Brazil on the rise: what to know in 2026

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

Joaquin Thul:
Welcome. My name is Joaquin Thul. I'm an economist at EFG in London and I will be hosting today's episode. Today we are going to focus on Brazil, Latin America’s largest economy. Last year, Brazil grew at around 2.5%, slightly above the average for the region and also its stocks market Bovespa was up by over 30% in dollar terms in 2025 and it has started this year quite strongly as well. So to discuss the outlook on Brazil, I have the pleasure of having Tiago Berriel. He's the chief strategist at BTG Pactual joining me today. Tiago joined BTG in early 2021 after various positions in the private sector and also being the deputy governor at the central bank of Brazil. So he has vast experience covering Brazil through different angles. Tiago welcome today.

Tiago Berriel:
Thank you Joaquin. It's a pleasure to talk to you today.

Joaquin Thul:
Great. So Tiago, to start, what's your general view on Brazil at the moment? Seems that there's a lot of things happening both domestically but also externally. Brazil seems to have had a very good year in 2025 despite all of the trade disputes that happened globally. What's your take on Brazil at the moment?

Tiago Berriel:
On the international story, I think there is this diversification out of the US that has been happening and Brazil was clearly under allocated in most of international portfolio managers. So we've seen here at BTG enormous increase in interest from large pension funds, sovereign funds and big investors in general in the second semester of last year for sure, the increase was amazing and basically they were not really invested in Brazil. Valuations were interesting, everything was very cheap and domestically we had a few years in 23-24 where we've had a very restrictive monetary policy, but the effect of fiscal policy was so strong on the expansionary side that people start doubting that we would ever have effective monetary policy in bringing back inflation into the target and to cool down a little bit this economic activity. And 2024 was a very important year to show that well expansionary fiscal policy has its limitation in time.

You have to stop being so expansionary at some point and then you have room for monetary policy to act. So we have seen a small deceleration in economic activity that actually made a feel of the channels of monetary policy operational and inflation went down. So we are starting the year with a very solid perspective that we're going to start an easing cycle and monetary policy and this easing cycle has everything to be a large one. We are coming out of 15% of nominal rates with a projected inflation for a year and a half from now of around 3%. So it's massive real rate that we have to adjust.

Joaquin Thul:
And speaking about that with a very high real rate just over 10%. But even with the expectations that are set at the moment for the easing that the central bank is going to deliver this year, it might bring that real rate to maybe 8% or just seven and a half or something like that. So the prospects for investors in Brazil, they still remain pretty interesting, right?

Tiago Berriel:
If you think in the steady state in the long term you are getting close to an inflation of 3%. But even if you miss the targets, let's suppose you converge to, it's a pessimistic scenario, go to 3.5% of inflation. If you don't have a fiscal pulse that is expansionary it was in the last three years easily, you could have a real rate of around 4%. So we're talking about nominal rates of 7.5 and that's not very aggressive scenario. It's actually a kind of conservative pessimistic scenario. It's really stressed pricing for nominal rates and real rates in Brazil and that actually affects all asset valuation in Brazil. And at the margin we saw that the Bovespa, the equity market has recovered, but the fixed income assets seems to be lagging behind till now.

Joaquin Thul:
And how do you evaluate the monetary policy strategy delivered by the central bank this time? Because there was a lot of fear of a loss of independence when Galipolo was announced in, I think it was August of 24, that he was too close to Lula that Lula was going to have too much control of the board. But yet since then the central bank delivered quite a significant tightening of conditions and actually has not been that directed by the government in that sense. How do you evaluate their strategy so far?

Tiago Berriel:
I think we are at that point. He got the credibility. He has done everything correctly. If he made a mistake, he made a mistake on the hawkish side, on the more conservative side at this point. And that has built him a reputation that now I think he's free to use it a little bit and do the standard textbook thing and start using cycle

Joaquin Thul:
To the price that he had to pay, let's say, of having a little bit of a deceleration in activity and a bit of domestic criticism. But you think it's the right thing to do?

Tiago Berriel:
That's unavoidable actually the fact that monetary policy was so strong and act through other channels than just economic activity is actually helping, right? So in the end, the three dos of monetary policy has increased a little bit since he got in and gained this credibility. So in some sense the sacrifice ratio is actually not that high and that's good news, but there's no way out of having a little bit of a softer economy at this point. I think we start the cooling process in 2025, we're going to have an extra leg of cooling this year and that's part of the process.

Joaquin Thul:
The weakening of the dollar seems to be impacting Latin American currencies quite strongly. What's your view on the real and where could we see the currency later this year?

Tiago Berriel:
So it's true that it's a global movement and it's a tail wind that is benefiting most of emerging economies overall. But I think there are few components in Brazil that helps, right? Once they carry, it's actually really good. The interest rate differential, it's massive and actually increased last year and that helped a lot. We are going to start the easing process. So this difference is going to decrease a bit. Brazil is going to be massive. We think that everything going well in the cycle and the issues that we have for Brazil this year, like the elections, we expect that the adjustment will be more on the other assets. We're going to see the adjustment more on the interest rate movements and a little bit less on the real, but we could see an extra appreciation because the adjustment in interest rates take a while if everything goes well.

