Brazil Country Risk Rating

The biggest issue remains the outcome of the October presidential election.  The most likely 2nd round runoff is between President Lula and right-wing candidate Flavio Bolsonaro, with the economy and crime being the key voter issues.  Bolsonaro has lost momentum after reports that he sought a loan from the owner of Banco Master that has been involved in a scandal.  Opinion polls now suggest a close race.  Markets are also watchful for any extra fiscal giveaways from the Lula administration. Elsewhere, given Trump’s dislike of Lula, Brazil is looking to build closer ties with other countries across the world.  The EU is keen to work with Brazil on its large rare earth mineral deposits (2nd only to China), which Trump wants to exploit if Bolsonaro wins. Oil exports to China and India have also increased since the start of the Iran war.  The critical long-term economic issue is the budget deficit and government debt trajectory, with the latter forecast at 96.5% of GDP in 2026, according to the IMF. While the government has pledged a primary surplus from 2026, debt servicing costs are now 7% of GDP. Thus, sovereign non-payment risk is medium-high. If fiscal consolidation is not seen post-election, we think it could cause domestic financial tensions in the coming years. The long-term fiscal problems also mean that the risk of doing business remains high. Economic growth is projected by the IMF to slow to 1.9% in 2026, as the lagged effects of ultra-restrictive monetary policy continue to feedthrough (the central bank has started cutting but is cautious due to Iran war energy price shock). The IMF forecasts 4.0% inflation in 2026 and 3.4% in 2027, respectively.