With upcoming tax reform, alongside well controlled inflation and higher than predicted GDP, the outlook for investment in Brazil is looking positive, despite the financial market’s scepticism regarding the Federal Government’s actions. The context is too complex to listen only to the pessimists. Vieira Rezende Managing Partner and CEO, Pedro Hermeto, offers an expert perspective on how key economic indicators will correlate with legal matters in the year to come.
One of the Brazilian government’s main challenges is to balance the budget, and specifically to reduce expenditure. Currently, spending isn't well managed, with government spending exceeding tax revenue.
What’s more, the budget deficit keeps interest rates in Brazil high, with rates recently being raised to 12.25% (this amount expected to increase over the coming months). The Central Bank uses high interest rates as a tool to control inflation, so one of the ways to reduce inflation is to reduce government spending.
Recently, the Brazilian Finance Minister, Fernando Haddad addressed the government’s plans to reduce federal spending to support the country’s fiscal framework. Minister Haddad announced a forthcoming package of measures, including a R$5 billion spending freeze for the final two months of 2024.
While some market analysts express scepticism about the scale of cuts needed (estimated to be between R$30 billion and R$70billion over the next two years), the government remains optimistic about maintaining fiscal responsibility.
Privatisation in Brazil has a strong legal foundation.Vieira Rezende, for example, has 30 years of experience in assisting clients (including public entities), in transferring assets from public to private ownership. Among many sectors, we have
been part of historic operations such as the privatisation of the Brazilian mining company Vale, the privatisation of the electricity and the telecommunications sectors, the restriction of the financial and steel industries, and airport operations.
Privatisation is expected to remain on the agenda throughout 2025. This creates a significant opportunity for foreign investors in Brazil, particularly when considering the favourable exchange rate for the U.S. Dollar. Investment opportunities are
expected across areas such as:
• Energy generation, distribution and transportation.
• Water and sewage infrastructure.
• Road and rail infrastructure.
• Airport operations.
Upcoming structural reforms are expected to make privatisation opportunities even more attractive for foreign investors. Tax reforms are expected to take effect in 2025.
The government is demonstrating improved cost management and debt repayment, and for the first time in twelve years has achieved a solid credit rating from agencies like S&P.
Of course, investors want to put their money where they will receive reliable dividends and returns. Brazil meets this need, offering astable legal environment and tax reforms designed to attract foreign capital. These factors are shaping a
relatively positive business outlook for 2025. Sectors like technology, clean energy, agribusiness, and infrastructure are expected to be especially appealing to foreign investors as a result.
GDP growth in the second quarter of 2024 was 1.4%, exceeding market expectations of 0.7-1.2%. On an annual basis, this growth translates to approximately 5.9%. Growth is projected at 2.6% for 2025, contingent on the adoption of efficient fiscal policies and controlled inflation.
Inflation is forecast at around 4.96% for 2025, which is consistent with recent trends. While Brazil faces no risk of hyper inflation, unlike other South American economies, the projected inflation rate may require tighter monetary policies to remain under control. Positive indicators, include ongoing reforms and efforts to stabilise the economy.
New players can benefit from a market with rising demand for energy and fuel, especially with Brazil’s growing middle class and industrial sectors. In terms of the industrial market, since COVID-19, the federal government has been conducting two major power infrastructure bids each year. These bids have attracted intense competition and are considered an excellent entry point for power infrastructure players. Beyond these national bids, any interested party can identify transmission opportunities and express it's interest to the government, who will then assess whether there are multiple interested parties. If so, a competitive bidding process will be held. If not, then authorisation is usually granted automatically.
Brazil’s middle class is an increasingly attractive opportunity. Not only is it expanding and estimated to include around 70 million consumers, the middle class is also becoming more sophisticated. This makes Brazil an attractive country to do business in, not just for the energy market but for anything from electronics and cell phones to luxury goods and beauty products.
Despite persistent logistics and infrastructure challenges in reaching remote areas, demand remains high in major urban centres, which are more accessible. Brazil’s historically low unemployment rate, increasing disposable income, and the growing purchasing power of the middle-class, are driving economic growth and enhancing the country’s appeal for investment.
Any discussion of the current and future economic outlook for legal matters must consider the impact of the U.S.A. election – which will inevitably affect investment opportunities in Brazil, after inauguration day.
President Trump’s plans to significantly increase tariffs on imports, specifically from China, could present an opportunity for Brazil to fill this gap.
In addition to his protectionist policies, President Trump has shown little support for ESG (Environmental, Social, and Governance) standards. Brazil, by contrast, is highly committed to ESG initiatives. This divergence creates opportunities for Brazil to attract investment, from Europe in particular, by focusing on ESG principles.
Read more about ESG investment opportunities in Brazil, including sustainable finance and the carbon credits market, in previous editions of the Brazil Brief.
While the U.S.A. is moving away from ESG, global interest in ESG investments – especially in renewable energy and carbon reduction –continues to grow. Foreign investors should consider Brazil as a prime destination. Brazil offers abundant natural resources, vast land, a large consumer market, and ample opportunities in energy and infrastructure.
Brazil also has large rainforests for carbon capture. Recently at COP29 in Baku, there was discussion about the need to support Indigenous peoples and local communities in protecting these forests. This support has been lacking in the past, affecting the credibility of the carbon credits market –as discussed in our article on navigating the challenges of Brazil’s carbon market. It was positive to hear foreign governments, including the U.K. Foreign Secretary David Lammy, acknowledge the importance of Indigenous rights and introduce new funding for forest tenure and management.
Brazil has none of the investment risks seen in countries like Mexico, where judicial reforms raised concerns about the rule of law and the stability of key institutions.
Foreign investment is actively welcomed, with recent tax and reform seeking to make it even more accessible and appealing.
I consider myself a cautious optimist and believe that Brazil remains a safe destination for foreign investors – especially those who have a long term vision and local specialist support. While the recent measures announced by Minister Haddad have sparked market distrust – and even put my optimism to the test – Brazilian institutions remain strong and a fertile ground for international investment.
We are living through a historic moment in the country. The level of depreciation of the Real has made available assets more affordable.
The situation demands action. Having specialised advisors to navigate the legal risks of doing business in Brazil is a key advantage in seizing the opportunities that arise.
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Brazil's dynamic political and economic environment offers diverse opportunities. Expert guidance is essential to navigate these complexities. This selection of articles highlights why Brazil is an attractive destination for international investment.
