Previous Quarterly Editions
Expropriation Risk: 46 47 47 53 ▲ Political Violence Risk: 48 48 49 49 ► Terrorism Risk: 40 40 42 39 ▼ Exchange Transfer and Trade Sanction Risk: 55 45 55 55 ► Sovereign Default Risk: 47 47 65 57 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Climate change and the broader environmental protection agenda in Brazil is a contentious political issue, with repercussions in the country’s domestic politics and international relations. While Brazil is well positioned to lead this agenda due to its many nature-based assets and solutions, as well as its advanced legal framework, President Jair Bolsonaro and his administration continue to provide mixed policy signals. This is fostering mistrust and a perception the Brazilian federal government is not willing and/or does not have the capacity to lead an ambitious and Paris Agreement-adherent climate agenda.
The country’s long-established policy pillars remain the same: investment in renewable energy; conservation of threatened biomes, such as the Amazon and the Cerrado; and a commitment to adopt climate change mitigation and adaptation measures. However, the administration is accused of relaxing environmental and climate change-related law enforcement, including to combat deforestation. It has also pushed for policy proposals both widely criticised in Brazil and some of the country’s major partners. These include the possibility of mining in indigenous peoples’ reserves and the legalisation of illegal mining activities.
The issue is contentious within the administration. On one hand, the president has been a supporter of groups with a poor record of environmental protection, including illegal miners, loggers and farmers in threatened biomes. On the other hand, one of his key advisors, the minister for agriculture, livestock and supply, is a powerful voice for large farm businesses heavily invested in the sustainability agenda and that want to distance themselves from these other groups. In addition, the economy minister, another important presidential advisor, has strong connections with leading market players also heavily invested in the sustainability agenda.
Despite these divisions within the administration, Brazil’s major media outlets continue to criticise the president on this agenda, highlighting policy reversals, the lack of law enforcement and his administration’s allegedly half-hearted commitment to environmental protection and carbon neutrality. The president is also widely criticised by the left and its associated non-government organisations and social movements.
The business community is strongly committed to a robust sustainability agenda. The country’s leading companies have been adopting a number of policies to reduce deforestation, mitigate climate change, reduce the impact to indigenous communities, and to finance and develop renewable energy projects, among others. Most businesses have embedded the United Nations’ Sustainable Development Goals and Brazil’s commitment within the framework of the Paris Agreement on climate in their business strategies. There is a sense in the business community that Brazilian society has already passed ‘the point of no return’ in terms of sustainability and even a half-hearted administration would not have the political and economic means to reverse this trend.
Most of Brazil’s major partners avoid confrontation and use a set of positive and negative incentives to push the president and his administration towards a more ambitious climate change-related agenda, including offers of financing and the adoption of trade-related regulation that imposes penalties on environmental misconduct.
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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 problematic due to time-consuming and costly judicial enforcement proceedings.
Populist policies tend to be more pronounced on social programmes, including tax benefits and conditional cash transfers to the poor, rather than on issues of property.
Despite President Bolsonaro’s clashes with other federal powers, intermittent threats to democracy and political radicalisation, there have been no significant episodes of political violence in Brazil. Since September 2021, the president has reduced his threats as part of a veiled agreement with political leaders in Congress and with justices of the Supreme Court.
There is a risk of more political instability as the 2022 electoral cycle approaches and Bolsonaro continues to lag former President Luiz Inácio Lula da Silva in the opinion polls, although the gap is reducing. Meanwhile, the armed forces continue to voice their obedience to the constitution and there is no signal of threat from the military leadership.
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Brazil continues to avoid direct experiences of terrorism. Nonetheless, it has improved its legal framework during the past decade to criminalise terrorism and terrorist financing, as well as to identify and freeze terrorist assets. The country also has extensive counterterrorism cooperation with other states.
Organised crime continues to be a leading source of insecurity. Brazil’s two largest criminal groups, the First Capital Command (PCC) and the Red Command (CV), dominate drug trafficking directed both to domestic consumption and foreign sales. The country is not a major drug producer, but has a large market and is a major transit route of cocaine distribution to Europe. In addition, local-level paramilitary groups (milícias) are relevant criminal groups, specifically in Rio de Janeiro.
Land property-related crimes also 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 mid-west regions.
Brazil faces no multilateral or unilateral sanctions of any kind, nor state-sponsored boycotts. There is a risk of the threat of sanctions, particularly on trade, if the country’s commitment to the protection of the Amazon biome deteriorates.
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Brazil eliminated its government (federal, state and local levels) 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-related high inflation. There is an expectation the country will face a new deficit in 2022, although smaller than in previous years. The debt-to-GDP (gross domestic product) rate declined from nearly 90% to below 80%.
The country is also expected to reach a peak in its benchmark Selic interest rate at around 12% as the central bank continues its effort to keep inflation under control. There is an expectation the central bank will begin reducing the rate by the end of the second quarter, but the Russia-Ukraine crisis might put further pressure on inflation through oil and fertiliser prices, both key inputs of the Brazilian economy. A higher interest rate also increases debt pressure.
While the fiscal and monetary policies scenario is not favourable in the short term, a sovereign default remains very unlikely. With the 2022 electoral cycle in the third quarter, presidential hopefuls will probably vow to pursue a new round of domestic reforms in 2023, to increase economic growth and reduce poverty while preserving fiscal and monetary policies’ fundamentals.
