Brazil improves but fragility alarms risk experts


Jeremy Weltman
Published on:

The worst might be over, yet there are still notable concerns surrounding one of the world’s largest emerging markets.

Up against a Bric wall: Brazil remains a low-ranking, tier-three sovereign, sitting
four places below fellow Bric India

Brazil’s risk score has slightly improved this year, sending the borrower three places higher in Euromoney’s global risk rankings, to 61st out of 186 countries, contrasting with the fate of South Africa, which is still declining:


This is largely down to ameliorating economic statistics.

Economic growth indicators have shown considerable improvement, the current account has moved back into balance and annual inflation has fallen to around 2% to 3% from a 12-year high of almost 11% in early 2016, thanks to falling utility, transport and food bills.

This is enabling the central bank to reduce the cost of borrowing, reinforcing economic growth, which rose in real terms by 0.2% in the second quarter – and 0.3% year on year – supported by agricultural production and private consumption.

GDP, after steep declines of 3.8% in 2015 and 3.6% in 2016 – causing unemployment to top 12% – is predicted to grow by 0.7% this year and 1.6% in 2018, according to the OECD. It might be higher, as some private estimates are factoring in stronger domestic demand.

This is showing up in the improvement to the economic-GNP outlook indicator in the survey.

With the government trying to push through reforms, and benefiting from stronger revenue growth as the economy rebounds, a slowly improving government finances indicator is also helping to lift Brazil’s country risk score.

Remaining cautious

Despite this, Brazil remains a low-ranking, tier-three sovereign, according to Euromoney, more than one point – and four places – below India in the global rankings, still short of investment grade with its prospects held back by political risk.

“There are elections next year, with uncertainty still hovering over the political situation,” says Bruno Vasconcelos, a São Paulo-based economist with CEIC Data, who also has doubts about the sustainability of the economic recovery.

On politics, Vasconcelos believes the way the government chose to conduct the implementation of its reforms and the corruption scandals allegedly involving the president Michel Temer and business tycoons have made the government weaker.

This is holding up the passage of laws in congress, meaning policy implementation is failing to keep pace, and that will keep the fiscal deficit high, which declined, but only to 9% of GDP last year.

In the meantime, the president and ministry of finance are seeking other alternatives to generate revenue.

“Recently, there was the increase in some taxes, PIS and Cofins on gas, diesel and ethanol, and there is an initiative to offer concessions to the private sector to operate airports,” says Vasconcelos.

Félix Larrañaga, a professor at Universidade Nove de Julho, takes a similarly balanced view on Brazil’s risk outlook, saying: “While some macroeconomic indicators show favourable trends [foreign trade, GDP, inflation, for example], the political and social scene is worsening. Unemployment is affecting more than 15 million people.”

This, the large fiscal deficit and high borrowing rates make Brazil rather fragile.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.