Brazil, show your true colors

A landscape marked by inequality, corruption, and unbridled ambition... sounds like a soap opera description, and it is! Who doesn't remember the famous Vale Tudo (if you don't remember, check it out on Wikipedia), which aired in the 1980s and is about to be remade and rebroadcast in a modern-day version. But wait, wasn't this report supposed to be about the economy? Yes, yes, dear readers, we will talk about the economy, as we know it is the most requested topic of the month and the one everyone likes to discuss and weigh in on, right? Before that, let's go back to Vale Tudo, as the plot revolves around the political and economic state of Brazil at that time—1988, to be precise—which was marked by inequality, corruption, high interest rates, economic recession, and other such things. Well, well, the soap opera is being remade more than 35 years later, and it seems nothing has changed!

Our inflation is high and above target; the interest rate is expected to reach 15% by the end of the year, and as a result, our growth should be around 2% or even lower, a result inferior to what was observed at the end of last year (3.4%). This is not to mention the institutional and confidence crisis the country has been facing. Furthermore, projections have worsened significantly and rapidly. Looking at the expectations in the Focus report for Brazil's main variables, it is possible to note a significant deterioration in some of them (see table 1). Given this scenario, it seems that the "worth watching again" phenomenon is not just happening on screen, but in real life as well—in our economy and in the perception that agents have of our country.

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Speaking of which, the perception of Brazil has been somewhat damaged for quite some time, ever since 1988... nervous laughter! Jokes aside, we have had some periods of improvement, we cannot deny that, but recently the image of our country hasn't been great, and that includes the institutional image represented by the figure of our president. The approval rating for the Lula administration follows a downward trend, as pointed out by different polling institutes. The Ipec survey released last week, for example, reinforces this scenario and indicates a 55% disapproval rating for the president, while approval is at only 40% (see chart 1). Furthermore, the negative rating (bad/terrible) reached 41%, well above the positive one (great/good), which fell to 27%. The stability in the portion that classifies the government as fair (30%) suggests there is little room for a possible recovery in the short term. It is worth noting that the drop in popularity can be explained by factors such as the president's difficulty in engaging with a broader electorate, in addition to macroeconomic factors like food inflation, which, although not at its worst historical level, has had a significant weight on public perception.

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Poor government popularity creates an institutional crisis, directly affecting confidence indicators, which, in our view, are extremely important thermometers for a country's economy. We have mentioned this a few times in other reports and we repeat it again. A business owner with low confidence has no intention of making investments; a consumer with low confidence consumes less, spends less, and the result is as if the gears that drive the country were rusted, making the economy run with the "handbrake on." To give you an idea, the most recent data from FGV shows that both business and consumer confidence continue to fall. Although they fluctuated a bit at the beginning of the year, the increase in inflation and interest rates, added to the deterioration of expectations, ended up bringing these indicators down again (see chart 2).

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Consequently, our country-risk perception is not improving either. The measure of country risk is important from the point of view of foreign investors, mainly. Those who have (or would have) any intention of investing in our country. In recent months, Brazil's country risk has remained at high levels (see chart 3), reflecting the distrust of foreign investors regarding the economic and political environments mentioned above. This increase in risk perception reduces Brazil's attractiveness for foreign capital, directly impacting assets such as the exchange rate and interest rates. With persistent uncertainty, the flow of investments tends to decrease, hindering economic recovery and increasing the volatility of national financial markets.

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Conclusion: in other words, just like in the soap opera, where characters face constant twists and challenges, the Brazilian economy seems to follow a similar script, with recurring crises, uncertainties, and promises of change that do not always materialize—"I want to see who pays, so we can stay like this!" The current scenario reflects this repetition of cycles, in which distrust, high inflation, high interest rates, and political instability return to be the protagonists of the economic plot. If in fiction there is still hope for a different ending, in reality, it remains to be seen whether we will be able to rewrite this story or if we will continue watching the same old plot, just in a new season.