Previous Quarterly Editions
Expropriation Risk: 46 48 49 52 Political Violence Risk: 54 59 55 58 Terrorism Risk: 38 38 40 40 Exchange Transfer and Trade Sanction Risk: 45 45 43 43 Sovereign Default Risk: 50 50 50 51
TREND ▲ OUTLOOK ▲
The presidency of Jair Bolsonaro, who took office in January, has got off to a bumpy start. The president and different members of his government initially spent much time attacking cultural trends and policies that his social conservative backers blame on previous left-leaning administrations. Bolsonaro, a former army captain, urged the military to celebrate the 55th anniversary of the 1964 coup that installed a 21-year dictatorship in the country, and maintained an attack on much of the media. However, his claims to represent a reaction against a corrupt political system have been dented by a scandal involving the diversion of campaign funds destined for a candidate of his Social Liberal Party. Beyond the rhetoric, policy-making under the new administration has not been effective. As it approaches six months in office, the government still lacks an official supporting coalition in Congress, which has refused to be overawed by the president’s initial popularity. Much of the damage has been done by Bolsonaro himself in a series of unprovoked attacks on House Speaker Rodrigo Maia, an economically conservative politician who is vital if the administration is to achieve its primary objective of passing an ambitious pensions reform. The business sector is increasingly concerned about the president’s inability to build a constructive relationship with Congress, even though he was a member for three decades, because it is damaging the prospects for achieving the pension reform package that is needed to correct a fundamental fiscal imbalance. While the Congress is still likely to pass some sort of reform measure, it is likely to be far less than the Bolsonaro’s proposal that he claims would yield savings of 285 billion dollars over ten years. The centre-left opposition regards many aspects of that proposal as socially unfair, urging the use of a tax on dividend payments to raise revenue before the pensionable age is raised. With the lack of experience in government no longer seen as an advantage, the share of Brazilians who rated his administration as good or very good fell from 49% in January to 35% at the end of April. 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.
At 0.4% of GDP, public investment in infrastructure fell to its lowest level for ten years during 2018, leading the government to increase efforts to attract private sector investment. Auctions held in March for licences to operate 12 airports exceeded government expectations, with more auctions expected, and legislation approved in May will allow foreign-owned airlines to operate domestic flights. Iron ore giant Vale reported a first-quarter loss of 1.6 billion dollars largely related to the fall in output that followed the Brumadinho tailings dam disaster in January, in which 230 people were killed. A five-billion-dollar lawsuit alleging negligence has been brought in the UK on behalf of 235,000 Brazilian plaintiffs against Anglo-Australian mining giant BHP Billiton in connection with the 2015 dam collapse at the Samarco mine in Minas Gerais state which BHP co-owned with Vale. Using international courts may circumvent some of the support that the Bolsonaro administration has promised to the mining sector.
Bolsonaro continues to play to his base among socially and politically conservative groups rather than reach out to build wider support. The strategy worked to his advantage during the election but, by maintaining this approach as president, Bolsonaro is continuing to deepen the profound divisions in Brazilian society that were evident during the election campaign. This ultimately increases the risk of social instability and political violence. Although there is no single area at present with obvious potential to be a trigger for such unrest, the recent cut of 1.8 billion dollars from the education budget, most of which will affect the university sector, is just one example of moves that leave a particular segment of Brazilians feeling targeted. In April, Petrobras suspended a 5.7% increase in diesel prices following a direct request from the president as he tried to prevent another damaging strike by truck drivers.
TREND ► OUTLOOK ►
Bolsonaro’s decision to open a Brazilian business office in Jerusalem, having dropped previous plans to move the country’s embassy there from Tel Aviv, and his alignment with Israeli Prime Minister Binyamin Netanyahu were both condemned by Hamas. However, this is not expected to make Brazil a major target of Islamist terrorist groups. Urban violence continues to be a serious problem, and while the number of homicides in 2018 was down by almost 10,000 compared to 2017 it was still extremely high at 51,000. Critics of the government’s promise to facilitate access to firearms expect this to make the situation worse rather than better.
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Although the sluggish economy and rising unemployment have generated protracted speculation that further reductions were likely, the central bank has maintained its benchmark Selic rate at a historic low of 6.5% since March 2018. Unexpectedly high monthly consumer inflation in March and April pushed the annual rate above 4.25%, which is the centre of the bank’s target range, making a rate reduction unlikely, at least for now. However, this could change if the US Federal Reserve cuts its rates, as this would make emerging markets more attractive and strengthen the real, helping curb inflation in Brazil. Concern about the prospects for pension reform saw a real dip against the dollar in April after a period of stability.
TREND ▲ OUTLOOK ►
After two full years of strong recession in 2015 and 2016 which were then followed by another two of anaemic recovery, the economy remains significantly smaller than in the first half of the decade. Without higher growth, itself a challenge given low output from a workforce lacking investment in skills and persistent income inequality limiting the availability of discretionary household spending, Brazil will struggle to plug the hole in its public finances. In April, the IMF projected that the gross debt-to-GDP ratio could reach 98% in 2024, up from 88% in 2018. However, a sovereign default remains unlikely, as the domestic political cost of such a measure would be enormous and almost the entire federal debt is denominated in the national currency.
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