Brazil Country Risk Rating

Overall risk in Brazil remains at a medium 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’s gap in 2nd round run off polls has narrowed back to 5-8%, after Bolsonaro in the spring was hurt by reports that he sought a loan from the owner of Banco Master that has been involved in a scandal. This means that the election race could be close by October. Trump’s dislike of Lula could also become an election issue, given the new tariffs imposed on Brazil and Trump’s overt support for Flavio Bolsonaro. Given this Trump administration pressure, Lula 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 general 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. If Lula is reelected, then he could be too slow on fiscal consolidation and this could cause post-election bond turbulence. 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 feed through (the central bank has started cutting but is cautious due to the Iran war energy price shock). The IMF forecasts 4.0% inflation in 2026 and 3.4% in 2027 respectively.