Brazil: Risk Assessment
Country Risk Rating
Business Climate Rating
- Varied mineral resources and agricultural harvests
- Large population (estimated at 211.9 million)
- Well-diversified industry
- Strong foreign exchange reserves
- Net creditor in foreign currency
- Sensitive fiscal position
- Infrastructure bottlenecks
- Low level of investment (roughly 19% of GDP)
- Relatively closed to foreign trade (exports + imports represent only 27% of GDP)
- High costs of production (wages, energy, logistics, credit) that harm competitiveness
- Shortage of qualified labor, inadequate education system
Economy better prepared to operate in an intermittent mode
The economy surprised positively in the first quarter of 2021. GDP rose by 1.2% quarter-on-quarter (QoQ) and 1% year-on-year (YoY), taking cumulative four-quarter activity too -3.8%. Looking ahead, activity will be underpinned mostly by the new round of aid to informal workers (restarted in April and to last until at least October 2021) and the economic reopening process. After reaching a weekly record high of over 3,000 COVID-19 deaths per day in mid-April 2021, the country started to bear to first fruits of its immunization program in early July 2021 (when the weekly average reached a still high 1,200 death toll). As of 18 July 2021, Brazil had 16% of its population fully immunized, while 44% had received at least one shot. Major downside risk to activity is certainly the new COVID-19 variants. In addition, in recent months, consumer prices have also strongly surpassed the 5.25% ceiling of the central bank´s target. This behavior is notably explained by commodity prices and supply chain disruptions. As a response, the monetary authorities will continue to retighten the policy rate Selic along with H2 2021 (since March 2021 it has moved from a 2% per year record-low to 4.25% as of July 2021). Consequently, higher inflation and relatively tighter credit conditions could undermine household consumption´s recovery. Lastly, Brazil has experienced its worst drought in 91 years: with 63% of the country´s power matrix related to hydroelectric, this has raised electricity tariffs. The effect on economic activity could be more damaging in 2022 if rainfall does not improve in Q4 2021.
Strong external position vs. a base-effect improvement in fiscal deficit
In the cumulative five first months of 2021, the current account deficit continued to narrow compared to the same period of 2020. A stronger trade balance bolstered the outcome, as robust external sales favored by high commodity prices have prevailed over the resumption of imports. The narrowing of the deficits in the services (driven by lower tourism expenditure and equipment rental) and income (due to the drop in foreign companies’ profits) accounts also contributed positively in the period. On the financing side, foreign direct investment has improved on the same comparison basis, albeit still at 2.6% of GDP in 12 months accumulated as of May 2021 (4.15% of GDP in May 2020). Finally, total gross external debt in May 2021 stood at 20% of GDP, with its public share at 7.8% of GDP. On the fiscal front, the budgetary deficit will narrow in 2021, thanks to rebounding corporate tax revenues and relatively lower fiscal stimulus. Finally, gross public debt has reduced to 84.5% of GDP in May 2021 from the 89.4% of GDP peak reached in February 2021. This has been driven by higher nominal activity (boosted by inflation), which alongside the state-owned development bank BNDES return of USD 19 billion to the treasury are expected to continue favoring the debt dynamics in H2 2021. Nonetheless, the public debt to GDP ratio will deteriorate in 2022, in the absence of strong fiscal consolidation measures, and as the temporary tailwinds fade.
The political climate has remained tense in 2021
In late June 2021, a Senate committee evaluating the government's handling of the COVID-19 health crisis gained momentum after a congressman and his brother, a Ministry of Health official, denounced possible overpricing and corruption related to the purchase of India’s Bharat Biotech COVID-19 vaccine with the intermediation of a local company. The brothers met with President Bolsonaro in March and, according to them, alerted him to the suspect contract, but nothing was done to investigate (the contract was only suspended after the case became public). In response, at the request of the Supreme Court (STF), the Federal Police opened an investigation into Bolsonaro. However, even if there was a complaint, for the process to be forwarded by the STF, the approval of two-thirds of the Chamber's deputies would be necessary. Bolsonaro would likely have the necessary votes to avoid it. However, the scandal has consequences. According to a survey conducted in early July 2021 by Datafolha, 51% of Brazilians disapproved of the president, the biggest rejection since he took office in January 2019. It is also worth remembering that the country will hold presidential elections in October 2022. There is still no confirmation of official candidates, ex-president Lula (2003-2010) from the leftist PT party may run for office. He has been competitive in the preliminary polls and so far looks like a relevant threat to Bolsonaro's possible re-election. Regarding the reform agenda, the government obtained congressional approval this year for some liberalizing measures, such as the official autonomy of the Central Bank and the bill that allows the privatization of Electrobras. Currently, there are also discussions in Congress on two other reforms: administrative (changes to the rules for new civil servants; limiting job stability for some careers) and tax (including reducing corporate tax rates while creating a dividend tax).