Brazil Country Risk Report

In the 2000s, Brazil witnessed robust GDP growth, averaging an annual rate of +3.9%. However, leading up to the pandemic, the country grappled with a fragile growth and fiscal outlook, stemming from ongoing recovery efforts following the severe recession of 2015-2016. Consequently, Brazil registered an average GDP growth of merely +0.3% over the decade from 2011 to 2020.Despite this initial setback, Brazil underwent a rapid recovery from the pandemic, buoyed by fiscal measures, the reopening of the services sector and favorable commodity prices. Real GDP expanded by +5.0% in 2021. However, the pace of growth is currently moderating, with an expected slowdown to +2.9% in 2022.

Looking ahead, Brazil’s economic trajectory is shaped by a combination of factors. Strong agricultural performance and income, alongside a robust labor market, provided tailwinds in 2023. However, the overall outlook is tempered by slowing private consumption and a decline in investment, influenced by the lingering effects of high-interest rates. Consequently, we anticipate Brazil’s GDP growth to reach +3.1% in 2023, followed by a slowdown to +1.5% in 2024. In the medium term, growth is expected to average around +2% from 2025 to 2028, with the potential for an upward bias if the country stays on track with significant reforms aimed at boosting productivity.

For instance, Brazil approved its historic tax reform in 2023, which, through the merger of all consumption taxes and the introduction of an integrated value-added tax, is expected to foster substantial efficiency and productivity gains. This reform is anticipated to reduce tax competition among subnational governments, mitigate risks from judicial disputes and potentially boost overall potential growth After reaching 4.6% in 2023, we expect inflation to keep gradually decelerating and converging to the target of +3% by 2025. As inflationary pressures in Brazil have eased, the Central Bank of Brazil (BCB) began a monetary easing cycle in August 2023. The BCB has lowered its benchmark interest rate by 50 basis points in a row and signaled its intention to continue cutting rates at this pace. We expect interest rate cuts to persist until the second half of 2024 before a projected pause at 9% (down from the current 11.75% in December 2023).

President Luiz Inácio Lula da Silva, heading Brazil’s left-wing Partido dos Trabalhadores (PT), currently enjoys popularity attributed to declining unemployment and disinflation as he enters the second year of his four-year term. To maintain political momentum amid economic challenges, Lula plans to leverage in expansionary policies and the Programa de Aceleração do Crescimento (PAC) – a state-driven growth acceleration plan – for a boost before the October 2024 local elections. However, anticipating a softer economy, his reform proposals for the year are expected to be more cautious due to legislators’ hesitancy during local election cycles.

Political complexities arise from ongoing disputes between political parties and the executive over budget allocations for local projects, adding a layer of uncertainty. As Lula progresses into the latter half of his term, the political landscape is anticipated to become more tumultuous as parties within his congressional alliance vie for position ahead of the 2026 general election. This fragmentation in a predominantly right-leaning Congress may pose challenges to advancing Lula’s progressive agenda, including proposed income tax reforms.

With his commitment to improving the illegal deforestation and mining situation in the Amazon rainforest, Lula is also expected to bring positive changes in environmental policy. Our proprietary Environmental Sustainability Indicator puts Brazil at rank 86 out of 227 economies in 2023. In terms of the overall business environment, The Heritage Foundation’s Index of Economic Freedom survey 2022 ranks Brazil 133 out of 177 economies, recognized as a “Mostly Unfree” country. Monetary freedom is relatively good, but its fiscal health is among the world’s worst. Meanwhile, its rank in the World Bank Institute’s annual Worldwide Governance Indicators has declined during the past decade due to its poor political stability and control of corruption.