Brazil

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With a GDP of USD 3.220 trillion after adjusting for purchasing power (PPP), Brazil is the 10th largest economy in the world according to data from the World Bank. It accounts for one third of Latin America and the Caribbean’s GDP (PPP) and with 210 million inhabitants, it accounts for one third of the region’s total population. It is also the 5th largest country in the world and hosts 20% of the world’s rainforest. The country has abundant natural resources and the economy is well-diversified. Brazil is weakly integrated in the global economy and also suffers from an important infrastructure gap, high income inequality, a complex tax system, high labour market rigidity, and weak governance.

Brazil’s growth profile over the past decade has been relatively volatile. While the economy has averaged 4.5% growth over period 2007-2011, economic activity since 2013 has mostly alternated between periods of relative stagnation (2014 2017, 2018, 2019) and contraction (2015, 2016, 2020). The subdued growth trajectory of recent years can be traced back to a combination of factors, including policy missteps, a less supportive external environment marked by the end of the commodity super-cycle in 2014 and a string of corruption scandals have affected the political and business communities with significant consequences on society, confidence and investment. In recent years, fiscal rigidities have impeded public investment growth, while record high lending rates (and a lack of access to long-term credit) as well as high administrative burdens and reduced access to subsidized credit have strained private investment. 

Brazil enjoys a well supervised and robust financial system. As the BRL is one of the most volatile currencies across emerging markets, corporations are vulnerable to currency risk. But Brazil’s sound external position—with strong liquidity buffers, moderate external debt levels and dynamic foreign direct investment (FDI) flows—mitigate the risk of transfer restrictions.

The Bolsonaro government has put in place a large economic package to alleviate hardships for corporates and vulnerable populations resulting from the fallout of the Covid-19 pandemic. Relief measures by both fiscal and monetary authorities were rolled out to provide liquidity support to firms, especially SMEs.

Looking forward, it will take time for the economy to recover. The unemployment rate will remain durably high, and the government will not be in a position to provide large stimuli to the economy as the Covid-19 pandemic has exacerbated fiscal imbalances. Inflation and policy rates are at historic lows so the debt burden has been contained so far. Reforms are implemented to control further growth in mandatory public spending (e.g. social security reform, administrative reform), reduce trade barriers and state intervention in credit markets, promote privatisation and concessions (Investment Partnership Program) and simplify the tax code. These reforms – if they materialize – may help to address some of Brazil’s deep-seated economic problems (e.g. weak productivity) and enhance the country’s growth potential.