In a global environment still characterized by elevated interest rates, heightened risk aversion, and increasingly selective capital allocation, foreign investors have favored markets that offer scale, regulatory predictability, and resilient institutional frameworks. In Brazil, this discussion takes on particular relevance amid the transition to a new tax system, the maturation of regulatory regimes in key sectors, and the approach of an election year—factors that simultaneously expand investment opportunities and reshape risk considerations.

Tax reform, through the unification of consumption taxes and the reduction of longstanding structural complexity, is expected to simplify corporate structures, lower compliance costs, and reduce legal uncertainty over the medium to long term. At the same time, the consolidation of more sophisticated regulatory frameworks, combined with stronger governance practices, effective compliance, and institutionalized dialogue with regulatory agencies, has enhanced the capacity of projects in Brazil to withstand more volatile macroeconomic conditions without sacrificing investment appeal. Across sectors such as infrastructure, energy, finance, and technology, this combination has increased operational predictability and reinforced international investors’ confidence.

Today, successful investments in Brazil require not only attractive return profiles but also structures capable of absorbing macroeconomic fluctuations, regulatory adjustments, and political cycles without undermining project viability. The convergence of market scale, independent institutions, and regulatory stability creates an environment that is more robust than is often perceived externally.

It is within this context that we invited José Camargo, Chief Economist at Genial Investimentos, PhD in Economics from MIT, and retired professor at PUC-Rio, to assess the key factors likely to shape Brazil’s outlook in 2026. In the following section, Camargo examines the macroeconomic landscape, the implications of the global monetary cycle, the effects of tax reform, and the sectors offering the most balanced risk-return profiles for international investors.

1. How do you assess Brazil’s macroeconomic outlook for 2026, and what factors are currently shaping foreign investors’ perception of the country?

JC: The year 2025 consolidated a macroeconomic framework characterized by significant policy imbalances, but also by a degree of cyclical resilience that exceeded expectations at the start of the year. The combination of a persistently expansionary fiscal stance, a markedly contractionary monetary policy, and a relatively supportive external environment resulted in solid economic growth, a tight labor market, and a gradual deceleration of inflation. At the same time, however, fiscal indicators deteriorated meaningfully.

The exchange rate played a central role in the disinflation process. Between January and August 2025, the Brazilian real appreciated by approximately 15%, largely reflecting the wide interest rate differential between Brazil and the United States and, more importantly, a global weakening of the US dollar. Trade policies under the Trump administration, alongside public criticism of the Federal Reserve, increased perceived risks to the dollar, contributing to a sharp decline in the DXY index and favoring emerging-market currencies and assets.

As a result, 2025 was marked by a fragile macroeconomic equilibrium. Economic activity proved resilient, supported by a tight labor market and moderating inflation, albeit still above target. In contrast, fiscal conditions worsened, with public debt rising to 79.5% of GDP, a nominal policy rate at 15.0% per year, and an ex-ante real interest rate exceeding 10.0%. The absence of a credible debt-stabilization strategy has kept fiscal risk elevated, increasing the sensitivity of domestic assets to political developments and the electoral cycle.

The year 2026 begins amid heightened uncertainty, both domestically and globally. In Brazil, the continued fiscal deterioration observed since the start of President Lula’s third term, combined with growing concerns about debt sustainability, is likely to keep fiscal risk high throughout the year. This is further compounded by the electoral cycle, which tends to amplify volatility in key financial variables given uncertainties surrounding presidential succession.

Externally, the main sources of risk include the Trump administration’s economic agenda, the potential appointment of a more inflation-tolerant Federal Reserve chair, persistent geopolitical tensions, and the structural slowdown of the Chinese economy.

As in 2025, the behavior of the US dollar will remain a critical variable for the trajectory of the Brazilian Real and domestic asset prices. A scenario of continued DXY depreciation, combined with relatively supportive global financial conditions, could replicate the dynamics seen at the start of the previous year: improved global risk appetite, favoring emerging-market currencies and supporting local assets—even amid domestic fiscal fragilities.

Fiscal risk and the electoral cycle will therefore remain central themes. Our projections point to GDP growth of 2.1% in 2026, broadly in line with the 2.3% estimated for 2025, supported by an expansionary economic agenda.

On inflation, we project an exchange rate depreciation to R$5.72 per dollar by year-end and inflation of 5.0% in 2026, up from 4.3% in 2025. Inflationary pressures are expected to re-accelerate due to demand-stimulus measures and currency depreciation, with fiscal policy partially offsetting the restrictive stance of monetary policy.

