Index Trend Previous Quarterly Editions
Expropriation Risk: 54 ► Political Violence Risk: 48 ► Terrorism Risk: 36 ► Exchange Transfer and Trade Sanction Risk: 55 ► Sovereign Default Risk: 55 ►
Overall Risk Temperature TREND ►
Special topic: crisis Protest intensity to date* Very-High Very-High Unrest risk in 2024** High High
The origin of the debt crisis in Brazil is in the global financial crisis and recession of 2008 to 2009. Since the third quarter of 2003, Brazil grew steadily at an average 1.44% of GDP per quarter for 21 consecutive quarters. When the financial crisis hit, the country had enough reserves and budget space to adopt a successful counter-cyclical policy to fend off the worst effects of that recession.
However, this early success was followed by the federal government increasing reliance on spending to fuel a state capitalism-type economic model that eventually collapsed, generating a second domestic recession in 2014 to 2016 that reduced Brazil’s GDP by 8.1%, left a significant annual public deficit and resulted in the impeachment of then-President Dilma Rousseff.
The post-impeachment administration approved in Congress a constitutional amendment establishing a new spending cap rule that was in force until 2023. This administration also proposed social security entitlement reform, eventually approved in 2019, during the administration of then-President Jair Bolsonaro.
Although effective in reestablishing the credibility of Brazil’s fiscal policy, the spending cap rule was gradually undermined during the COVID-19 pandemic as Congress approved a number of waivers. The goal was to increase spending to support the provision of healthcare services as well as individuals and companies. A return of massive spending, coupled with external shocks including the pandemic and the Russia/Ukraine conflict from February 2022, generated growing inflation and contributed to then-President Bolsonaro’s loss of his re-election bid in October 2022.
When President Lula da Silva was elected for a third mandate after defeating Bolsonaro, he pledged to substitute the spending cap rule with a new fiscal framework that was approved by Congress and signed into law by Lula in August 2023.
The new fiscal framework establishes a “fiscal anchor” based on an annual primary budget surplus target, from minus 0.5% of GDP in 2023 to 1% of GDP in 2026, growing in increments of 0.5 percentage points per year. This surplus target will be pursued within a tolerance range of between +0.25% and –0.25% of GDP of the year’s target.
In addition to the target, growth in spending will be pegged to revenue increase at 70%. If the target is not achieved, the peg is reduced to 50%; however, the spending increase has both a “floor” of 0.6% and a “ceiling” of 2.5% of revenue increase. In other words, the 70% or 50% of the peg will fluctuate between the ceiling and floor, shielding from both excessive increase or decrease in revenue.
The main criticism is the framework’s overreliance on revenue increase — and the Lula administration’s unsuccessful measures to achieve it. There is a growing expectation among market players that spending cuts are unavoidable for the administration to comply with the new framework.
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
Expropriation Risk 54 (Medium) TREND ►
The risk of expropriation is very low due to a strong legal framework in place and Brazil’s commitment to an open investment policy, with national treatment of foreign investors guaranteed by the constitution; however, contract enforcement continues to be an issue due to time-consuming and costly judicial enforcement proceedings.
Populist policies tend to be more pronounced on social programs, including tax benefits and conditional cash transfers to the poor, rather than on issues of property.
Political Violence Risk 48 (Medium) TREND ►
Despite former President Bolsonaro’s clashes with other federal powers, intermittent threats to democracy, political radicalization and the invasion of the palaces of the three branches of power by a pro-Bolsonaro mob in January 2023, few significant episodes of political violence have occurred in Brazil.
The new Lula administration is planning to propose additional measures to Congress in order to avoid a repetition of the anti-democratic acts that took place before and after the 2022 presidential election. In parallel, the Federal Senate established an inquiry commission on the January 8 invasion.
The armed forces continue to voice their obedience to the constitution, and military leadership has not signaled any threat, despite a growing question of their involvement in a planned coup by Bolsonaro and his allies.
Terrorism Risk 35 (Medium-Low) TREND ►
Brazil continues to avoid direct experiences of terrorism. Nonetheless, it has improved its legal framework during the past decade to criminalize terrorism and terrorist financing as well as to identify and freeze terrorist assets. Brazil also has extensive counterterrorism cooperation with other countries.
Organized crime continues to be a major source of insecurity. Brazil’s three largest criminal groups — the First Capital Command (PCC), Red Command (CV) and Family of the North (FDN) — dominate drug trafficking directed to both domestic consumption and foreign sales. The country is not a major drug producer, but it has a large market and is a major transit route of cocaine distribution to Europe. In addition, local-level paramilitary groups are relevant criminal groups, specifically in Rio de Janeiro.
Recent trends show a growth in organized crime in the northeast region of Brazil. Crimes related to land property continue to be an important source of insecurity, in particular in the countryside and in states in the country’s agricultural frontier in the north and midwest regions.
Exchange Transfer and Trade Sanctions Risk 55 (Significant) TREND ►
Brazil faces no multilateral or unilateral sanctions of any kind, nor state-sponsored boycotts. The threat of sanctions, particularly on trade, connected to the country’s commitment to protect the Amazon biome decreased with the election of a pro-environment administration in 2022.
Sovereign Default Risk 56 (Significant) TREND ►
Brazil eliminated its government (combined federal, state, and local) public deficit in 2021 after eight consecutive years of deficits. However, this was mainly the result of state and local governments’ increase in tax revenue due to COVID-19 and high inflation. While the government surplus was maintained in 2022, the deterioration of the spending ceiling fiscal policy framework resulted in a return of government deficit in 2023.
To counter the large government deficit foreseen in 2023, the new opposition-led administration adopted a number of legislative and administrative measures to reduce it. There is an expectation that the administration might be able to cut the deficit in half of the original projection for the year.
While the fiscal and monetary policies scenario is not favourable in the short term, a sovereign default remains very unlikely. If the economic strategy being proposed by the administration is successfully implemented, the country might see a return in economic growth and job creation by the end of the year.
