Security, trading and investment update for Brazil

02 May 2019

Security trading and investment update for Brazil The Bolsonaro administration is set to implement wide-ranging pro-market economic reforms, including the privatisation of large infrastructure assets in 2019. The overhaul of the pension system will also ensure fiscal stability returns to Brazil after nearly two years of economic recession.

Security Environment

Jair Bolsonaro, the far-right president and former Brazilian army captain, completed 100 days in office in April 2019. He is now expected to add substance to his campaign promises and ramp up the number of security patrols and arrests in the favelas of major cities.

However, the planned implementation of shoot to kill policing tactics in areas of Rio de Janeiro is likely to lead to a short-term spike in the homicide rate and increase the likelihood of retaliatory attacks on government buildings.

Violent crime is concentrated in the favelas yet the national homicide rate, at 30.8 per 100,000 people is five times the global average.

Security trading and investment update for Brazil The main risk to foreign nationals in major urban cities such as Rio de Janeiro and São Paulo will remain opportunistic street robberies and express kidnappings.

Traditional kidnap for ransom has declined across Brazil due to improved policing and the introduction of tougher punishment with prison terms of up to 15 years.

In 2018, four kidnap for ransom cases were recorded, down from eight in 2017. There are also significant risks to cargo and transport with more than 25,000 robberies carried out nationwide in 2018.

Bolsonaro’s right-wing rhetoric will continue to incite opposition. There is an increasing risk of disruptive, politically motivated protests by left-wing parties and labour unions against the Bolsonaro government’s austerity agenda.

The main hotspots for protests include São Paulo's Avenida Paulista, Rio de Janeiro's Copacabana beach and city centre, and Brasília's Esplanada dos Ministérios. Scuffles between protesters and state security forces, as well as arson attacks against public buses pose property damage risks.

Trading Environment

The economic challenges facing Brazil are daunting. The country continues to grapple with poor fiscal health, elevated debt and debt-servicing costs and an uncompetitive private sector. Nevertheless, Bolsonaro’s government has announced a pro-market agenda that may generate upside risks for the economy.

The planned overhaul of the deficit-ridden pension system will be crucial to the country’s economic fortunes.

According to Finance Minister Paulo Guedes, reform will save between R$700 million and R$1.3 trillion. The Brazilian economy is forecasted to grow by 2.2% in 2019 and 2.4% in 2020, driven largely by increased foreign investment in hydrocarbons and infrastructure assets.

However, significant economic headwinds will undermine the growth recovery over the coming quarters. Mine closures will limit mining sector production following the deadly Brumadinho dam collapse in January 2019.

Iron ore production will be stagnant as a result of the responsible mining firm’s decision to suspend and close operations at several sites.

Judicial and legislative scrutiny also raises the possibility of further production cuts.

Brazil’s fiscal deficit is expected to reach 1.4% of GDP in 2019 and 1.7% in 2020, rising from 0.8% in 2018, but export growth will keep the shortfall at modest levels over the long-term.

Demand for Brazilian exports will increase as China diversifies its sources of soybean and other agricultural commodities as a result of its trade dispute with the United States.

Foreign reserves are strong at an ample US$377 billion (approximately 28.5 months of import cover) and foreign direct investment (FDI) continues to grow. In the 12 months to February 2019, FDI in Brazil reached US$89.5 billion, up from US$67.7 billion the previous year.

Investment Environment

Pricing outlook BrazilThe Bolsonaro administration seeks to liberalise trade through wide-ranging economic reforms, including private concessions for highways, airports, railways and seaports. In total, tenders to privatise 49 infrastructure assets have been announced since Bolsonaro came to power.

In April 2019, the Lower House of the Brazilian congress approved a government bill to open up the aviation industry to foreign investment.

Airports will be divided into three regional blocks, the most attractive of which for investors is the North-Eastern block with its six different airports carrying 12 million passengers a year.

Expropriation risks have decreased with the election of the pro-market Bolsonaro administration but a promised anti-corruption drive increases contract revision risks.

Operation Lava Jato, a corruption investigation looking at a kickback scheme uncovered at the state oil firm, is having knock-on effects on companies that have contracts with the firm. 23 companies, including Brazil’s largest construction firms, are being investigated and their contracts are likely to be revised.

These firms also run airport, hydropower and railways concessions, posing further risks for investors.

A new anti-corruption law, the Brazilian Clean Company Act of 2014, bans companies guilty of using bribes to secure contracts from bidding for public work projects for up to five years.

The monthly Risk Outlook is supported by our proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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5 Key Takeaways

  • The Bolsonaro administration is set to privatise a large number of infrastructure assets in 2019
  • Planned reform of the pension system will save between R$700 million and R$1.3 trillion annually
  • Significant risks to cargo and transport exist with more than 25,000 robberies carried out nationwide in 2018
  • Mine closures will limit mining sector production following the deadly Brumadinho dam collapse in January 2019
  • Contract alteration risks have increased following a corruption investigation into a state oil firm

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Egypt, Mexico, Ghana and South Africa, all of which have been the subject of recent enquiries from our client base.

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  • Eleanor SmithEleanor Smith

    Eleanor Smith is a Senior Political Risk Analyst within Marsh JLT Specialty’s Credit Specialties team. At Marsh JLT Specialty, Eleanor analyses developments in political risks, and advises clients on their effect in a range of sectors. Eleanor is also responsible for delivery of World Risk Review, JLT’s country risk ratings platform, to clients and prospects. Eleanor has a first-class degree in History with Spanish from UCL, and a Masters in International Public Policy from the same institution. With experience in a range of sectors, including diplomatic missions and not-for-profit, Eleanor can help clients understand their risk exposure.

    If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on
    +44 (0)121 626 7837.