Previous Quarterly Editions
Expropriation Risk: 48 49 52 52 Political Violence Risk: 59 55 58 60 Terrorism Risk: 38 40 40 40 Exchange Transfer and Trade Sanction Risk: 45 43 43 44 Sovereign Default Risk: 50 50 51 50
TREND ▲ OUTLOOK ▲
Brazil managed to avoid a recession when second quarter figures showed GDP expanding by a stronger-than-expected 0.4% quarter-on-quarter and 1.0% year-on-year. In the first half of the year, year-on-year growth reached 0.7% as manufacturing and construction strengthened and services expanded slightly. However, there was a contraction in the key agricultural sector, and full-year forecasts still have growth at just 0.8%. This figure could be even lower if the economic situation in Argentina, a key export market for Brazil, deteriorates further. The economic news came as President Bolsonaro engaged in another row with foreign governments, this time over fires in the Amazon. His administration has encouraged the clearing of parts of Amazonia for farming and the quickest way to do this is by burning. By late August, the country had 80,000 fires burning, with Bolsonaro blaming many of them on NGOs seeking to discredit his attempts to “monetise” Amazonia. The director of the space research institute who released satellite photographs of the fires was summarily fired. A direct result of the president’s policy towards the environment may well be an EU refusal to ratify the free trade agreement with regional trade group Mercosur, which would have significant consequences for Brazil’s commodity exports. The president’s abrasive style is also deepening political divisions at home. He has denigrated governors from the impoverished north-eastern region, said that he will only make federal funds available to states that support his policies, and continues to praise members of the 1964-85 military dictatorship. Even so, nominating his son Eduardo as ambassador to Washington on the grounds that he knows the Trumps was a surprise. A potentially more serious concern are the leaks apparently showing that the current justice minister was in direct contact with the prosecution when he was the presiding judge in the corruption case against former president Luiz Inácio Lula da Silva. The most popular politician at the time of last year’s presidential elections, and a likely winner over Bolsonaro, Lula was prevented from standing because of his conviction. Yet, while the president’s overall popularity has been slipping, he retains a firm hold on the one-third of the electorate that shares his position on social issues. These include a large share of the evangelical community and those who back a firm approach to crime. Moreover, his government still enjoys the backing of a large part of the business community for its economically liberal stance. It appreciates that Bolsonaro’s team has managed to steer a version of the much-needed pension reform programme through the difficult Lower House without too much dilution. With Senate approval now expected, the reform will be crucial to improving Brazil’s dire fiscal situation over the longer term by saving 200 billion dollars in government spending over the next decade. However, it will not by itself reignite growth in an economy that has failed to expand by little more than 1.1% annually since the end of the profound 2015-2016 recession.
TREND ► OUTLOOK ▲
After its success with selling licences to operate regional airports earlier this year, the government intends to step up the pace of privatisations, especially in the infrastructure sector. In July, state oil company Petrobras sold a 30% stake in its domestic distribution arm for 2.2 billion dollars. It has also agreed to sell all of its gas transport and distribution assets by 2021 following an intervention by the competition watchdog. The government is hoping to boost investment with increasingly attractive privatisation offers, but the unpredictable nature of the Bolsonaro administration, including the president’s tendency to seek confrontation with a large range of actors including specific businesses, will keep investors wary.
The president’s rhetoric remains targeted firmly at his socially and politically conservative base, with little attempt to broaden his support. The security services appear to have taken a cue from his emphasis on law and order. In both São Paulo and Rio de Janeiro states the number of people killed by the military police has increased significantly under Bolsonaro, and police killings now account for a quarter of all violent deaths in Rio. A police sector with less accountability operating in a society that is becoming more politically polarised suggests that protests and demonstrations may quickly result in violence. It is only a few years since the major clashes during the Dilma administration over rising bus fares and spending on the World Cup, indicating that those opposed to Bolsonaro may be prepared for further confrontations.
Brazil continues to avoid the experience of terrorism but violence continues to be a serious problem, in rural as well as urban areas. Conflict between miners and indigenous peoples has been heating up as the Bolsonaro government shows its support for the mining sector and indicates that it may weaken some of the protections given to indigenous peoples and open their lands to mineral extraction. In late July a group of small-scale miners murdered a local leader of the Wajapi ethnicity in Amapa state. There is also the potential for increasing clashes between police forces and landless peasants.
TREND ▲ OUTLOOK ►
At the end of July, the central bank lowered its benchmark Selic interest rate by 50 basis points to a record low of 6% as inflation fell to the centre of the target band. This was the first cut since March 2018 but more look likely as low growth keeps prices and inflation down. The currency remains weak and in August the central bank had to sell reserves as the real fell to its lowest against the dollar in twelve months and came close to the all-time low seen in 2015.
TREND ▼ OUTLOOK ▼
Brazil’s gross debt-to-GDP rate reached 79% in July, with debt public debt at 56%. Passage of the pension reform package should provide some long-term relief, however, and a sovereign default remains unlikely, as almost the entire federal debt is denominated in reals. The next task after pension reform is streamlining the tax system to support growth. However, Bolsonaro has demonstrated little interest in economic policy or working with Congress, which may make it difficult to launch a new round of reforms.
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