Brazil

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

Economy to strongly decelerate in 2023

In 2023, the economy is set to cool down substantially, mostly driven by base effects and the lagged impact of aggressive monetary policy tightening which should be felt more sorely (policy rate stands on hold at 13.75% per year since August 2022, up from a minimum of 2% up to March 2021). In addition, the slow easing of interest rates expected from H2 2023 onwards could be jeopardised in case of fiscal slippage. Moreover, household consumption (61% of GDP), albeit remaining the main driver of growth, will decelerate in 2023, also owing to families’ high indebtedness levels and durably historically high consumer price inflation (above the 4.75% upper range of the central bank´s target). This should prevail over the higher social transfers and the real increase of the minimum wage. Meanwhile, gross fixed investments are expected to contract slightly as global credit conditions are tightening, the growth outlook has clouded, and assuming some caution on the part of companies amid the start of a new government. Durably historically elevated commodity prices (accounting for 60% of foreign sales), the bright 2022/2023 crop outlook and relatively higher growth in China in 2023 (the main export destination), along with the easing of COVID-19 lockdowns will allow exports to grow, even as the global economy loses traction.

Fiscal deficit to widen, while the external shortfall will be reduced

Brazil will keep an adequate external position in 2023, with the current account deficit expected to narrow somewhat. The trade balance surplus should increase (2.2% of GDP in 2021) since the deceleration in imports growth (reflecting weaker domestic activity) should exceed that to be registered by exports. In addition, the primary income deficit (3.6% of GDP) should be curtailed by the drop in repatriated foreign investment income. Meanwhile, the services deficit (1.6% of GDP) is likely to remain broadly stable as expected lower average freight cost could be somewhat compensated by higher foreign travel. On the financing side, foreign direct investment (2.8% of GDP) will continue to comfortably cover the external shortfall. FDI recovered the 2019 pre-pandemic level in 2022, but should marginally weaken in 2023, reflecting higher financing costs and a weaker activity outlook. Meanwhile, foreign currency reserves will remain robust (ensuring an import coverage of 13 months as at December 2022). Finally, total gross external debt (including intercompany loans and domestic fixed income securities held by non-residents) stood at 36% of GDP in November 2022, with its public share representing 5% of GDP.
Regarding the fiscal accounts, the budgetary deficit is set to climb in 2023, owing to a current rise in public expenditure and higher interest payments. In December 2022, Lula´s then transition government was able to obtain approval for a constitution amendment (PEC) in Congress to expand the spending cap (which limits the rise in public expenditure to inflation) by 1.4% of GDP for the year 2023, the third in a row. These extra resources will be used to cover higher expenses with social welfare program Bolsa Família, gas subsidies, Popular Pharmacy, and a real increase in the minimum wage of roughly 3%, among others. The amendment also excluded the outlay of an additional 0.2% of GDP in windfall revenue on public investment from the spending cap. Finally, the PEC also establishes that a new fiscal anchor to replace the spending cap rule must be presented by August 2023. As a result of the agreed changes, the 2023 primary deficit estimate was increased to 2.3% of GDP, against the 0.6% initially forecast. Overall, the already elevated gross public debt (95% domestically owed) is set to further increase in 2023.

Brazil turns back left

Luiz Inácio Lula da Silva, from the leftist Labor Party (PT) and already twice president (2003-2010), took office again in January 2023 after defeating by a tight margin (50.3% vs 49.7% of the valid votes) the then incumbent leader Jair Bolsonaro, from the right-wing Liberal party, in the October 2022 presidential elections runoff. Nonetheless, he will face a polarised political environment as suggested by his tight margin of victory. Moreover, Lula will need to build a coalition with centrist parties in order to pass constitutional amendments. This is because in the Lower House the left-leaning members will hold 27% of the benches, while centrists and right-wing members will have 24% and 49% of the seats, respectively. The framework is no better for the ruling government in the Senate, with the leftists holding 16% of the seats, the centrists 40% and right-wing members 44%. During his term, Lula is expected to favour a more active role for the state in the economy, including raising the participation of state banks, halting new privatisations (shifting emphasis to public-private partnerships), reversing the state-owned oil company Petrobras´ divestment policy towards more investments to increase domestic energy autonomy, while also changing the fuel price policy (instead of following international prices). He also intends to give priority to tax reform, aiming to simplify taxes, reduce them on consumption, and raise them on income and wealth. In foreign policy, relations with neighbouring countries (many of which have also leaned left in recent years) could be strengthened, including with Venezuela, with which relations have been severed since 2019. Lastly, the new government is also poised to sign the Mercosur trade agreement with the European Union, which has been stalled due to environmental concerns by the EU member states. However, to move forward with this topic, the new Brazilian government will likely have to make progress in combating deforestation, which was one of its campaign promises.

Last updated: February 2023

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.