Previous Quarterly Editions
Expropriation Risk: 46 46 46 46 Political Violence Risk: 48 48 48 48 Terrorism Risk: 39 39 40 40 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 57 57 57 47
TREND ▼
With COVID-19 contagion and deaths out of control, health systems collapsing in several states and a slow vaccination rollout, Brazil has become a leading global pandemic hotspot. As of early April 2021, the country accounted for around one-third of global daily COVID-19 deaths, with nearly 3,000 deaths daily. On March 23 2021, the fourth health minister took office since the pandemic began. The third of these, Eduardo Pazuello, was a general who accepted the position after his two immediate predecessors left the government amid disagreements with far-right President Jair Bolsonaro.
Bolsonaro has persistently attacked science-based measures to address the pandemic, such as social distancing and mask-wearing, refused to wear a mask himself, promoted unproved treatments and the agglomeration of his supporters in a series of events, and even dismissed vaccines for several months before changing his tone under pressure in March 2021.
Against its healthcare difficulties and a struggling economy, Bolsonaro’s popularity has fallen strongly. The government will hope that the new round of benefit payments to the population worst-affected by the COVID-19-induced economic crisis will underpin the President’s popularity, as happened last year during the first round of such payments. This time, however, payments are less generous, and Brazil’s current (second) COVID-19 wave is proving more lethal than the first. Additionally, the Senate has established a parliamentary investigative commission on the government’s handling of COVID-19.
Bolsonaro has often suggested the armed forces would stage a coup if needed, to keep him in power. However, the armed forces have distanced themselves from this position. On March 29 2021, Bolsonaro fired defence minister Fernando Azevedo e Silva, who left the government highlighting his opposition to a political role for the armed forces. The following day, the President also fired the heads of the three branches of the forces, though their replacements are unlikely to be any more willing to partake in politics.
Azevedo e Silva was sacked amid a wider reshuffle that saw six cabinet members lose their jobs, including Ernesto Araujo, the ultra-conservative foreign relations minister. Araujo had come under heavy fire from Congress, notably from parliamentarians of the ‘Centrao’ (a group of ideologically flexible parties known for their readiness to exchange support for government jobs) for his constant attacks on China - China being a key exporter of vaccine ingredients that Brazil badly needs. Claiming to have been elected to ditch the bad habits of horse-trading politics associated with corruption, Bolsonaro had refused to negotiate with the Centrao until mid-2020.
That changed after he faced growing impeachment threats, especially given the alleged involvement of members of his inner circle in crime rackets. The recent cabinet reshuffle increased Centrao influence over an increasingly isolated Bolsonaro, who has now named a first-term federal deputy from the group, Flavia Arruda, as Secretary of Government, who is responsible for political articulation with Congress.
Pressure on Bolsonaro also increased recently with the ‘return’ to centre stage of former centre-left President Luiz Inacio Lula da Silva, after he was initially considered by a court guilty of crimes, but then appeals revealed the conviction was unsafe and tainted by judicial corruption.
TREND ►
On February 19 2021, Bolsonaro fired the chief executive officer of state-controlled oil company Petrobras. The announcement was followed by market turmoil and speculation that the government was completely abandoning the market-oriented economic policies it had pledged to pursue.
It is more likely, however, that economic policy will be increasingly inconsistent, with liberal initiatives and populist moves alternated as Bolsonaro seeks to please different constituencies, often with opposing interests.
In the Petrobras case, the President was trying to soothe truck drivers’ concerns, who had threatened to strike amid rising diesel prices. Hauliers not only play a key economic role in a large country highly dependent on road transport; most of them also are long-standing Bolsonaro supporters.
While military leaders will not back any attempt to overthrow democracy, Bolsonaro exerts significant influence over small armed groups. At least some of these have members who are retired or serving men from military or police forces. Congress is considering (but unlikely to pass) a bill that increases federal control of these groups, which currently respond to state governments and which Bolsonaro has long courted.
In Rio de Janeiro, retired and serving policemen have organised in paramilitary militia groups (originally set up in the early 2000s) to combat drug traffickers. However, with time, these groups have expanded their operations; they now include extortion rackets, illegal construction work, the charging for appointments in public hospitals and the imposition of an overall reign of terror in the mostly low-income areas they control.
Against this backdrop, and with Bolsonaro adopting a highly confrontational stance to politics, any spark could lead to an escalation of politically motivated violence. This will become increasingly likely next year, as Brazil focuses on the October 2021 general elections from which Bolsonaro seeks a second term.
Brazil continues to avoid direct experience of terrorism incidents. However, the risk to personal security remains considerable and high unemployment levels could increase crime in urban settings. The economy is struggling to recover, and a double-dip recession is a significant risk in the first half of 2021. Already in November-January, the country had 14.3 million unemployed workers (14.2% of the workforce), with another 32.4 underemployed and 76.4 million out of the workforce altogether (up 10.6 million year-on-year).
In response to a significant increase in consumer inflation, in March 2021 the central bank rose its benchmark SELIC interest rate from a record low of 2% to 2.75%. This was the first increase in six years and is set to be the first in a new upward cycle. The US dollar, which traded below 4 to the Brazilian real when Bolsonaro was elected in October 2018, was touching 5.6 to the real in early April 2021.
With poor economic prospects, a troubled fiscal outlook, the government struggling to pass liberal reforms and unstable politics, the Brazilian currency is unlikely to gain much ground in the foreseeable future, even in an environment of high commodity prices, which historically tend to favour it. If advanced-economy central banks, especially the US Federal Reserve, increase their rates earlier than expected, the Brazilian real could face further strong devaluation pressures.
Gross public debt reached 90% in February 2021. In March 2021, Congress passed a budget that had fewer resources than required to cover mandatory government spending but generous amounts for forthcoming projects to be introduced as amendments proposed by parliamentarians.
Bolsonaro subsequently indicated he will veto parts of the budget (failing to do so would leave him open to accusation of impeachable offences under the Fiscal Responsibility Act). However, the President must tread carefully to avoid creating a political crisis with the Centrao, on which he depends to pass legislation and avoid impeachment. There are currently dozens of impeachment requests that House Speaker Arthur Lira (himself a Centrao name) has so far refrained from tabling.
While the executive and legislature are likely to reach an agreement to address this conundrum, the government’s difficulty in adopting an annual budget is symptomatic of the uphill battle it will face if and when it seeks to pass reforms to areas such as the public administration and the tax system. By the time it does adopt an annual budget, Brazil will have gone without one for at least the entire first quarter of 2021.
Especially amid a poorly performing economy and with strong spending pressure at least in the short- to middle-term caused by the health and associated social crisis, Brazil’s fiscal situation is unlikely to improve much soon. Most government debt is denominated in local currency, which minimises the risk of default. However, the current cycle of upward adjustment in the benchmark interest rate will also lead to higher debt.
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