Previous Quarterly Editions
Expropriation Risk: 52 54 56 59 Political Violence Risk: 60 61 59 62 Terrorism Risk: 40 38 39 40 Exchange Transfer and Trade Sanction Risk: 44 45 49 49 Sovereign Default Risk: 50 48 52 54
TREND ▲ OUTLOOK ▲
With President Jair Bolsonaro testing positive for COVID-19, and the number of registered cases in the country surpassing two million, the impact of the pandemic on Brazil showed little sign of abating in July 2020. It has not only hit the economy hard but deepened the divide between supporters and opponents of Bolsonaro’s administration. By early July 2020, the number of cases in Brazil was second to the United States, but underreporting means that the real numbers are likely to be substantially higher. The politicisation of the pandemic has hampered an effective response. The country has been without a health minister since May 15 2020, when Nelson Teich resigned after less than a month. His predecessor was fired after clashing with Bolsonaro’s reluctance to endorse social distancing, the wearing of facemasks, and other measures. Bolsonaro has often appeared in public without wearing a mask, joining demonstrations in support of his government and demanding the closure of Congress and of the Supreme Court. He has often suggested that the military is prepared to stage a coup in his support if Congress frustrates his agenda, but the threat is unlikely to prevent the legislature from taking up impeachment proceedings against him later this year. Bolsonaro faces a series of legal problems, the most serious of which involve allegations of interfering in an investigation by the federal police who are investigating a long-time family associate, Fabricio Queiroz, who is employed by the president’s son. Media reports accuse Queiroz of redirecting public resources to finance a militia allegedly led by the president’s son Flavio, now a senator. The suspicion is that the operations of this criminal organisation were headed by another former policeman who was killed by the police in his hideout in the state of Bahia earlier this year. It is suspected of involvement in contract killings that included Marielle Franco, a Rio de Janeiro city councillor and human rights activist. After Queiroz’s arrest in mid-June 2020, Bolsonaro adopted a lower profile and avoided the confrontational stance that has characterised his time in office. The economy continues to suffer as the pandemic takes hold. In late June 2020, the IMF projected a contraction of 9.1% for this year followed by growth of 3.6% in 2021. Even amid the pandemic, Bolsonaro’s encouragement of deforestation in the Amazon continues to trouble investors. In June 2020, 29 global investment funds managing total assets of 3.7 trillion USD expressed concern about escalating loss of rain forest, with some signatories indicating that they may divest Brazilian assets if environmental policies are not changed. The move followed a warning in May 2020 from 40 European companies that they would consider boycotting Brazilian products if deforestation is not effectively curtailed. According to the country’s National Institute for Space Research (INPE), the area of newly deforested land in the Amazon rose by 51.5% year-on-year in the first quarter of 2020. President Bolsonaro has repeatedly dismissed such concerns and called for greater development of agriculture and mining in Amazonia. The latest concern is that unchecked illegal activity in the region has already exposed isolated indigenous groups to COVID-19.
In late June 2020, the central bank ordered Visa and Mastercard to halt payments and transfers via a new service from WhatsApp on the grounds that WhatsApp had not requested prior authorisation. Facebook's WhatsApp, which has 120 million users in Brazil (its second-largest market), had begun operating the service only a few days before. The central bank is expected to launch its own instant payments system in November 2020, prompting criticism that it is acting as both regulator and competitor to WhatsApp.
During the first half of 2020, a consistent series of attacks by the president and his close allies on the country’s key institutions, including the judiciary and the media, has aggravated political tensions. Bolsonaro continues to appeal to a base of support that is made up mostly of social conservatives and fierce nationalists. This includes about a third of the population and so far have remained unswervingly loyal. But his disapproval rating had reached 45% by July 2020, up from 36% at the start of the year amid strong support for lockdown provisions. Clashes between supporters and opponents are increasingly likely as Bolsonaro continues with his divisive rhetoric and as social media pronouncements from both sides are becoming progressively more threatening. Pro- and anti-government demonstrations were evident in Brasilia, São Paulo and Rio de Janeiro during June 2020- a significant clash between the two sides looks increasingly likely. Both sides assume that the police and security forces will favour Bolsonaro.
While Brazil continues to avoid direct experience of terrorism, personal insecurity remains high and there is concern that the rise in unemployment could increase crime in urban areas. Nine million people lost employment between March and May 2020, and by mid-year more than half of the total working age population of 174 million was not in formal employment. The pressure to look for work will increase after September 2020 when the government is due to end the monthly emergency payments that have been in place since April 2020.
TREND ► OUTLOOK ►
With inflation now less than 2% and below its target range of 2.5-5.5%, the central bank cut the benchmark SELIC rate to a record low of 2.25% in June 2020 to stimulate the economy. It has made clear that it is prepared to go further. However, the central bank governor’s insistence that the country will see a V-shaped recovery is extremely optimistic. Having fallen to 5.9 to the US dollar in mid-May 2020, the real had recovered to 5.3 in early July 2020, but this still remains significantly below the level of 4.0 to the US dollar at the start of 2020.
Gross public debt was around 82% of GDP at mid-year (2020), up from 76% a year ago, and has a very real possibility of coming close to 100% by the start of 2021. This leaves the government almost no scope to pursue deficit-fuelled growth as resources are concentrated on improving public services. However, the overwhelming majority of government debt is denominated in local currency, which curbs the risk of default, and the government is greatly helped by having the SELIC rate at 2.25% rather than 14.25%, as it was in,as recently as, 2016. The economy minister is preparing Congress for a primary deficit of 15% by the end of 2020.
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