Brazil

The fiscal trajectory is Brazil's most tangible medium-term vulnerability. Gross public debt reached 80.4% of GDP in April 2026 and continues climbing, driven primarily by interest costs rather than primary spending. The government's headline targets (primary surplus of 0.25% of GDP in 2026, 0.5% in 2027) remain within reach under current policy, but the Treasury itself has acknowledged that these become unfeasible from 2028 without new structural measures. Pre-election fiscal loosening (through additional credit stimulus or off-balance-sheet spending) cannot be ruled out and would compress the already narrow margin for fiscal credibility.

Corporate stress is deepening at a pace that demands attention. A record 5,680 companies entered judicial recovery in 2025, and over 7.1mn businesses are in arrears nationally. Insolvencies are projected to rise a further +18% in 2026. The epicenter is agribusiness: 539 firms under court-supervised restructuring in Q1 2026 (+58% y/y), farm loan delinquency at its highest level in two decades, rural lending down -13% y/y and farm seizure auctions accelerating across producing states. The combination of the Selic at 14.25%, prolonged drought in key basins and volatile commodity receipts has created a structural cash-flow problem for mid-sized producers. Banking sector capitalization remains adequate, but credit standards are tightening and the transmission from agricultural distress to broader SME segments bears monitoring through H2.

Brazil's structural attractiveness rests on scale, diversification and resource depth. The economy has no single-sector dependency, and the ongoing shift in trade patterns, with US exports falling to a 30-year low while China and Asia absorb the surplus, is reducing geographic concentration. However, this also deepens strategic reliance on Chinese demand, creating new vulnerabilities that the current bilateral framework does not adequately hedge.

The 25% US Section 301 tariff imposed in July, covering a broad range of manufactured and agricultural goods (with exemptions for oil, aircraft and orange juice), marks a structural repricing of the bilateral trade relationship. It compounds the existing 10% baseline tariff and signals a durable shift in US trade posture toward Brazil. The short-term impact is modest at 0.1-0.3% of GDP on a 12-month basis, but the medium-term impact will depend on whether Brazilian firms can accelerate diversification and whether retaliatory measures remain contained.

On the environmental dimension, COP30 held in Belém in November 2025 confirmed Brazil's convening power but delivered weak binding outcomes without a fossil fuel phase-out roadmap or deforestation agreements despite the presidency's early ambitions. Amazon deforestation declined from its 2022 peak but remains elevated at nearly 5,800 km² in 2025. The gap between international climate commitments and domestic enforcement capacity continues to create ESG-related reputational risk for investors with Brazilian exposure.

Regulatory complexity, infrastructure bottlenecks and judicial unpredictability persist as binding structural constraints. Tax reform implementation is advancing but slowly, and operational costs remain among the highest in the OECD.

The October general election is the dominant risk variable for H2 2026. The incumbent seeks a fourth non-consecutive term against the main opposition candidate, in what polls consistently show as a competitive first round, with a (potential) second-round margin within the error band. The race carries policy discontinuity risk and institutional tensions that may replicate those witnessed in 2022.

Three structural factors elevate the political risk premium beyond the electoral calendar itself. First, the diplomatic relationship with Washington has deteriorated to its lowest point in decades amid the tariff escalation, visa denials to US officials and Argentina's diplomatic intervention, all pointing to a contested external environment that will outlast the campaign. Second, the opposition has begun publicly questioning the integrity of the electronic voting system, echoing the narrative pattern that preceded the January 2023 institutional crisis. Third, a fragmented Congress means that any incoming administration will face protracted coalition-building that delays reform implementation.

Under a continuity scenario, markets should expect sustained fiscal pressure, gradual reform but no breakthrough consolidation and a foreign policy posture that prioritizes South-South diversification. Under an opposition victory, we expect a reorientation toward Washington, a potential rollback of environmental enforcement and fiscal populism in the transition period before market discipline reasserts itself. Either outcome implies elevated uncertainty through Q1 2027 as policy teams recalibrate, and neither resolves the structural fiscal challenge that underpins Brazil's sovereign risk premium.