Brazil’s Recovery Faces Crucial Challenges

January 11, 2019

Brazil is increasingly attracting the scrutiny of investors worldwide as the country enters a key phase for its economy. After years of recession, the largest Latin American country is slowly showing signs of economic recovery, but political turbulence – driven by the anti-corruption operation “Lava Jato” – has cast shadows over the ability of the political leadership to sustain such recovery.

The international business community will closely follow what happens in Brazil over the next months, here are three reasons why:

  1. The elections’ uncertain results will impact the economy recovery

    The presidential elections scheduled for October 2018 are considered the most unpredictable ever approached by the country. The economy, weakened by years of recession, has only recently picked up and strongly needs political leadership – and stability – to keep recovering, but projecting the electoral outcome has never been so uncertain. Despite the convictions and the ambiguity over the legality of him running for election, former President Lula da Silva enjoys wide popular support and leads the polls. A radical rightwing policy maker, Jair Bolsonaro, ranks second benefitting from appearing as an “outsider candidate” and touching upon the increasing demand for security and social order from the Brazilian people. A packed field is contending for third place, including environmentalist Marina Silva, leftist Ciro Gomes and Sao Paulo centre-right Governor Geraldo Alckmin. Whoever will be sitting at the presidential Palacio do Planalto, the next Brazilian administration is likely to be a weak one whose ability to govern will depend on how well it can appease the various political parties in Congress. 

  2. Several crucial business dossiers are at play

    Even before the elections, key business and economic dossiers are to be addressed in the country. On the policy side, Brazil’s outgoing administration is trying to pass measures to reform the pension system and to privatize state assets before its time in office runs out. The pension reform bill was the cornerstone of President Michel Temer’s efforts to reduce Brazil’s budget deficit. For months, Temer has been trying to secure the votes needed to pass the bill in the Congress, but he is always falling short and is now acknowledging the bill is going nowhere. This is increasing market skepticism over Brazil’s ability to rein in a deficit that caused the loss of its investment grade credit rating. State assets privatization is also crucial and represent a palatable opportunity for foreign investors. Last August, the government announced reforms to privatize a large number of sectors in the country, from the lottery to the electric company. Temer’s privatization package is the biggest the country has seen in two decades. The most prominent company which could undergo privatization is Eletrobras, the largest power utility company in Latin America. Currently, Eletrobras is a majority Brazilian state-owned business, accounting for 30 percent of the energy generated in Brazil and 50 percent of the power lines crisscrossing the country. If privatized according to the current plan, the government hopes that Eletrobras’ assets would be sold off for 20 billion reais, or $6.3 billion dollars. Fifty-six other major state owned asset are part of the privatization plan, including airports, oil blocks, hydropower plants and other strategic infrastructure entities.

  3. Brazil’s economic performance is linked to Latin America’s
    The recovery is broad based across Latin America and Brazil acts as an economic driver for the region. The World Bank estimates the region’s growth will double this year, passing from 0.9 percent to 2 percent, mostly thanks to the recovery of the Brazilian economy, which is expected to grow at 2 percent in 2018 after a two-year long recession. The country is also a crucial decision maker to finalize the Mercosur-EU Association Agreement, a long awaited major trade deal between the four founding members of Mercosur (Argentina, Brazil, Paraguay and Uruguay) and the European Union. The EU-Mercosur negotiations were relaunched in May 2010, paused in 2012 and resumed in 2016. Talks are expected to move to the “endgame” phase in the weeks ahead, overcoming disagreements mostly related to the agricultural sector. Both sides see an imperative in the imminent closing of a window of opportunity when Brazil goes into election mode. A potential agreement can strongly influence economic recovery for Argentina and Brazil, boost investment in the region and ultimately liberalize services, access to public procurement and trade and investment. A Mercosur-EU trade agreement would create a market of over 750 million people. From an investor perspective, a deal with the EU promises to help set the economic agenda in both regions, increase market demand, create a positive trade balance with more exports, foster economic growth and access to industry and services, drive resilience and, more importantly, increase investments.  

For all these reasons, Brazil is attracting the interest of the international business community. What happens politically and economically in Brazil over the next months will be a key indicator of the country’s outlook in the coming years with significant repercussions at regional level.


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