Brazil

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

GDP growth to lose momentum

Growth momentum is expected to lose steam in 2024 as the strong agriculture outcome (7% of 2023 GDP) achieved in 2023 (with an annual expansion of 15%) will not be repeated. This time around, the sector has been affected by adverse weather conditions related to the El Niño phenomenon. In March 2024, the National Supply company (CONAB) expected the grain harvest to drop by 8% year-on-year, from the 2023 record high output. Meanwhile, household consumption (67% of GDP) should be the main source of growth, supported by social benefits, easing inflation and the job market remains tight (real wages on the rise). These should prevail over the still restrictive monetary stance. While the central bank has eased interest rates since August 2023 (from 13.75% to 10.75% in March 2024), real rates should remain high throughout the year. Furthermore, the economy is also starting to feel the lagging passthrough of lower policy rates. That said, the business payment experience, which strongly deteriorated in 2023 (after being well controlled for many years), is expected to remain sensitive in 2024. Contrary to household consumption, gross fixed investment (18% of GDP) is likely to register a timid expansion, coming from a weak comparison base (the index dropped by 3% in 2023) and as credit conditions slowly improve. Last, export (15 % of GDP) growth momentum should lose strength due to decelerating activity in main export markets (including China and the US), relatively lower average commodity prices and falling volumes in agricultural exports. Despite this, oil exports (2% of GDP) is expected to increase in line with rising domestic production related to the pre-salt oil field.

Sound external accounts diverge from persistently wide fiscal deficit

Brazil’s external shortfall is expected to improve marginally in 2024. This should be driven by some narrowing of the large primary income deficit (3.3% of GDP in 2023), which will likely be curtailed by the drop in repatriated foreign investment income (mainly associated with lower commodity prices). In addition, the services deficit (1.7% of GDP) should marginally shrink, owing to a lower travel deficit. On the contrary, the trade balance surplus will still be robust (3.7% of GDP), though its amount should be slightly smaller. Imports should rebound somewhat (buoyed by a resilient domestic demand and relatively lower interest rates improving foreign capital goods purchases), outpacing the rise in exports. On the financing side, foreign direct investment (2.9% of GDP) will continue to comfortably cover the external shortfall. Meanwhile, foreign currency reserves will remain robust (ensuring an import coverage of 17 months as of December 2023). Last, total gross external debt (including intercompany loans and domestic fixed income securities held by non-residents) stood at 33% of GDP in January 2024, with its public share representing 5% of GDP.
On the fiscal front, in 2024, the budget deficit is set to fall, but will still remain high. The relatively lower shortfall can be explained by the fading effect from the one-off payment, in late 2023, of court-ordered debts that had accumulated since 2021 (equivalent to 0.9% of GDP), and slightly lower interest expenditure. While policymakers will strive to pass measures to improve tax collection (such as a gradual resumption of payroll tax), they are expected to be watered down somewhat by Congress. That said, the government will likely fall short of reaching the 0.1% primary fiscal deficit target established for 2024. That said, overall, the already high level of gross public debt (although 95% is domestically-owned) is set to further increase in 2024. It is worth bearing in mind that a new fiscal framework was approved in Congress in August 2023. It defines that the real growth rate of primary spending may vary between 0.6% and 2.5% per year or correspond to 70% of revenue growth. Every year, expenses will grow by at least 0.6%, up to a maximum of 2.5%, even if the application of 70% rule results in a higher value. While this new rule does not guarantee a downward trajectory for public debt (its effectiveness relies on the capacity to increase public revenues), it will prevent an explosive trajectory of the debt-to-GDP ratio.

