Philippe Gelis, CEO and co-founder of Kantox, takes a step back from the World Cup fervour and asks what kind of business legacy may be left behind.
The World Cup may have come to a spectacular finish, with Germany capturing the crown, but this is not the end of the story for Brazil.
While Brazilians will be disappointed that they didn’t make it beyond the semi-final, the legacy of the World Cup 2014 is likely to continue for many years to come.
According to Colliers International’s report FIFA World Cup 2014: Brazilian Goals, ‘The World Cup will act as a giant advertisement for Brazil and its host cities, showcasing them as places in which to invest, visit and live.’
With a number of UK-based growing companies likely to start opening their eyes to the opportunities in post-World Cup Brazil, what do they need to consider before crossing the Atlantic?
Brazil is the sixth largest economy in the world and one of the fastest growing. It is also currently the world’s 20th biggest exporter and 21st biggest importer. As with a number of emerging markets, Brazil represents a significant opportunity for ambitious UK businesses, but it is essential to do the right pre-entry market research to become educated in local laws, customs and ways of doing business.
A particular challenge facing foreign businesses in Brazil is the currency. The Brazilian real, which marked its 20th anniversary this month, was first introduced in 1994 as a means to counteract hyperinflation of over 2,000 per cent per year. While the Brazilian real brought relative stability to the economy, with the rate of inflation falling to 22 per cent by 1995 and single figures in the following year, it is important that businesses consider the impact of the real as a ‘non-convertible’, or ‘blocked’ currency.
More on Brazil:
- Building a better business in Brazil
- Cracking the Brazilian market by starting with a trade mission
- Life beyond Euroland
What is a non-convertible currency?
Non-convertible currencies are prohibited from being traded on the foreign exchange (FX) market. This measure is usually taken as a means to protect exotic currencies from market movements.
As such, the main method a business can gain access to a non-convertible currency is to trade locally and through the use of non-deliverable forward contracts (NDFs) when hedging FX risk. These are similar to regular foreign exchange forward contracts – whereby a company locks in an exchange rate for a certain period in the future, though unlike forward contracts, with NDFs there is no physical settlement of the two currencies once maturity is reached. The advantage of such contracts is that they provide a way to hedge local currency risk, but the non-convertible currency itself can never be moved.
Pricing and paying suppliers
Despite NDFs trading as an alternative to the real, when doing business in Brazil, it is much more favourable to price your actual products or services in the local currency. Pricing in your own home currency comes with many drawbacks: Clients are less likely to do business with you when you use your own currency, and it is necessary to price locally in order to conclude a rate for an NDF.
In contrast, when looking to pay suppliers from Brazil, it is best to reach an agreement based in a major currency, rather than Brazilian real, as major currencies will be more liquid and ultimately less costly.
As is the case when looking to expand to any international economy, it would be foolish to go in blind without first doing your research. With Brazil in particular, the blocked nature of the currency means there are additional factors to take into consideration first. Nonetheless, Brazil should not be ignored by UK businesses as a market opportunity. By 2020, 70 per cent of global GDP’s growth is expected to come from emerging markets, with China, India, Russia and Brazil making up the four main players. The World Cup will have already increased the appeal of this particular South American country and with the Brazilian-based Olympics just around the corner, the country could become an even more attractive investment option in the not-too distant future.