Previous Quarterly Editions
Expropriation Risk: 49 52 52 54 Political Violence Risk: 55 58 60 61 Terrorism Risk: 40 40 40 38 Exchange Transfer and Trade Sanction Risk: 43 43 44 45 Sovereign Default Risk: 50 51 50 48
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The approval ratings for President Bolsonaro’s government continued to slide during the second half of 2019, ending the year with less than 30% approving and almost 40% disapproving of its performance. The situation worsened for Bolsonaro after former president Luiz Inácio Lula da Silva of the centre-left Worker’s Party (PT) was released from federal prison in November. Lula has not been acquitted on corruption charges but is benefiting from a Supreme Court decision that defendants can only be sent to prison after exhausting all possible appeals, which he has not yet done. His freedom, however temporary, emboldened the PT and the wider left-of-centre opposition. On his release, he delivered two speeches heavily critical of the Bolsonaro government and its extremely liberal economic policies. Lula himself will find it difficult to regain a leadership position in a progressive landscape that does not always have fond memories of the PT and its attitude while in government. However, he remains hugely popular in the country and could emerge as a rallying point for the many parties and political leaders with flexible ideological positions that make up a substantial share of the 513 deputies in the Lower House. Some of these have reluctantly backed measures sought by the Bolsonaro government, especially the clearly necessary reform of the pension system, but have defied him on other issues. The president’s agenda could quickly be in greater trouble if their relationship with a PT-led opposition improves. Bolsonaro’s attitude towards Congress has not helped, alternating between aloof and aggressive during 2019. The Speaker of the House, Rodrigo Maia, achieved pension reform largely in spite of the president rather than because of him. Although he served in Congress himself for many years, Bolsonaro regards the building of governing coalitions in Congress as the main source of corruption in the legislature, with governments traditionally trading ministerial jobs for legislative support. But his decision not to form a governing coalition in a Congress which has over twenty political parties has seriously undermined his ability to govern effectively. In late 2019, he announced that he was starting his own party, the Alliance for Brazil, but it is not clear that this will attract many sitting legislators. Instead, he will continue to rely on intermittent support from the same groups that Lula might also seek to attract, putting at risk the tax reforms proposed for 2020. The economy continues to underperform, with growth in 2019 barely reaching 1%. Although overall signs are mildly positive entering 2020, with growth expected to be closer to 2%, a further deterioration in the political situation could impact the economy yet again. There is concern in the business sector about damage to exports from the government’s erratic and often undiplomatic foreign policy, as seen in its nationalistic and highly aggressive reaction to EU criticism over fires in the Amazon region and its confrontational stance at the COP25 environmental summit at the end of 2019. Relations with Argentina, a key market for Brazilian exports before its latest economic crisis, are expected to worsen in 2020 now that it has a left-wing president. By contrast, relations with China, Brazil’s largest foreign market, have largely been pragmatic, and there was even some talk during the November BRICS summit meeting of a possible free trade deal.
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The government’s pro-market stance suffered a blow in November when two highly anticipated auctions for licences to explore pre-salt oil fields failed to attract bids from major global companies. Of the fourteen companies that originally registered to participate, only Petrobras, partnering with two Chinese firms, presented bids. Several blocs failed to attract any bids at all. The reasons included high prices, the complex nature of Brazil’s oil exploration regime, and the fact that the winners would have to compensate Petrobras for work already done in some blocs, but the level of political uncertainty was widely seen as increasing the reluctance to invest. While other infrastructure projects, particularly those in the transport sector, tend to be less politically sensitive and earlier auctions of operating rights have proved successful, the level of political uncertainty could have a greater impact during 2020. The investigation into the Car Wash scandal involving illegal political donations is continuing, with companies in the shipping sector now in the spotlight.
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The president has made little effort to build support beyond his electoral base, instead stoking left/right divisions on social as well as economic issues. If the return of Lula sharpens the country’s political divide even further in 2020, the risk that both sides will mobilise street protests will rise. This in turn risks the kind of police violence against demonstrators that ultimately brought down Lula’s PT successor as president, Dilma Rousseff.
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Although Brazil continues to avoid the experience of terrorism, an extraordinary degree of personal insecurity persists in rural as well as urban areas. The government’s determination to develop natural resources in the Amazon region resulted in a year-on-year increase of 100% in the deforested area during 2019, involving almost 10,000 square kilometres. Its pro-mining stance has also prompted several violent flare-ups as indigenous people protest proposed and current mining operations. The collapse of the Vale-owned Brumadinho dam in Minas Gerais state at the start of 2019 has increased sympathy for the anti-mining movement.
Consistently low inflation allowed the central bank to bring its benchmark interest rate down to a record low of 4.5% by the end of 2019. No further cuts are expected in the coming months as inflation looks likely to move above the target of 4.25% once again. The real was one of the worst-performing emerging market currencies in 2019, hitting a record low against the dollar in November after the disappointing oil auctions.
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Brazil’s gross debt, which includes the federal, state and municipal governments, as well as the public pension system, hit 80% of GDP during mid-2019, having been around 50% as recently as the start of 2014. The steep fall in interest rates and the government’s economically liberal agenda, including pension reform, should help to encourage a downward trend that has already seen the debt ratio move back slightly to 77% at the end of 2019.
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