Brazil

Economic growth to ease in 2025

Growth dynamics are expected to lose momentum in 2025. Household consumption (67% of GDP in 2023) should continue to be the main source of growth, supported by a durably tight labour market and the minimum wage adjustment rule, which enable real gains for workers and beneficiaries of some cash transfer programmes. However, its rate of expansion will slow, hampered by the lag effect from tight lending conditions. In September 2024, the central bank decided to resume its monetary tightening policy (ending 2024 at 12.25% per annum and expected to reach 14.25% in March 2025). The decision was underpinned by rising inflation expectations associated with fiscal uncertainties, sharp exchange-rate depreciation experienced throughout 2024 (losing 27% against the USD) and a persistently heated economy. That said, business’ payment experience is likely to remain challenging throughout 2025 (the number of companies filing for Chapter XI bankruptcy proceedings increased by 60% year-on-year during the first eleven months of 2024, following a 69% increase in full-year 2023). In addition, gross fixed investment is also expected to expand at a slower pace. The private sector will be affected by tight lending conditions and their negative spillover effects on non-earmarked bank loans and the debenture market, while the public sector will be impacted by fiscal constraints. Likewise, fiscal policy will also imply a smaller increase in public spending (18% GDP). However, the agricultural sector (7%) is expected to recover in 2025 after contracting in 2024, on back of the side effects associated with the El Niño weather phenomenon. Although La Niña may be present at the beginning of 2025, it is expected to be of low intensity and short duration. In Brazil, this phenomenon tends to cause less rain in the South and more in the North and Northeast of the country. In the Southeast and Centre-West, the risks of cold and rainy periods increase. Last, export growth (15% of GDP) should be somewhat higher than in 2024 due to a weak comparison base and despite slower growth in Brazil’s main export market, China. Further exchange-rate depreciation, some economic recovery in Argentina (from a weak comparison base), recovery in agricultural crop output and an increase in oil production will contribute positively to foreign sales.

The solid external position must continue to diverge from the durably poor fiscal landscape

Brazil’s external shortfall is expected to improve marginally in 2025 on the back of a higher trade surplus (4.2% GDP in 2023). This is expected to result from a faster loss of import momentum amid weaker domestic activity than in exports. In addition, the services deficit (-1.8% of GDP) could narrow slightly, helped by lower maritime and air transport costs. Similarly, the large primary income deficit (3.5% of GDP) will likely be curtailed by the drop in repatriated foreign investment income, which is mainly associated with lower domestic activity. 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 16 months from November 2024). That said, total gross external debt (including intercompany loans and domestic fixed income securities held by non-residents) stood at 35% of GDP in September 2024, with its public share representing a mere 6% of GDP.

On the fiscal front, public accounts remain the Achilles heel of the Brazilian economy. For now, policymakers have mostly concentrated their efforts on enhancing revenues, rather than cutting expenditures and addressing high budget rigidity (mandatory expenditure accounts for 92% of total spending). In November 2024, the Ministry of the Economy presented a long-awaited budget adjustment package which envisaged spending cuts totalling roughly 0.6% of GDP in 2025-2026. The latter was intended to ensure compliance with the primary budget targets (before interest payments) set for the next two years (primary balance in 2025 and a surplus of 0.25% of GDP in 2026). However, the amount was considered insufficient by financial markets, which penalised the Brazilian Real in response (a watered-down version of the bill was approved by Congress in December 2024). Exchange-rate volatility (and its impact on inflation) may begin to outweigh the upside from maintaining a loose fiscal stance and dent the popularity of Luiz Inácio Lula da Silva’s (better known as Lula) government. Such an outcome would likely prompt the President to issue fresh announcements to appease the markets. That said, assuming no new cost-cutting measures, the government will likely fall short of reaching the fiscal target established for 2025. Moreover, the budgetary deficit should also increase on the back of a higher debt burden owing to the increase in the Selic policy rate (affecting the portion of treasury bill that is linked to the index, which was 46% of the total debt in October 2024). Last, the already high gross public debt (96% in local currency) is set to further increase in 2025.

