Previous Quarterly Editions
Expropriation Risk: 53 52 54 54 ►Political Violence Risk:67 57 51 66 ▲Terrorism Risk:42 39 37 35 ▼Exchange Transfer and Trade Sanction Risk: 55 54 54 54 ►Sovereign Default Risk:66 47 56 56 ►
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Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : Low LowAll protest: Medium Low
Cost-of-living protest risk in 2023*Wage protest: High Food/fuel policy protests: Medium
Since the COVID-19 pandemic hit Brazil in March 2020, the country has been through a swing in monetary policy. In the first year, as consumption was halted due to socioeconomic lockdown measures to contain the spreading of the virus, the country experienced a record deflation that allowed the central bank to reduce the benchmark interest rate (SELIC) from 4.25% in February 2020 to 2% in August 2020. It remained at this level up to March 2021.
After an initial deflationary cycle, and as the Brazilian National Congress approved substantial emergency spending to support companies and families throughout the pandemic, a rapid increase in consumption, coupled with a global break in supply chains and the invasion of Ukraine by Russia in February 2022, resulted in rapid and widespread inflation. As a consequence, the central bank reversed course and steadily increased the SELIC rate from 2% in March 2021 to 13.75% in August 2022, the level at which it remains now. Brazil has the highest real interest rate among the largest economies.
This drastic swing, especially during the presidential electoral year of 2022, put the central bank under fire from both the incumbent and opposition candidates. However, as Congress formally approved the bank’s legal independence in 2021, its governor and board were shielded from political pressure and interference. Nonetheless, the new opposition-led administration has been consistently criticising the central bank for the high rate, arguing that the bank mishandled monetary policy. This view is shared by the domestic industry and some market players that believe the current inflation target is too stringent and unrealistic in view of global inflation.
In parallel to this, there was also a swing in fiscal policy. The 2016 fiscal framework approved by Congress through a constitutional amendment after the 2014-16 recession – the so-called ‘spending ceiling’ – was gradually eroded during the pandemic through several additional amendments to allow further spending beyond the ceiling level. This was due in part to an attempt to support companies and families during the lockdown, and in part due to the incumbent candidate’s effort to avoid a ‘punishment vote’ in the 2022 presidential election as inflation kept growing and spreading through the Brazilian economy.
The new opposition-led administration, backed by its electoral victory in 2022, is proposing a three-pronged strategy. This involves reducing tax subsidies through legislation and administrative action to lower the fiscal deficit. There is also proposal of a new fiscal framework, substituting the now largely ineffective spending ceiling, to be submitted to a congressional vote, focusing on reducing the public debt. There is also an overhaul of the tax system with the merging of between five and seven existing taxes over consumption into a single value-added tax. If successful, the new fiscal policy can alleviate the pressure over monetary policy, allowing the central bank to reduce the SELIC rate.
The administration’s congressional coalition does not seem to have enough votes in Congress to approve all measures contained in its strategy and is likely to rely on the substantial political power of the Speaker of the House of Deputies and the President of the Federal Senate to secure the necessary votes. While the President of the Senate is a formal ally of the administration, the Speaker backed the defeated incumbent candidate in 2022. The administration is courting the Speaker by appointing his allies to key positions in the executive branch.
*Note: Protest inensity is calculated based on ACLED. Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of calculations, see the introductory essay.
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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 an issue 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 former President Jair Bolsonaro’s clashes with other federal powers, intermittent threats to democracy, political radicalisation, and the invasion of the palaces of the three branches of power by a pro-Bolsonaro mob on January 8, 2023, there have been few significant episodes of political violence in Brazil.
The new opposition-led 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 is discussing the possibility of establishing an inquiry commission on the January 8 invasion.
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, the country has improved its legal framework during the past decade to criminalise 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 two largest criminal groups, the First Capital Command (or ‘PCC’) and the Red Command (or ‘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 are relevant criminal groups, specifically in Rio de Janeiro.
A recent investigation by the Brazilian Federal Police uncovered a plot by the PCC to kill key political leaders, including the leading judge of the world-renowned anti-corruption Carwash Operation and former Minister of Justice and Public Safety, Sergio Moro, now a member of the Federal Senate.
Land property-related crimes 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.
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.
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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.