We expect the Central Bank to initiate an interest-rate easing cycle in March, starting with a 25-basis-point cut in the Selic rate. Under our baseline scenario, however, inflation should begin to accelerate again toward the end of the first half of 2026, prompting the Central Bank to pause the easing cycle. We project the Selic rate to end 2026 at 13.0%, with the easing cycle interrupted as inflation reaccelerates in the second half of the year.

With real interest rates remaining elevated, debt-servicing costs will continue to exert significant pressure on public finances. Our baseline scenario projects gross public debt reaching approximately 84% of GDP in 2026, an increase of nearly 12 percentage points over the course of President Lula’s third term. According to our estimates, stabilizing the debt ratio would require a primary surplus of 3.0% to 3.5% of GDP—well above the official target of 0.25%.

The electoral cycle introduces substantial additional risks to the 2026 outlook. High rejection rates among leading candidates point to a polarized and highly competitive race, with a non-negligible probability of defeat for the incumbent. Should this scenario gain momentum, there is a risk that new expansionary fiscal measures could be adopted during the year, further deteriorating public finances. Conversely, the mere expectation of a change in government could compress risk premia, exerting downward pressure on both the neutral interest rate and the exchange rate, with potentially disinflationary effects over time.

Even if President Lula is re-elected, we do not expect a meaningful shift in the economic policy framework. We diverge from the prevailing view that a structural fiscal adjustment would become unavoidable under any administration. In our assessment, the priority of a potential fourth Lula term would likely be the consolidation of a political successor, preserving a growth model anchored in fiscal stimulus and demand support.

Under this scenario, we would expect higher risk premia, increased market caution, and renewed depreciation pressure on the real, similar to the episode observed at the end of 2024, when the exchange rate moved from R$5.46 to R$6.29 per dollar in roughly two months.

Elections will therefore play a decisive role in shaping exchange-rate dynamics over the coming year and represent the main risk to our baseline projections for the currency and inflation and, by extension, to the monetary policy path adopted by the Central Bank from 2026 onward.

Ultimately, the key question is which force will prevail: appreciation pressures on the Real driven by a potentially more accommodative stance from the Federal Reserve, or depreciation pressures stemming from domestic political risk.

The market reaction observed at the end of last year, following the announcement of Flávio Bolsonaro’s candidacy, underscores the sensitivity of asset prices to the electoral outlook and may foreshadow price dynamics should polling begin to assign a higher probability to President Lula’s re-election. Even under a more supportive external environment, we expect domestic political factors to dominate in the short term.

2. How can foreign investors benefit from the divergence between still-high interest rates in Brazil and global monetary easing in the coming years?

JC: Against this backdrop, investors should focus on two key dynamics. First, US monetary policy will remain a major driver of the dollar’s global performance. A more accommodative stance by the Federal Reserve would tend to weaken the dollar and support the appreciation of emerging-market currencies, while a less accommodative stance would have the opposite effect.

In parallel, high-interest rate differentials, particularly in Brazil, support carry trade strategies, increasing demand for local government bonds and contributing to currency appreciation against the dollar.

3. How might tax reform and the prospect of lower energy costs globally enhance the attractiveness of productive and infrastructure projects?

JC: The year 2026 is widely viewed as a test year for Brazil’s tax reform, as implementation will be gradual and its direct economic effects are expected to be limited in the short term. Once fully implemented, however, the reform will introduce a value-added tax (VAT) on consumption of goods and services, significantly simplifying the tax system by reducing the number of taxes and consolidating legislation.

Given the significant number of exceptions, the standard rate of Value Added Tax (VAT) will increase by 27.5%. In practice, the structure of taxation is expected to shift meaningfully, with higher effective taxation on services and lower taxation on goods, particularly industrial products. On the other hand, the reform is designed to maintain overall tax neutrality, at least in principle.

4. In your view, which Brazilian sectors are likely to offer the best balance between risk and return for global investors in the coming years?

JC: Sectors with the most attractive risk-return profiles are likely to be infrastructure, particularly sanitation, ports and airports, and highways—as well as energy, with an emphasis on renewables. That said, despite the still-wide interest rate differential between Brazil and the United States, close attention must be paid to public debt sustainability. The electoral environment remains a potential source of instability and heightened volatility throughout the year.