(Bloomberg) — When Brazil’s interest rates hit 12.25% in December, it soon became clear that even billionaires couldn’t make the market work for them.
Rubens Ometto said the latest increase in borrowing costs was behind his decision to sell his 9 billion reais ($1.58 billion) stake in mining giant Vale SA the following month. He said he had to reduce his conglomerate Cosan SA’s leverage and pay down debt. Rates have since gone up to 13.25%.
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That very environment — along with forecasts of higher inflation, a weaker real and growing public debt — has executives across industries hitting pause on investment plans until, they hope, a new president is elected in 2026.
Logistics firm Simpar SA, known by its aggressive investment profile, is planning to lower its capital expenditure level to its lowest-ever this year because of higher rates, according to a person familiar with the matter who was not authorized to speak publicly. One of the country’s biggest wholesalers, Sendas Distribuidora SA, announced it is dialing back plans to open new stores in 2025 in a bid to de-leverage.
The head of an education firm said there’s no better investment than the acquisition of its own shares. Executives from a retail company and a health-care firm said there’s no appetite for mergers or acquisitions. All spoke on the condition of anonymity, not wanting to publicly criticize the government.
While it’s normal for businesses to wait out election results to make big decisions, the nearly two-year window is atypical and speaks to how much faith they’ve lost in President Luiz Inacio Lula da Silva. His approval rating fell to 24% in February, the lowest of his current term, according to Datafolha.
Local economists have already forecast growth to slow to 2% this year, from around 3.5% in 2024. They also estimate inflation will greatly exceed the central bank’s 3% target. The government, meanwhile, remains confident that Brazil can attract outside capital, and that an expected superharvest will buoy the economy. The market has also signficantly rebounded after a meltdown in December.
Although any bets for what could happen in the 2026 election are “pure speculation,” leftist parties are on the decline globally and consumers’ diminishing purchasing power in Brazil won’t help Lula’s party, said Gustavo Medeiros, head of research at Ashmore Group.
“This trend may persist,” he said, “if the government keeps insisting in policies that do not lead an effective fiscal accounts anchoring.”
State of the Market
Brazilian companies were struggling long before the market cratered at the end of the year.
Take Diagnosticos da America SA, the country’s largest medical diagnostics company. It took advantage of historically low rates during the pandemic to fund mergers and acquisitions. But after inflation expectations soared, the central bank started to raise borrowing costs last September. The higher costs have pushed Dasa to consolidate obligations, slash investments and sell non-core assets.
There haven’t been any new initial public offerings in Brazil’s local stock market since 2021. In 2024, Brazilian companies announced the biggest number of buyback programs in almost two decades, to return money to investors.
Bankruptcies also reached an all-time high last year, jumping 62% year-over-year to 2,773 companies seeking judicial protection, according to Serasa Experian, which has tracked filings since 1991.
More broadly, financial restructurings are already happening, and divestments of business units and assets for de-leveraging are to come, said Celso Nishihara, head of M&A at Banco Fator.
Things got worse when Lula’s administration released its spending plan in November. Banks like Itaú and JPMorgan estimated that the total amount cut — 71.9 billion reais in expenditures — would end up being substantially less than the official numbers suggested.
Local stocks dropped and the central bank sped its tightening cycle, lifting its rate by 100 basis points in December and again in January, to fight inflation. The Brazilian real closed the year as the worst-performing major currency tracked by Bloomberg, losing more than 20% in 2024.
What all that means for companies is increased capital costs, limited capacity to make investments in growth and production, and a reduced appetite in the local stock market, said Nishihara.
Even XP Inc’s founder Guilherme Benchimol, the man behind one of Brazil’s largest investment platforms, has touted inflation-linked bonds as the best way to secure real investment gains in the long-term.
Too Soon
Investors already see the emergence of a “2026 trade,” according to Lucas de Aragão, a political analyst at Arko Advice. That looks like betting on the Brazilian currency and stock gains — a partial reversal of the 2024 selloff already seen at the beginning of this year.
Still, there’s very little clarity given that the right-wing, Lula’s opposition, has not organized itself around a single candidate, he said. Former President Jair Bolsonaro, the leader of the far-right Liberal Party, is legally banned from running in 2026 because of baseless claims he made against the nation’s voting system in the 2022 election.
“I still don’t see them taking this potential optimism as a turning point,” de Aragão said, referring to some investors’ hope for a change in the political landscape.
Local assets have rebounded in January, in part because US President Donald Trump’s tariffs pledges have largely spared Brazil. The government has yet to discuss Trump’s order for 25% tariffs on steel, but is floating the idea of quotas that limit the amount of the metal that comes from the South American nation.
High rates have also encouraged some investors to trim their bets against the real, but the currency, now around 5.70 per US dollar, is still far weaker than the 4.90 level seen at the beginning of 2024. Analysts see it ending the year at 6 per dollar.
Superharvest Hopes
Brazil’s ruling coalition is resistant to the idea that the next two years until the election will be lost.
“I don’t believe in a lost biennium,” Planning and Budget Minister Simone Tebet said in an interview.
She touted the economy’s 7% growth over the last two years, the country’s solid democracy and institutions and an investor-friendly tax reform. “Not to mention that it is cheap to invest in Brazil because of the currency,” she added.
Tebet also referenced the zero deficit target. She said the government will wait for the next bimonthly fiscal report in March “to see if further measures are necessary.”
Some important investments will pay off in 2025 and 2026, Tebet added. She pointed to the first phase of the South American Integration Routes, a network of new or upgraded roads intended to link Brazil to its neighbors. The idea is to open a door to the Pacific Ocean and ultimately China.
Plus, what’s expected to be a superharvest this year is giving the government hope. Local producers should harvest 325.7 million tons of grain in this season, 9.4% more than in the last, the National Supply Company reported in February. That would set a record.
The Long Term
Adriana Dupita, the deputy chief emerging markets economist for Bloomberg Economics, said that any boost from crops or previous investments won’t be able to offset a sharp slowdown in economic activity over the next two years.
“Slower growth is not a bug, it’s rather a feature of the effort to tame inflation,” she said.
Dupita noted that the downturn is likely to be temporary and should not discourage investments, especially those with a longer horizon, “provided that the government resists the temptation to counter such slowdown with fiscal stimulus or with the help of state-owned enterprises.”
On Feb. 11, Finance Minister Fernando Haddad presented to Congress a list of more than 20 proposals meant to strengthen the fiscal rules, improve mechanisms for protecting minority investors, modernize the legal framework for medicine prices and reform the legislation for public-private partnerships.
He characterized it as an effort to compete for capital and investment. Despite “the difficulties we know,” he said, “Brazil has all the conditions to take advantage of the moment.”
It’s possible that investors may not have much faith in anything Lula’s administration does.
“Markets will cheer up and premiums will fall” if a change in government becomes more clear, said Carlos Viana, a former central bank director and currently head of economic research at hedge fund Kapitalo Investimentos, in an event in late January.
“At the other extreme, if a re-election becomes more certain,” he said, “the scenario will get much worse.”
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