Brazil Country Risk Report

Brazil’s economy continues to show notable resilience, driven by a combination of robust agricultural output, a healthy labor market and strong consumer spending, all of which are critical factors that have underpinned recent economic growth. In 2024, Brazil’s GDP was supported by inflation-proof consumer demand, strong agricultural performance and expanding industrial sectors. The auto market, one of the fastest-growing globally, also contributed to economic activity. Industrial production at large is on the rise, helping to sustain momentum despite external challenges such as rising imports, particularly from China, which risk dampening domestic production. Increasing insolvencies in the agribusiness sector also highlight the importance of prudent financing and high sensitivity to both international input prices and weather conditions, including deforestation-related droughts and declining crop productivity in affected areas.

Brazil’s inflationary pressures remain a concern, with inflation forecasted to hover around 4.5% in 2025 and dip below 4% only in the second half of 2026. A large part of the authorities’ strategy to address inflation involves the central bank’s aggressive monetary tightening amid recurrent fiscal slippage. The Selic rate is expected to reach nearly 15% by mid-2025, continuing to curtail consumer spending and business investment, which could result in slower overall growth in the coming years. While higher interest rates are necessary to manage inflation, they also significantly increase Brazil’s debt-servicing costs, which currently represent 7% of GDP. Moreover, a large portion of domestic debt is indexed to the Selic rate, making these costs particularly sensitive to rate hikes.

To address these fiscal challenges, Brazil’s government is implementing fiscal reforms, including adjustments to income tax structures, capping public sector wages and imposing retirement age limits for military personnel. These measures aim to curb the growing fiscal deficit, but with public debt rising towards 90% of GDP by the end of 2026, the challenge of stabilizing fiscal dynamics remains. Brazil’s revenue collection ranks among the highest in the region, yet it is still insufficient to meet the country’s expenses and the resulting debt burden.

Despite these challenges, Brazil has made progress on poverty reduction, with the country managing to decrease extreme poverty by 40% in the first year of the current administration. This success can be attributed to sustained increases in wages, a reduction in unemployment and effective social policies that have bolstered private consumption. The country’s unemployment rate, which has hit a record low of 6% at the end of 2024, is one of the key factors driving consumption and economic growth, and it has helped maintain a sense of optimism in the country’s economic trajectory.

Brazil’s political environment remains marked by significant uncertainty as the 2026 elections approach. Though President Luiz Inácio Lula da Silva enjoys considerable popular support, especially due to his historical ties with the working class and his ability to enact reforms in the past, faces increasing challenges in advancing his progressive agenda. Lula’s health concerns further complicate his political future as it remains unclear whether he will seek re-election in 2026. His tenure has been characterized by both legislative victories and setbacks, with a more conservative Congress frequently opposing some of his key proposals. The government’s push for wealth taxes and reforms to the income tax code has met resistance, undermining the potential for sweeping fiscal reforms that could stabilize the country’s long-term debt trajectory.

This political tension is compounded by Brazil’s uncertain fiscal future. The government’s commitment to fiscal discipline is being questioned, particularly given the country’s growing deficit and the structural challenges posed by high debt-servicing costs. If the economy falters in the coming years, there is a real possibility that a right-wing candidate could emerge as a stronger contender in 2026. This shift would signal potential policy reversals and could create further instability, especially given the political fragmentation within the country.

Internationally, Brazil’s political stance is equally complex. Lula has pursued a non-aligned foreign policy, pushing for a multipolar world order that includes a more prominent role for Brazil in global politics. While this approach has positioned Brazil as an advocate for developing nations, it has also raised concerns among Western powers. Brazil’s decision to host COP30 in 2025 will provide an opportunity for Lula to highlight his environmental policies, particularly in relation to deforestation in the Amazon. However, tensions over his government’s foreign policy direction, along with economic volatility, could complicate Brazil’s diplomatic relations with both Western countries and other global powers.