted twice a year, with CDB, taxes are only deducted when the money is moved to the checking account. This allows one to make compound interest over a space of years rather than a short 6 months. The interest rate on funds is slightly higher than the CDB, however, if you plan to keep the money in the account for years, the tax benefit could well outweigh the interest difference.
So after a lot of work and worrying, I believe I have achieved one of my life’s goals. My interest income here in Brazil is such that I have an oustanding income without having to work ever again. It is hard to describe the feeling, but there is a certain tranquility. When I describe my experience to my many American friends, almost all of them still feel a hesitancy to invest in Brazil.
To be honest, I felt the same way! If I had not slowly over the course over the last 5 years transferred safely so much money, I would never have felt comfortable making this happen. But there is a lot more than just experience driving my comfort level for investing in Brazil. Here are some of the many reasons why I think Brazil is a smart place to invest.
High interest rates
The Brazilian high interest rates is actually a reflection of an economic policy that is vastly different than the rest of the world. Back in the 1980’s, Brazil went through a period of hyper inflation which ultimately led to the collapse of their banking system and their currency. When talking to anyone in Brazil, everyone in the nation remembers this gloomy period in their history. Therefore, the Brazilian central bank is very cautious about inflation. The best way to keep inflation in check is to keep interest rates high.
But more importantly, Brazil’s measure for inflation is as accurate as possible. It includes the costs of all goods and services in the economy. The American inflation number excludes the cost of energy and the cost of food!
There is also a qualitative point. When I talk to my banker in Brazil, she is extremely knowledgeable about macroeconomics. In general, Brazilians are much more sensitive to macro economics perhaps due to the collapse in the 80’s.
Currency Risk
I personally have less currency risk than an American since I live in Brazil and have legitimate expenses in the local currency. But even throwing that out, I still think Brazil is a smart place to invest money.
The first reason is the most overpowering. The US strategy to fight this economic crisis is to print money. Print money to lower interest rates. Print money to bail out distressed companies and banks. Print money to build bridges and new schools. And on and on. This strategy reeks of panic, and is very risky. Ultimately, this strategy is inflationary, and more over puts significant downward pressure on the dollar. To get an idea on the magnitude of the American printing press, check out this video of none other than Fox News.
The next argument is the high interest rates offset currency losses. If you believe that the dollar will rise, then if that rise is not too significant, the interest rates will offset any losses. Here’s an example. With Brazilian interest rates where they are, your money will double in a little less than 5 years. The dollar is currently at R$2.30. The dollar would have to rise to R$4.6 to stay out of the black.
How did I do it?
I have investigated a lot of things, and it was not easy. It is not easy to move money from the United States to Brazil. For example, if an American wanted to own Euro’s, they could setup a foreign exchange account and buy and sell to their heart’s content. Not on the Brazilian real.
The only way to do this is to setup a Brazilian bank account. The key is to have a visa that is anything other than a tourist visa. Right now, I have permanent residence since I am married to a Brazilian woman. Other options are to get an investment visa, student visa, or work visa.
It is unclear to me why Brazil makes it so difficult for foreigners to invest in their nation. I believe that if they open up these regulations that the economy would boom. A friend of mine was saying that the key success is to catch a trend on the way up before too many people know. That’s where I believe we are on the curve right now.
I have been talking to various people in the financial industry. I believe there is a way for a mutual fund or perhaps a hedge fund to create a low risk way for Americans to participate in the high Brazilian interest rates. I’ll keep everyone posted as those discussions progress.
If you have any comments or questions, leave them below.
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February 11th, 2009 at 5:45 am
Great analysis, Rob. Having been a victim of Brasil’s tight banking regulation policies, I’d like to see some loosening of them. I’d drop a few hundred thousand into accounts there in a nanosecond. I no longer have any faith in US banks or investment houses, and the government will screw up this stimulus package, between the Dems loading it with pork and the Repubs packing it with tax breaks for their friends. It’s looking a lot like sausage…
February 13th, 2009 at 2:57 am
Rob, I wonder if Brazil making difficult for foreigners to transfer money to Brazil is someway connected to the crash of 1997, which happened because of speculative capital. I mean, if any foreigner could transfer money to Brazil, then in the case of any “rumour” (and these rumours are usually more frightening if your money is invested in “a third world country”) withdraw that money, wouldnt that lead to a crash?
I have no clue if its the same situation, but I just remembered that. Since it seems you have a good knowledge of economics, you might analize it, since you mentioned the 80 crysis but didnt mentioned the 1997 crash.
