Top Risks 2024: Implications for Brazil

 

IMPLICATIONS FOR brazil
There is a sense of optimism in Brazil as 2024 gets underway. President Luiz Inacio Lula da Silva's second year in office is set to be more challenging than the first, with a cooling economy weighing on his presidency and the administration's zero-deficit goal proving to be a tall order. Yet the outlook cannot dampen the upbeat sentiment in local markets. The stock exchange is hitting new highs, the dollar is moving away from the five-reais mark, and there has been a steady increase in bond issuances.

Call it a feeling of a return to normalcy after years of crises. At the same time, though, there is also recognition that Brasilia is still capable of enacting important structural reforms, such as a tax overhaul, despite heightened political polarization and ongoing squabbles among congress, the administration, and the judiciary.

Eurasia Group's Top Risks 2024 report highlights significant risks and opportunities that we expect will affect Latin America's largest economy. The good news is that Brazil is relatively well positioned to navigate two of the top three geopolitical risks: Middle East on the brink (risk #2) and Partitioned Ukraine (risk #3). Being a food and energy producer means Brazil can reap economic benefits from dislocations caused by either risk; but also, Brazil can more broadly profit from the diversion of investments amid a geopolitically contentious global backdrop. The bad news is that this year's Top Risks serve as a reminder of latent domestic political risks that could start to manifest in 2024 (risks #1 and #4), along with some important headwinds in the global economy that could undermine domestic growth (risks #6 and #8).

Here are some of the key takeaways from Eurasia Group's Top Risks 2024 report for Brazil. For the full list of top ten global risks, please see the report here.

• First the good news for Brazil. In a G-Zero world, geopolitical risks will remain structurally high in 2024. That will be evident with the ongoing Middle East turmoil, the Ukraine conflict, and the so-called axis of rogue states (risk #5). Brazil, along with some other leading countries in the Global South, stands to gain in relative terms from the dislocation of investment flows driven by companies and investors seeking protection. Being a food and energy producer, and having low-carbon energy sources, works in Brazil's favor in this context. It is no coincidence that the EU was interested last year in signing a free trade deal with the Mercosur trading bloc—even if the deal was not ratified. Policymakers in the EU view the trade pact as a vital deliverable given energy and food security needs, and Europe's private sector does as well.
• The competition to produce critical minerals for the green and digital economy (risk #7) is a clear example of such an opportunity for Brazil—even though it could be squandered depending on regulatory and environmental concerns. As governments worldwide adopt protectionist measures to ensure control over critical inputs for battery and semiconductor production, Brazil could attract interest in some of its reserves, many of which remain untapped. For example, it has the world's third-largest graphite reserves, and these are critical for electric vehicle production. The threat of Chinese export controls has already prompted firms to fast-track investments in mines in Bahia. Brazil also has substantial deposits of nickel, phosphate, and rare earth minerals.
• Lastly, even though wars—in the Middle East (risk #2) and Ukraine (risk #3)—can harm the global economy through higher food and energy prices, Brazil suffers much less on a relative basis given its status as a provider of both commodities. Higher oil prices in 2024 would translate to higher domestic fuel prices yet also higher revenue from oil production. Brazil's biggest macroeconomic vulnerability is its fiscal accounts, but a spike in revenue, much like what occurred following Russia's 2022 invasion of Ukraine, would ameliorate that concern. These wars, however, could hamper Brazil's role as a diplomatic frontrunner as G20 host this year—especially as they increasingly play the United States and, to a lesser degree, Europe against countries from the Global South.
• The bad news comes on several fronts. Most notably, the US election (risk #1) and ungoverned AI (risk #4) are stark reminders of troublesome domestic issues that for the most part remained dormant in 2023. Much like the US, Brazil is a deeply divided and polarized country in which trust in the media, courts, and political leaders runs structurally low. Almost one-third of the electorate thinks former president Jair Bolsonaro won the 2022 Brazil presidential race and roughly 40% say they would vote for him again. Last year, higher-than-anticipated economic growth and a drop in food prices kept Lula's approval ratings above 50% and the Bolsonarista opposition at bay. But a likely decline in Lula's numbers in 2024 amid lower growth could spur a more vocal opposition that would in turn cause the president to exert more pressure on his administration's fiscal framework. While this will not undermine the overall direction of economic management or political stability, more polarized politics could start to resurface with enhanced tools for disinformation and a weaker administration. This could also serve as a reminder that the politically charged environment of 2022 is set to return for the 2026 election.
• Brazil must likewise prepare for the potential election of Donald Trump to the White House next January. If that happens, the Brazil-US relationship would be cooler and significantly more volatile. In this scenario, Brazilian companies might suffer from new tariffs imposed by a Trump administration that is even more aggressive with its trade strategies this time around. And environmental cooperation, including funds to combat deforestation and other green investments, would face greater difficulty.
• Meanwhile, AI (risk #4) both captivates users and concerns authorities in Brazil and around the world. The upcoming municipal elections have spurred congressional interest in regulating AI tools to curb disinformation tactics during campaigns. Yet as noted in the Top Risks report, regulatory efforts are likely to be futile given the pace of new tool development. Innovations set to be unveiled in 2024, potentially involving non-written language and more customized algorithms, will make current chatbots seem obsolete. Nevertheless, despite the pitfalls, AI can boost productivity across the economy, as businesses and even workers and students learn to use robots as co-pilots (though Brazil sits toward the bottom of the G20 in terms of AI-related policy and investment). One important risk in that context is hasty and ill-considered regulation could prematurely stifle many AI applications in Brazil, hindering the competitiveness of domestic companies.
• Economic risks (#6 and #8) are another area with direct implications for Brazil, particularly as they relate to China, its largest trading partner. Lower Chinese growth dampens Brazil's economic momentum, thereby reducing growth and tax revenue. The strong political centralization around President Xi Jinping lowers the chances of an acute crisis in 2024 but deepens structural distortions over the long term. For Brazil, this underscores the importance of opening new markets for its products, not only in Asia but across other continents as well. The Mercosur trade deal with the EU could advance, though it is unlikely to be ratified in 2024, and further negotiations for more trade and investment should be on Brazil's agenda.
• Lastly, the role of the BRICS in 2024 is noteworthy—not as a risk but as a red herring. Internal differences among China, India, Brazil, and other members prevent the group from acting effectively as a counterbalance to the G7 and other institutions led by the US and Europe. Also, Brazil's involvement in the BRICS is not a sign that Brazilian diplomacy is tilted more toward China than the US.