“Brazil is sunny, with some scattered clouds”

Brazil - the largest economy in Latin America and the eighth largest in the world in terms of GDP - is five months away from holding its general elections, and despite a complicated institutional situation, several economic and social indicators give reasons to be optimistic.

At the institutional level, the last two years have been difficult for Brazil. In August 2016, Dilma Rousseff was impeached for approving decrees without authorization from Congress to open supplementary credits and for manipulating budget accounting. In the background, Operation Lava Jato – considered to be the largest corruption investigation in the history of Brazil – has been ongoing. This operation is investigating a wide network of money laundering and alleged bribes by companies to obtain contracts from the semi-public oil company Petrobras. The investigation has touched a large number of politicians with varying degrees of alleged involvement, including former President Lula, who has been sentenced to twelve years in prison for a crime of passive corruption. The Datafolha survey published in April 2018 still shows Lula as a favorite among the candidates for this year's elections, with 30% support (a decrease compared to 34% / 37% of support projected in January). Neil Montgomery, partner at Montgomery & Associados, highlights the social and legal commitment in Brazil to combat corruption: "The fight against corruption, which has culminated in the arrest of many politicians and businessmen (and even former President Lula), shows the new face of a country that wants to have more transparency and get rid of an evil that has been ravaging the Latin American region for centuries."

Welson H. Lassali Rodrigues, partner at Chiarottino e Nicoletti Advogados, explains the difficult economic situation that accompanied this period of institutional turbulence, but that seems to be rebounding presently: “From April 2014 until December 2016, Brazil underwent its worst economic recession ever, with a reduction of the Brazilian gross domestic product (GDP) for a period of 11 quarters in a row. Among the reasons that gave rise to such a maelstrom, we may include the mistaken economic and regulatory decisions taken by former leftist president Dilma Roussef (impeached by Brazilian Congress in August 2016), the global reduction of commodities’ prices, and even the unstable political scenario that was then in place.”

The current administration of President Michel Temer - who took office after the impeachment of Dilma Rousseff, having served as her Vice President - has been marked by a low level of popularity (in April, an Ibope survey of 2,000 people indicated an approval rating 5%) and by an alleged corruption scandal related to bribes paid by the company JBS. Despite this, several indicators show a clear improvement in the economy; for example, the International Monetary Fund (IMF) forecasts a GDP growth of 1.9% this year and 2.1% in 2019. Andoni Hernández Bengoa, partner at Demarest Advogados, describes the business perspective as follows: “Brazil is sunny, with some scattered clouds (…) there are many good signs for hope”. He proceeds by stating: “Many of the macro-economic indicators (controlled inflation, lower interest rates, upcoming consumption levels in the private sector...) are already reflecting the recovery of the economy and the expectation is that upon definition of the new government in 2018, if the politics allow it and do not take steps back, Brazil may probably enjoy a new wave in the upper side of the cycle for the coming years.”

Montgomery also highlights the effects of the recent labor reform: "The labor reform, which came into effect in November of last year, has helped bring more legal security and a better balance in employer-employee relations. At this point, it is estimated that this reform has been responsible for reducing the number of new labor actions by more than 50%, which for decades have contributed to the 'Brazil cost'. " Bengoa also emphasizes this point, commenting that “the effects of the recent labor reform have already started to bring some hope as to rationalizing the number of labor claims. “

The three lawyers consulted highlighted the visible improvements in the amount of foreign investment entering Brazil:

Welson H. Lassali Rodrigues: 

“The local economy is clearly recovering in all of its sectors. In 2017 Brazil received USD 75 billion in foreign direct investment (FDI), while the current projections expect FDI to increase to USD 80 billion in 2018. These results make Brazil the 6th country that receives the highest FDI worldwide.

This robust score stems from the fact that foreign investors have a perception that the worst is already gone, with a great possibility that the pace of Brazilian recovery continues for the next years, in view of the policies adopted by the current government to correct the errors of the past, the magnitude of Brazilian consumer markets, the greatness of its natural resources and the perspective of a significant resumption of the economy, as already signaled in the last quarters (…) A more stable perspective is evidently in sight, with international investors now being able to see enhancements in governmental policies to promote consistent increases in both FDI and GDP in Brazil for the years to come. ”

Andoni Hernández Bengoa:

“Despite the caution that the current political scenario requires, and the uncertainty about the probable successors for the current Administration, we are seeing renewed interest of foreign investors -attracted by good size opportunities in a good range of different industries-, and a general increase of DFI (direct foreign investments) and local investments. Moreover, for the first time after a few long years, the M&A market is moving independently from the “carwash” (Lava Jato). Aside energy related projects (which have kept busy during these past years), we are now seeing many relevant assets and infrastructure projects making their way through to overcome the pitfalls and paralysis caused by the crisis (…) The financial industry is strong and healthy, ready to expand alongside investors in a new playground where the public banks are leaving free space due to their forced retreat.”

Neil Montgomery:

"The Brazilian economy begins to show timid signs of improvement and, after some years of recession, it is likely that we will finally have GDP growth in 2018. Some of these signs include, after several years in which many foreign companies closed their operations in Brazil, the interest of the foreign investor in considering investing again in the Brazilian market, either with the establishment of subsidiaries or with the purchase of already established companies (...) If it is possible to choose a President that is aligned with the current economic policy, Brazil has great chance to recover its trajectory of prosperity, which was lost several years ago. It's what we want as legal professionals and as Brazilians."

Miguel Spivakovsky
Latin Counsel