Thank you.
ps: as soon as I win the lottery, I will also invest the money and live from the interest rate
February 13th, 2009 at 9:22 pm
Interest rates in South Africa are similar to those in Brazil and, like Brazil, South Africa has been much less affected by the global economic crisis than the US or Europe. For example, until a few months ago ABSA bank in South Africa used to have about one tenth the market capitalisation of Barclays bank in the UK - now, post the melt-down, they are almost exactly equal in size. So it is worth considering opening an investment account at a South African bank. I think (although I’m not sure) there are fewer restrictions on foreign investors than in Brazil, plus everybody speaks English - which can be a difficulty in Brazil if you don’t speak Portuguese.
February 14th, 2009 at 4:01 am
Thanks to coordinated quantitative easing (i.e., debt monetization), ALL currencies will lose substantial purchasing power over the next decade or two. The only way to protect your wealth is to:
1. Run a business that can maintain pricing power during periods of high inflation.
2. Own ag real-estate (farmland) that is not likely to be subjected to large increases in the rate of property taxes.
3. Buy as much physical gold & silver as you can get your hands on.
Also, it wouldn’t hurt to keep 6-9 months of canned food, beans ‘n rice, and any other storable essentials in case the supply chain breaks down for a sustained period of time.
March 19th, 2009 at 10:43 pm
Rob –
I’d love to hear how you were able to move large sums of money to Brazil. I know wire transfers are possible (and Western Union, etc) but it’s clear you have done your homework, so I wonder if you came up with a smarter way of transferring the money. I am currently wiring $10K per month to Brazil, and getting a good currency rate, until the Brazilian bank converts the USD to Reales.
Thanks
March 20th, 2009 at 12:29 am
Chris,
Here is the way I moved the money. In 2003, I setup a banking account to purchase my apartment. At that time, I think there was a loop hole in the law, and I was able to setup my Banco do Brasil account without a permanent residence visa. I just needed to have my birth certificate and my CPF number which is the same as a social security number in the US.
Once the bank account was setup then I just wired the money from my US account to the Brazilian account. There is like a 1% wire fee, but that is small given the interest rates. You make that up in a month.
But now the rules have changed and you must have a permanent residence visa to create a banking account. Fortunately, now I have that also since I am married to a Brazilian.
Even if you are using Western Union to get the money into the country, you still need a bank to put it in to get Brazilian interest rates.
March 20th, 2009 at 4:57 am
I didn’t write clearly — sorry. My husband is Brazilian, so a Brazilian account is not the issue. I am finding that the US banks only wire money in dollars and the Brazilian banks are charging a high fee to convert dollars to reales, so I was just wondering if you had found a way to send in reales, or a way around these conversion costs. I realize someone is going to make money off the transaction, but the costs are higher than it was sending Euros to Spain when I needed to do that.
Thanks for your comments
March 21st, 2009 at 8:24 am
I have done this many times, and there are two issues:
1. The wire fees. Both the sending and receiving bank have a fee. Here in Brazil, I have found the receiving fee to be about 1%, which is pretty high in my view.
2. The exchange rate. They usually give you a hair cut on the exchange rate also. But that said, I usually try to time my transfer so I am getting as high an exchange rate as possible. I also have found that if you are transferring a large amount of money, they will give you a better rate than a smaller amount.
If you have a Brazilian bank account, then you are in good shape. Some of the fees are high, but the sooner you do it the better, because then you can start earning 1%/month on your money for a certificate of deposit.
As the economic crisis unfolds, Brazil will start lowering their interest rate as an economic stimulus. We will get less interest, but if you plan to move the money back out of Brazil (I do) then I will make it back on exchange rate since Brazil’s economy will most likely grow faster than the rest of the world, and so will their currency.
May 4th, 2009 at 12:19 pm
hey rob, hows it going in brazil? i read your article in investing in brazil and i want to do the same. question: what is the maximun amount that a bank will allow u to invest in their accounts? trying to get big interest return
July 19th, 2009 at 11:29 pm
i am from Brazil, my name is Augusto Ferreira and i want to help you guys with that, and also give you some opportunities to invest here.
Best Regards
Augusto Ferreira
September 6th, 2009 at 10:59 am
I have a question regarding wiring money to BR, do you have to pay taxes on that money? Another blog I read that the bank could hold your money for months until they check the money isn’t from ilegal sources.
September 6th, 2009 at 11:48 am
I have wired money to Brazil many times and have never had a delay. Some times, I must sign a paper that says the money is mine and not for some other person etc.
December 14th, 2009 at 4:19 pm
Interesting perspective on this and I was wondering about “Investing in Brazil” of Bank account, Thanks for tackling this case study.