Time running out to pass reforms in 2024 with municipal elections in sight

In his first year in office in 2023, the leftist government of Luiz Inácio Lula da Silva (better known as Lula) managed to push the new fiscal reform package through the predominantly centre-right Congress. The aim of the long-awaited reform was to unify consumption taxes and other bills to increase tax revenues (such as changes to the taxing of offshore companies and exclusive funds). In addition, the Lula government unveiled a new infrastructure plan, the so-called New PAC (Programa de Aceleração do Crescimento) in August 2023. In the pipeline is roughly USD 340 billion in investments by 2026 (16% of GDP) of which USD 280 billion has been earmarked for new highways, ports and energy efficiency, among others. The resources will come from the general budget (22%), state-owned companies (20%), state-owned bank financing (21%) and private sector (36%). In addition, in January 2024, the government presented its 'New Industry Brazil' law with the aim of combatting deindustrialization to the tune of a total of USD 60 billion (2.8% of GDP). Over the next ten years, the new policy will target several areas: agroindustry, bioeconomy, health industrial complex, infrastructure, sanitation, housing, mobility, digital transformation and defence technology. Credit lines, government subsidies, and local content requirement in industrial production are planned to encourage national companies. Nonetheless, these two initiatives met with a lukewarm reception from the market, which is somewhat cautious about their possible fiscal impact. Nonetheless, an intended income tax reform may not advance in Congress in 2024. Municipal elections will be held in October 2024 – voters will choose mayors and councillors of 5,570 municipalities – making the legislative calendar more restrictive this year. Lawmakers will tend to prioritize the regulation of the 2023 consumption tax reform. Importantly, the elections are approaching at a time when the government is experiencing some decline in popularity. According to a March 2024 survey by the Atlas Intel institute, the approval rating for the Lula government weakened. According to survey results, 47% of Brazilians approved of his performance, down from 52% in January. In addition, the disapproval rate went up from 43% to 46%. As for foreign policy, in March 2024 the government toughened its tone with the Venezuelan government of Nicolás Maduro when it expressed concern about the process of the elections scheduled for July in the neighboring country, given the impediment to the registration of several opposition candidates. Meanwhile, negotiations have stalled with Paraguay on the bilateral treaty governing their Itaipu hydroelectric dam that expired in August 2023. Asuncion aims to sell its unused share of electricity production to third-party countries at a higher price, a practice which has been prohibited for 50 years. Last, regarding the stalled trade agreement between Mercosur and the European Union, Lula defended its ratification during a visit to Brazil, in March 2024, by French President Emmanuel Macron, who opposes it and claims that more work is needed on the climate and biodiversity issues.

Last updated: April 2024

Payment

Bills of exchange (letra de câmbio) and, to a lesser extent, promissory notes (nota promissória) are the most common form of credit note used in local commercial transactions. The validity of either instrument requires a certain degree of formalism in their issuance. The most commonly payment method used in Brasil is “Boleto bancário” which is an official Brazilian payment method regulated by the Central Bank of Brazil. It is a push payment system, which was launched in 1993 and today generates 3.7 billion transactions per year.  The payment process for “Boleto bancário” transactions is similar to that of wire transfer or cash payment methods. Customers are provided with a prefilled boleto bancário payment slip. At this point, the customer has the option of printing the form and paying it physically at any bank branch or at authorized processors such as drugstores, supermarkets, lottery agencies and post offices. Additionally, it can also be paid electronically at any of the more than 48,000 ATMs in Brazil, as well as through internet banking or mobile banking apps, which are widely used in the country. Although the use of the above credit payment instruments for international settlements is not advisable, they nonetheless represent, an effective means of pressure in case of default, constituting an extra-legal enforcement title that provides creditors with privileged access to enforcement proceedings.

The duplicata mercantil, a specific payment instrument, is a copy of the original invoice presented by the supplier to the customer within 30 days for acceptance and signature. It can then circulate as an enforceable credit instrument.

Bank transfers, sometimes guaranteed by a standby letter of credit, are also commonly used for payments in domestic and foreign transactions. They offer relatively flexible settlement processing, particularly via the SWIFT electronic network, to which most major Brazilian banks are connected. For transfers of large sums, various highly automated interbank transfer systems are available, e.g. the STR real time Interbank Fund Transfer System (sistema de transferência de reservas) or the National Financial System Network (rede do sistema financeiro nacional, RSFN).

Debt collection

Amicable Phase

Creditors begin this phase by attempting to contact their debtors via telephone and email. If unsuccessful, creditors must then make a final demand by a registered letter with recorded delivery, requesting that the debtor pay the outstanding principal increased by past-due interest as stipulated in the transaction agreement. In the absence of an interest-rate clause, the civil code stipulates use of the penalty interest rate imposed on tax payments, which is 1% per month past due. When creditors are unable to reach their debtors by phone and/or email, a search of the company’s contacts, partner businesses, and owners is conducted. If there is still no contact, this leads to an investigation of assets, an on-site visit, and an analysis of the debtor’s financial situation so as to ascertain the feasibility of taking legal action. Considering the slow pace and the cost of legal proceedings, it is always advisable to negotiate directly with defaulting debtors where possible, and attempt to settle on an amicable basis, taking into consideration that a repayment plan may last for up to two years.

