Brazil

Financing conditions remain tight with only gradual monetary easing expected in 2026. High interest rates have increased debt-servicing costs, with public debt projected to exceed 80% of GDP. Fiscal reforms have slowed the rise in deficits, but the government budget remains deeply negative. Corporate insolvencies, particularly in agribusiness, have risen due to high borrowing costs and volatile input prices. Credit growth has been resilient, supported by fintech expansion and higher incomes, but is expected to slow as monetary policy remains restrictive. The banking sector is well-capitalized, but non-performing loans are ticking up, especially among small and medium enterprises. After an estimated increase in business insolvencies of +28% in 2025 compared to the previous year, we still expect a slight increase of +5% in 2026 before a decline in 2027 (-8%). On the sovereign side, fiscal credibility remains crucial; any slippage or pre-election spending could trigger further capital outflows and currency weakness. The external position is supported by a large trade surplus and low external debt, but foreign investor sentiment remains cautious due to fiscal and political uncertainties.

Political risk is elevated as Brazil approaches the 2026 general elections. President Lula’s administration faces mounting challenges in advancing fiscal reforms amid a fragmented and often oppositional Congress. Lula’s health and potential candidacy add to the uncertainty, with the possibility of a right-wing resurgence if economic conditions deteriorate. Policy continuity is at risk, especially regarding fiscal discipline and tax reform. Social tensions remain moderate but could flare if unemployment rises or social spending is cut. Internationally, Brazil’s non-aligned foreign policy and leadership in climate diplomacy (COP30) enhance its global profile but sometimes strain relations with major partners. Pre-election fiscal loosening is a risk, as is the potential for policy reversals depending on the electoral outcome. Investors remain wary of political volatility and the risk of abrupt shifts in economic policy, which could impact market stability and long-term growth prospects.