Previous Quarterly Editions
Expropriation Risk: 46 46 48 49 Political Violence Risk: 50 54 59 55 Terrorism Risk: 35 38 38 40 Exchange Transfer and Trade Sanction Risk: 45 45 45 43 Sovereign Default Risk: 52 50 50 50
TREND ▼ OUTLOOK ►
Jair Bolsonaro, the far-right president who took office on January 1, triumphed in the October 2018 elections by riding a wave of dissatisfaction with the country’s mainstream politicians. Bringing together economic liberals, supporters of the military, those demanding a tough line on crime, and socially conservative evangelical Christians, he built an enthusiastic base of support for a campaign that lacked policy specifics but talked a lot about freeing the country from socialism, keeping its citizens safe, and adhering to family values. He also pledged to combat corruption and end the long-standing presidential practice of trading jobs in the executive for support in the legislature. This has enabled previous governments to function in a political system that currently has 30 parties in Congress, but it has definitely affected the quality of governance. Now that he is in power, Bolsonaro must make good on his promises but faces three potential sources of trouble. One is the internal strains within his own administration, which contains a wide range of approaches from economic liberalism to economic nationalism, with an added dash of military thinking. Another is the challenge of dealing with Congress while eschewing the tried and tested approach of political horse-trading. In putting together his cabinet, Bolsonaro did not give seats to the range of parties from which he hopes to forge a legislative coalition. Opinion polls show this was highly popular, but the president may quickly find that he needs friends in the Congress to advance his agenda. Finally, having campaigned on honesty, transparency, and a ‘new way’ of doing politics, any indication of corruption within his administration could quickly lead disillusioned voters to regard him as just another politician. Questions have already been asked about his son, elected to the Senate last year, his economy minister and his chief of staff.
Although overshadowed by political developments, FDI inflows beat most estimates to reach 88 billion dollars in 2018, while net FDI inflows reached 4.7% of GDP, the highest level since 2001. The current account deficit doubled from 2017 to 14.5 billion dollars but remains well under 1% of GDP. Exports rose by 10% and imports by 20%, reducing the trade surplus but still leaving it at 53 billion dollars. However, there is some concern at the speed with which Bolsonaro hopes to replace Brazil’s long-standing tradition of pragmatism and multilateralism with a highly ideological and nationalistic approach to foreign policy. With discernible elements of the Trump agenda, from climate change scepticism and hostility to immigration to aggressive support for the country’s agrobusiness sector and the opposition in Venezuela, Bolsonaro risks solidifying his support base at the expense of Brazil’s external relations.
TREND ▲ OUTLOOK ▼
There is considerable hope among current and prospective investors that Bolsonaro will succeed in pushing through an effective pension reform package. This would strengthen the currency, help to contain inflation, and increase consumer purchasing power, although a stronger currency risks some damage to exports. Bolsonaro’s instinct to ally ‘automatically’ with the United States could put some strain on Brazil’s important commercial relationship with China, its largest export market. Five executives from Vale were arrested after a deadly dam collapse at one of the company’s mines in Minas Grande in January that left at least 85 dead and hundreds missing. The government initially responded to the accident by saying it would replace the company’s management team before stepping back from that statement, but the case will be closely watched for indications of how seriously it will enforce mining regulations. Vale is taking similar dams out of commission in a move that will affect 10% of its total iron ore output.
The Bolsonaro government’s combination of social conservatism and economic liberalism has the potential to trigger strong protests across a wide range of issues, but early demonstrations involving those on the left will not worry it unduly. However, if the current lacklustre economy fails to gain momentum after a period of austerity, especially if that period produces new government scandals, then street demonstrations may well increase in both protestor numbers and political composition. If so, the government’s instinct may be to crack down hard, risking an escalating series of clashes. For the time being, however, most Brazilians have begun 2019 with positive expectations of the new government, giving it a degree of political capital for its first months in office.
TREND ▲ OUTLOOK ►
Although Brazil has not been a target for international terrorist groups, Bolsonaro’s pledge to move its embassy in Israel from Tel Aviv to Jerusalem could draw the attention of Islamist extremists, some of whom are believed to be in the trinational border region shared with Paraguay and Argentina. In addition, Brazil’s porous border makes it a potential haven for narcotics trafficking, which may become an early target for action under Bolsonaro with enthusiastic support from Washington.
The central bank has maintained its benchmark Selic interest rate at a historic low of 6.5% since March 2018. With weak growth and inflation within the target band, the rate should remain unchanged in the coming months. The bank hopes that economic liberalisation moves by the new government will attract more foreign capital to Brazil in the coming months. This should, in turn, strengthen the real and allow the Selic rate to remain as low as possible.
TREND ► OUTLOOK ▼
After five consecutive years of primary deficits, the Bolsonaro government will struggle to achieve a promised fiscal balance, certainly during its first two years. Quick action on pension reform, capitalising on its goodwill with the electorate, would certainly address the most serious problem facing public finances. However, given that relations with Congress are already strained, this looks unlikely. Although Brazil’s debt-to-GDP ratio is close to 75%, making it a heavy burden for an emerging market with low growth and relatively high interest rates, the vast majority of debt is denominated in local currency. With central bank reserves holding steady at 375 billion dollars during 2018, both factors help to keep down the risk of sovereign default.
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