The new year begins overshadowed by the exchange rate volatility experienced at the end of 2024. The sudden currency devaluation forced the Central Bank of Brazil to expend over $30 billion in reserves (nearly 10% of its end-2023 holdings), exacerbating inflation concerns for the coming months. Investor confidence plummeted, uncertainty surged, and the Central Bank aggressively raised interest rates with further hikes promised. Market forecasts now project rates to exceed 15%, signaling a significant contractionary trend likely to commence in the second half of the year. Meanwhile, inflation is not anticipated to return to the target level until late 2026.

The root cause lies in unsustainable fiscal policies. The administration and Congress have consistently failed to address the escalating public debt-to-GDP ratio, which has surged to 78%, a 4.4 percentage point increase in just 12 months. Notably, this ratio stood at a more manageable 52% as recently as 2013. The 2024 fiscal deficit reached a staggering 7.8% of GDP and is projected to further deteriorate to 8.6% this year, the highest among emerging markets, second only to Bolivia.

The erosion of the fiscal framework began with the 2014-16 recession, and subsequent measures have proven inadequate in reversing this trend. The underlying issues are well understood, with legislative proposals languishing in Congress. The obstacle is political. With the electorate deeply polarized on other issues, there is no clear mandate for fiscal reform. In a surprising turn of events, Congress, shortly after the 2022 election and even before the new administration assumed office, approved a package of measures that injected significant fiscal stimulus into the economy in 2023-24. This led to a surge in GDP growth, the creation of 3.6 million formal jobs, and the lowest unemployment rate in the historical series.

Now comes the payback. Annual GDP growth is projected to decelerate from 3.5% in 2024 to 2% this year. Given the strong growth momentum earlier in the year, negative quarterly growth rates are possible in the latter part of 2025, intensifying political pressure ahead of the 2026 elections.

Thank you to everyone who joined us for “2025 Brazil: Economic and Political Outlook,” where a distinguished panel of analysts provided in-depth analyses of economic trends and structural policy developments shaping Brazil’s outlook in the coming months.

Moderators:

Paulo Vieira da Cunha, Partner, VERBANK Consulting LLC | Former Deputy Governor, Central Bank of Brazil

Drausio Giacomeli, Managing Director, Deutsche Bank Securities

Speakers:

Thiago de Aragão, CEO, ARKO International Affairs

Myriã Bast, Economic Superintended, Bradesco (Via Zoom)

Daniel Cunha, Head of Macro Strategy and Sales, BGC Liquidez (Via Zoom)

Roberto Secemski, Chief Brazil Economist, Barclays

Shelly Shetty, Managing Director, Fitch Ratings