Previous Quarterly Editions
Expropriation Risk: 46 46 46 47 ▲ Political Violence Risk: 48 48 48 49 ▲ Terrorism Risk: 39 40 40 42 ▲ Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 57 57 47 65 ▲
TREND ▲
Brazil remains the country with the second highest number of COVID-19 deaths, with around 580,000 as of late August. However, the daily average has dropped significantly in recent months -- from a peak of above 3,000 a day in the first half of April to below 700 a day more recently. Although this figure is still high by the standards of most countries, restrictions on mobility and gatherings imposed by local or regional governments have been removed or wound down across the country.
In any case, the pandemic continues to be politically costly to the government of far-right President Jair Bolsonaro, who has attacked and ignored measures to tackle it, from restrictions on gatherings to vaccines and the use of masks. A current headache for the government is a senate inquiry commission which is looking, among other areas, into alleged corruption in the purchase of vaccines.
The president, meanwhile, has been raising his bet on an ever-increasing radicalisation of the political environment and on the destabilisation of Brazil’s democratic institutions. In recent weeks, for example, he has pushed for the impeachment of a Supreme Court justice and a constitutional reform to Brazil´s electronic voting system by adding a requirement that votes be printed, and claiming, against technical evidence and without producing any proof, that the current method leads to election fraud. Congress has thwarted both initiatives.
Such a strategy and Bolsonaro’s constant threats to subvert democracy have energised the more loyalist followers of the president. However, this approach has contributed to the decline of Bolsonaro´s overall popularity, also affected by the dire economic situation and the disillusionment of those who chose him in the 2018 election due to his promise to tackle corruption.
The Speaker of the House, Arthur Lira, a Bolsonaro ally, has so far failed to table any of the several dozens of requests to impeach the president piling up on his desk. However, the ever-present impeachment threat has forced Bolsonaro to grant an increasingly central role in his government to the so-called “Centrao” (Big Centre). This is a large, informal group of parties known for self-serving practices, corruption and little ideological attachment that is key to passing or barring any initiative in Congress and that the president had fiercely attacked during his campaign. On August 4, however, he further increased the group´s space in his cabinet with the appointment of Ciro Nogueira (formerly a sitting senator) as his chief of staff.
As the president stokes up tensions with other branches of government, especially the judiciary, he has pledged to join his supporters in pro-government demonstrations. ‘Bolsonarista’ demonstrations often include demands for a military intervention and for the Supreme Court to be closed.
The economy, meanwhile, continues to recover slowly from the pandemic-induced recession recorded in the first half of 2020. Unemployment, at 14.7%, remains stubbornly high and consumer inflation reached 8.99% year-on-year in July. This has led the central bank to hike rates from a historic low of 2% in March to 5.25% in its most recent meeting in August.
Such tightening may not be enough, though. Apart from problems common to other economies -- notably supply-chain bottlenecks -- Brazil is facing rising energy prices as the most serious drought in nine decades takes its toll on a country that is highly dependent on hydroelectric power.
Increasing policy unpredictability amounts to risks to businesses and investors and populist economic policy in the run-up to the October 2022 presidential elections is a distinct possibility. Additionally, the government has, so far, very little to show for the privatisation drive that it is officially committed to. More broadly, the environment for foreign investment in Brazil will not benefit from chaotic policymaking, confrontational politics and resulting political (and economic) instability.
Bolsonaro´s mounting threats to democracy and the radicalisation of his supporters represent a significant increase in the already high risk of political violence. While the president is unlikely to be able muster the support he would need for a coup, the political situation could become increasingly unstable and political violence would not come as a surprising development.
Brazil continues to avoid direct experience of terrorism, but personal insecurity remains high and there is concern that high unemployment could increase crime in urban areas. Indeed, an economy slowly recovering, extremely high unemployment, elevated inflation (with food price rises especially pronounced at 13.25% year-on-year in July) and possible electricity rationing are an especially combustible mix.
Violence in the countryside could also mount, especially as Congress discusses legislation affecting the demarcation of lands under the control of indigenous populations, often targeted by illegal miners and other groups.
TREND ►
While trade sanctions and boycotts currently are a somewhat distant prospect, they could well materialise in the coming years if Amazonia deforestation remains at its current place -- especially if extreme weather events likely related to climate change continue to increase in frequency in rich countries.
Brazil remains at some risk of economic crisis, although such a crisis would be unlikely to result in restrictions on transfer of foreign exchange (see “Sovereign default risk,” below).
With low structural growth rates, higher interest rates could increase debt pressure on a country that already faces an extremely high debt-to-GDP (Gross Domestic Product) rate for an emerging market (84% as of June) -- though this has fallen somewhat in the last year.
Brazil would be vulnerable to capital outflows in the event of an increase in global interest rates. A sovereign default remains extremely unlikely, however, since Brazil has almost all its debt denominated in the local currency. That said, the country’s political system remains incapable of delivering the reforms needed to balance the budget and make public spending more effective without increasing the country’s already exceptionally high inequality levels.
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