December 16th, 2009 at 5:50 pm
hey r0b, h0ws it g0ing in brazil? i want t0 kn0w what the c0st 0f living is in brazil in br prices, if i am t0 live there. what is the max i can invest in a bank acct? i kn0w the inc0me 0f a brazilian is 465 reals m0nthly, what is the rent like?
December 16th, 2009 at 6:50 pm
Hello Robert,
You are asking a tough question. First off, if you want to look at cost of living in dollar terms, it is high. The reason is that the dollar is very weak against the Brazilian real. Most believe that it will get significantly weaker due to the policies after the economic melt down began.
On top of that, here in Rio, costs are much higher than other parts of Brazil. I would say that Rio and São Paulo are the most expensive places in Brazil to live.
Rents in Rio particularly in the areas near the beaches are pretty pricey, although you can get a very nice apartment for probably about R$3000/month, which is about $1800/month at today’s exchange rates.
On the other hand, certain things cost a lot less. Clothing, food and furniture cost significantly less than the US.
Hope this helps.
January 8th, 2010 at 2:40 am
Hey Rob,
Im from Brazil living in Canada for the pass 15 years…and always new Brazil is one the best places to have a good return on your investiment.
As of now Im trying to figure out the best way to transfer money without lossing too much on exchange rates and bank fees etc…For all of you out there wondering…right now real state is the best investiment with 100% return. Feel free to ask questions at frends31@hotmail.com
January 11th, 2010 at 9:54 pm
Hi Rob,
I just found your blog and I am so impressed that your comments have continued on this post all year! I’m an entrepreneur and I’ve started my company in Brazil, an electric vehicle company. If any of your fans are interested in putting their money this is another means–invest in start up in Brazil–it’s got its own set of risks but the hassles it may be more rewarding.
Cheers, Melissa
January 15th, 2010 at 6:37 am
Great blog Rob, and am hoping you can assist me.
I regularly come and go from Brazil, as a “tourist”, and I have a house in SP and wife is Paulista. I have a CPF and am going for RNE tomorrow. After two wasted meetings with Estillo (BdB) have found great bank manager is Sao Paulo who will open a bank account for me so I can invest (CDI likely). Am here for around 4-6 weeks per year.
So my question:- what is the trigger that would make me liable for my tax in Brasil on my worldwide income? Is it living here >180 days per year, or merely having a CPF (registered as a foreigner)? The rates of return are great, but if I am taxed on my other income it would be a nightmare. What is the definition of a ‘resident’ for tax purposes?
Any help would be appreciated. All the best, b.
January 16th, 2010 at 3:45 am
Hi Barney,
All of your interest is automatically taxed in Brazil. You don’t have to do anything. When you withdraw the money, it is deducted. Also, the tax is deducted if not withdrawn every 6 months. There is one exception which is the CDI and tax is only deducted when you withdraw.
I don’t think there is a trigger that makes you liable. In fact, it is the opposite. If you wanted to only pay your taxes in Brazil and not in the US, then you would have to renounce your citizenship. Keep in mind that it if you revoke your citizenship, then it is permanent.
Here’s a link.
http://travel.state.gov/law/citizenship/citizenship_776.html
January 17th, 2010 at 3:48 am
Thanks Rob. I would be happy to pay the taxes on the interest earned; it still yields much more than I get from my Canadian bank where I have money on CD.
Im British, and live (domiciled) in a tax free jurisdiction so do not have any tax obligations to any Country (thankfully). Went to Fed Police in SP this week and they told me that I can get my RNE as soon as I return to Brazil from UK with a Residency Visa (from Consulate in London), which I should get due to three years of marriage.
Am still worried that at some point the Govt in Brasil may consider me a ‘resident’ for tax reasons and block my CPF effectively freezing any assets I hold in Brasil. Any ideas where I can get a definition of Residency in Brazil that would make me liable for tax on worldwide income?
(Great pictures of your family on your site, you look really happy)
All the best.
February 15th, 2010 at 7:53 am
thank you for posting this info. I’m investigating moving money from my accounts in the US to brazil. My wife is brazilian and we already have bank accounts there…. does the brazilian government take a piece on the transfer (large amount, not a couple hundred bucks)? or is the 1% fee pretty much the only fee or tax to move the money that you’re seeing? thanks again for this super helpful info. I had read that the gov’t was taking 27.5%, but this was from a message board without alot of info…
February 15th, 2010 at 9:47 am
There is a small fee to wire the money. It is less than the amount that the exchange rate fluctuates so you don’t notice very much. Or sometimes, the rate fluctuates in your favor and you get slightly more than you anticipated with the fee included.