The government enters the second part of its term of office aiming to drive income tax reform

After the approval of a long-awaited tax reform to consolidate five existing taxes into a single consumption levy with separate federal and regional rates during its first year in office in 2023, Lula’s left-wing government focused on implementing the reform bill at legislative level in 2024 by setting the tax rates and establishing a management committee for the portion of tax due to states and municipalities. Meanwhile, the planned income tax reform, which aims to improve income distribution in the country, was postponed to 2025 owing to the shortened Parliamentary sitting year caused by the October 2024 municipal elections. The announcement of the budget adjustment package in November 2024 also included an income tax reform (one of Lula’s campaign promises), with an exemption for individuals earning up to roughly USD 830 a month (around 36 million Brazilians or 78% of the 46 million taxpayers earning income), to be financed by taxing slightly more those who earn more than BRL 8,300 (around 100,000 people would be affected). This measure soured the markets due to its timing and the possible negative spillover effects on inflation and interest rates, since it would encourage spending. In addition, regarding the general outlook to pass reforms in Parliament, in order to secure a majority, the government needs to gain the support of centrist parties, which implies watering down its policies. In the Lower House, the left-leaning members hold 25% of the seats, while centrists and centre-right wing members have 24% and 51% of the seats, respectively. The situation is no better in the Senate, where the leftists hold 16% of the seats, the centrists 40% and centre-right members 44%. This set-up implies that the government will be forced to water down reforms. For instance, it could impact possible future new spending cut bills, especially if those cuts affect lawmakers’ interests, such as parliamentary fund transfers. Importantly, the Supreme Court ruled in late 2024 that some parliamentary amendments were invalid on the grounds of lack of transparency. The ruling has also caused negative side effects for the federal government, thereby hindering progress of its economic agenda.

Regarding the municipal elections, centrist and center-right parties gained strength, while the ruling Labour Party turned in a weak performance. The ruling party won only one state capital municipality out of 26 (versus zero in 2020), which was well below the performance of the right and centre-right parties which won 14 state capital municipalities (from 13) and of the Liberal Party (PL) of former President Jair Bolsonaro with four capitals (up from 1). Although historically, local elections are not generally an omen for the general elections – the next general elections are scheduled to take place in October 2026 – the ruling party’s weak showing cannot be overlooked. During the municipal elections in the country's largest city São Paulo (equivalent to 6% of the national electorate), the current centre-right mayor Ricardo Nunes (backed by São Paulo Governor Tarcisio de Freitas, a former minister in the Bolsonaro administration and a Bolsonaro ally) was re-elected by a wide margin in the second round against the leftist Guilherme Boulos, who was backed by Lula. This performance is indicative of Tarcísio's political capital as a right-wing option for the 2026 presidential elections. Importantly, while Bolsonaro is banned by the national electoral authority from running for office until 2030 for his attacks on the integrity of Brazil's electronic voting system, he has stated that he will try to regain power. Overall, despite the Workers’ Party’s (PT) weak showing in the municipal elections, Lula’s own popularity has proved quite resilient thanks to his strong electoral base. In December 2024, Lula's government was perceived to be good or excellent by 35% of the population (compared to 38% in April 2023), average by 29% (30%), and bad or terrible by 34% (29%).

On the external front, diplomatic relations with Argentina have been guided by pragmatism from both sides despite the ideological differences with the ultra-liberal government of Javier Milei. Regarding Venezuela, the relation has soured somewhat since the neighbouring country’s presidential election in July 2024 as the Brazilian government does not recognise the result. Furthermore, in October 2024, Brazil took a stand against Venezuela joining the BRICS during the summit meeting. On that occasion, Lula also supported the creation of an alternative currency to the dollar for transactions between BRICS members. This proposal sparked discontent from US president-elect Donald Trump, who threatened to impose 100% import tariffs on products from the group's countries if they went ahead with the idea. In November 2024, Trump also blamed Brazil for charging high import tariffs on US products and stated that his government would “do the same thing”. Regarding the relationship with its Paraguayan neighbour, in May 2024 the two countries reached a basic agreement for Annex C of the Itaipu Treaty which defines the conditions for selling the energy generated by the binational hydroelectric mega-plant. From 2027, Itaipu's tariff will be between US$10 and US$12 per kilowatt, remunerating only the plant's operation and maintenance (O&M) costs, a drop of 30% in relation to the current price. Also from 2027, Paraguay will be able to sell its share of Itaipu's energy on the free market in Brazil. Last, regarding the 25-year negotiations between Mercosur and the European Union, both sides announced in December 2024 the signing of a free trade agreement to reduce export tariffs between the two blocs. This came five years after an initial deal which had been stalled notably due to environmental concerns on the part of the European Union about deforestation in Mercosur countries. The major changes on the 2019 text are the commitment to adhere to the Paris Climate Change Agreement (with possible suspension of benefits in the event of a breach, amendments to public procurement, auto trading and critical minerals exports. However, the agreement still needs to be ratified by the Parliaments of Mercosur member countries and, on the European side, the Council of the European Union and the European Parliament. In the European Council, at least 55% of the countries must agree, and these must account for at least 65% of the bloc's total population. Objections come mainly from France, but the text may raise opposition from other countries.

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.

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Enforcement of a Legal Decision

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 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 7 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.

Last updated: December 2024