It’s getting ugly in Brazil as warning signs emerge 

Between 2016 and 2021, the number of Brazilians in Ireland rose from 13,600 to 70,000, according to an estimate by the Brazilian Embassy. This is an astonishing number that continues to grow year-on-year. Indeed, there was a recent survey which suggested that 76% of young people in Brazil wanted to emigrate. Why are they leaving? 

In Brazil’s case, much of this can be explained by disenchantment and a lack of domestic opportunities due to political decisions taken in the early part of the last decade. This was a period during which President Lula (now re-elected) and former President Bolsonaro both facilitated an explosion of debt in Brazil, with limited associated wealth creation for its people: We note:  

1. Interest rates fell from 15% in 2015 to 2% in 2020.  

2. Loose fiscal policy supported household income. The fiscal deficit averaged 6% of GDP since 2015, primarily due to large domestic social programmes. This allowed many “underbanked” to enter the banking system by having a credit card 

3. Total economy debt levels exploded. It rose to 175% at end 2022 (from 128% in 2013). Within this, the government is over 80%, and the private sector is close to 90% (of which, household is c. 37%).  

4. The productivity of new debt was close to zero as investment fell. The latter averaged 20% of GDP until 2015. It is c. 15% since then. Industrial production remains well below 2013 levels. 

5. Demographics are no longer supportive. Population growth is now below 1% YoY and falling. It will decline from 2040. Brazil is also ageing rapidly. The old-age dependency ratio will be 36% by 2050. It is 14% today. 

6. GDP per capita in constant USD is falling. The ‘underbanked’ will, therefore, most likely remain underbanked. The credit losses of those who have entered the banking system during this phase are likely to be much higher than forecast. 

So could 2023 be the year that this bubble bursts? Warning signs are emerging: 

1. The Itaú daily tracker of activity levels has turned down for the first time since the pandemic:  

2. Loan growth is slowing:  

3. The reliance on foreign funding to support the economy remains high at close to 3% of GDP. This will limit the ability of the authorities to lower interest rates. Why should foreigners provide money if it generates limited gains in economic output?  

4. Front book loan rates remain well above the back book. Interest cost as a share of GDP will accelerate from here.  

Conclusion: 2023 is going to be an interesting year for Brazil. It needs foreign money to allow it to lower interest rates to support an economy that is already swimming in debt. With the economy turning down, the pressure on President Lula to respond will accelerate. This could get ugly fast.  

The investment implications of this are nuanced but ultimately clear.  


If you would like to access our work, Carraighill Research Access enables you to access these and other thematic and sectoral research through our secure online portal. If you would like to speak to a partner or analyst on the topics raised in this piece, you can contact us here.