Legal proceedings

The legal system comprises two types of jurisdiction. The first of these is at the state level. Each Brazilian state (26 states, plus the Distrito Federal of Brasilia), notably including a Court of Justice (Tribunal de Justiça) whose judgments can be appealed at the state level. Legal costs vary from state to state. The second type of jurisdiction involves the Federal Courts. There are five regional Federal Courts (Tribunais Regionais Federais, TRF), each with its own geographic competence encompassing several states. For recourse on non-constitutional questions, TRF judgments can be appealed to the highest court of law, the Superior Tribunal de Justiça (STJ) located in Brasilia.

Monitory Action

The ação monitória is a special procedure that can be filed by any creditor who holds either a non-enforceable written proof, or any proof that is considered as an extrajudicial instrument recognized by the law as enforceable (even if it does not comply with all the legal requirements). If the debtor’s obligation is deemed certain, liquid and eligible, the Municipal Courts usually render payment orders within fifteen days. If the debtor fails to comply within three days, the order becomes enforceable. In cases of appeal, the creditor has to commence formal ordinary legal action. The difference between this procedure and the Enforcement Proceeding lies in the legal requirements and in the possibility of questioning the merit of the obligational relationship by the debtor over the course of the suit. The ação monitória is slower than a regular Enforcement Proceeding: if the debtor presents an objection in the court, the merits of the commercial relation will be thoroughly discussed in the same fashion as a Standard Lawsuit. The estimated period of this lawsuit is on average two years.

Ordinary proceedings

Ordinary proceedings are presided over by an interrogating judge (inquisitorial procedure), and require examination of evidence submitted by each party in conjunction with study of any expert testimony. The creditor must serve the debtor with a registered Writ of Summons, which the debtor must answer within 15 days of receipt. The initial proceedings encompass an investigation phase and an examination phase. The final step of the process is the main hearing, during which the respective parties are heard. After this, a judgement is made by the court. The tribunal may render a default judgment if a duly served writ is left unanswered. It takes two to three years to obtain an enforceable judgment in first instance.

Enforcement Proceeding

On average and within the main states, it takes a year for a judgement to be made following the initiation of legal proceedings.

Court Decision

A final judgment is normally automatically enforced by Brazilian Courts. Since the reforms in 2005 and 2006, attachment of the debtor’s assets is possible if the latter fails to obey a final order within three days. In practice, execution can prove difficult, as there are very few methods for tracing assets in Brazil.

Foreign awards can be enforced if they meet certain conditions: the homologation has to be concluded by the Superior Court to be enforced in Brazil, the parties have be notified, and the award has to comply with all the requirements for enforcement (such as being translated from Portuguese by a public sworn translator).

Extrajudicial Instruments

The enforcement of extrajudicial instruments is a legal type of enforcement granted to the creditor in order to allow him to claim his rights against the debtor. This is the most direct and effective court vehicle to recover credits in Brazil. This lawsuit does not require prior guarantees from foreign creditors (as the bond in the monitory suit for example). Moreover, Brazilian legislation renders some documents enforceable. These are separated in two main categories: Legal enforcement titles (including judgments made by a local Court recognizing the existence of a contractual obligation, and court-approved conciliations and arbitral awards) and extra-legal enforcement titles, which includes bills of exchange, invoices, promissory notes, duplicata mercantil, cheques, official documents signed by the debtor, private agreements signed by debtor, creditor and two witnesses (obligatory)  as an acknowledgement of debt, secured agreements, and so on. It is obligatory to submit the original versions of these documents – copies are not accepted by the court. 

Insolvency proceedings

Out of Court restructuring

Debtors can negotiate a restructuring plan informally with their creditors. The plan must represent a minimum of 60% of the total debt amount. This plan must be approved by the court.

Judicial Restructuring

Debtors make a restructure to the request to the court, or request the conversion of a liquidation request to the court from their creditor(s). If the plan is accepted by the court, debtors typically have 60 days to present a list with all debts from creditors, and a payment plan. A judge then schedules two creditors’ meetings, with the second only occurring if the first one does not take place. During these meetings, the proposed plan must be accepted by a majority of creditors. Once accepted, payments start as decided in the approved plan. The estimated period of this lawsuit is between 5 and 20 years.

Liquidation

The principal stages of liquidation are as follows:

• liquidation can be requested by either debtors (auto-falência), or any of their creditors if the debt totals more than 40 times the minimum wage;
• the initiating party must prove the existence of a net obligation, overdue and defaulted by presenting protested enforceable title (special protest – personal notice of debtor);
• upon analysis of a debtor’s financial situation, the judge can decide that the company must be liquidated.

All of the company’s assets have to be sold and the obtained amount is shared equally between creditors, respecting eventual privileges. The estimated period of this lawsuit is between 7 and 20 years.