Joaquin Thul:
Moving a little bit into maybe the external side, one of the things that let's say Brazil was on the headlines for last year was all of the issues between President Trump and Lula with the US imposing 50% times on Brazil on products entering the US with a massive amount of, let's say exceptions that in the end turn out to be not that exactly the case, but all of this was due to more of a political thing with the issues with Bolsonaro and his imprisonment, it seems that Brazil has navigated that relation with Trump or that conflict, let's put it in between conflict with Trump fairly well. Is that credited to Lula? Is he one of the few leaders that could manage to stand up to Trump last year?

Tiago Berriel:
I wouldn't say really stand up, but he could navigate it well. So the tariffs that were imposed didn't make much economic sense to be honest. It was mostly on commodities that would affect a lot American consumers. It would be somewhat diverted for Brazil. Brazil runs a trade deficit with the US so if we retaliated in the Trump logic, it wouldn't didn't seem to be a good deal. So I think they realised that this didn't make sense, made all these exceptions, and Lula was not confrontational or too much confrontational. He had the ability to talk to Trump and make the whole story less significant. So in the end it was a good moment for Lula politically, domestically. So the effect actually backfired a little bit. So the way he dealt out with Trump and the lack of consequences that the first Trump measures against Brazil had actually I think boosted a little bit Lula’s popularity and it didn't benefit at all Bolsonaro, so everything seems to be stable and calm. We don't expect much noise coming out of Trump Lula relations at this point.

Joaquin Thul:
And at the same time as the same as the majority of the region with exceptions of maybe Colombia, Ecuador, and maybe one or two other countries in central America, most of the region, including Brazil, have very strong commercial ties with China rather than with the US. So in the end, the US can impose tariff, but then all the rest of the region care more about what happens with China.

Tiago Berriel:
That's absolutely right in terms of trade volume, the volume of financial flows coming out of trade, China is way more important than the US at this point, and it's actually becoming even more important as time goes by. We've seen the last two years an enormous increase in imports of industrial goods from China to Brazil, and actually at prices there are decreasing over time. So the classic China strategy of boosting exports is really pushing the trade flows to Brazil and actually terms of trade in Brazil has to be improving, not really because commodity prices are booming, but mostly because import prices are going down and that's due to China.

Joaquin Thul:
And at the same time, Brazil has sort taken this leadership within Mercosur for the agreement with the EU. So we could probably see even further diversification in Brazil by getting access to one of the largest markets in the world. So what do you think Brazil gets to gain from this trade deal?

Tiago Berriel:
I think we'll continue. So if you look at Brazilian external accounts data in the last actually 15, 20 years, we've seen an incredible amount of increase in openness and you see that for the country as a whole, but that's of course more, it's driven by a few sectors and those sectors that engage in international trade are the ones that gained a lot of efficiency that drove productivity in Brazil. So again, I guess this relationship with China, the trade agreement with the European Union, I think will boost this trend and its efficient, its openness and growth in the medium term for the country. So we are optimistic with this type of developments.

Joaquin Thul:
Turning to the fiscal side, which is something that tends to be discussed a lot when we talk about Brazil, but it's always a tricky subject and a never-ending story there. And you were saying that this could be a good moment to start adding a bit of duration in Brazil, but do you think that some of the issues on the fiscal side potentially become a bit of a hindrance for the longer end of the curve going forward? Or how do you see the fiscal situation now?

Tiago Berriel:
Okay, so that's a good question. So have at this point, something that seems to be not really sustainable, why is that? Because we have a debt over GDP, public debt over GDP of around let's say 80% and real rates on this debt that are, I dunno, seven, 8% along the entire real yield curve. You do the math and you grow around 2% a year. You do the math, you have to run a surplus, a primary surplus of 3.5-4% of GDP to stabilise. That's crazy. You're not going to do it. You barely do a zero deficit or zero surplus and that's very tough. So how come this is not going to be an issue? And then I have a positive view because people have to take into account that this real rate is endogenous to what we've done in the fiscal side in the last few years. We've had, as I mentioned the beginning of our conversation, an immensely expansionary fiscal policy in 22, 23 and 24 that has led the short, short-term neutral real rates. That is the rates that you need not to inflate the economy to be extremely high, but that's not a structural feature of the Brazilian economy. That's the result of our short-term fiscal expansionary fiscal policy.

But markets kind of tend to extrapolate a phenomenon that we see for a few years forever. So it actually drove the expectations of real rates to very high levels forever. And I don't think that's sustainable because I don't think that even politically or automatically, we won't be able to have the type of fiscal expansion that we've seen in the last three to four years. So because of that, I'm optimistic that going back to kind of a neutral fiscal policy, we are going to see the market's learning that real rates are going to be much lower than that. And when you do that, you'll see you do the math and if you do a surplus that is positive, but I don't know around one or 1.5%, which is doable, we're going to stabilise the public debt. So it's not something impossible to do, you just have to do the basic stuff right? There are some low hanging fruits there and you get rid of this bad equilibrium that we've seen the last three to four years.

Joaquin Thul:
But these are the complexities that this is an election year, right? Yes. And so things get distorted a little bit with promises and with projects that become really appealing, but they're fiscally not really, let's say possible. What's your view on the impact that the elections could have on that fiscal strategy?

Tiago Berriel:
We've seen in 2025, some moderation actually, to be honest. And many of the buttons that we thought that would be pushed by Lula to get the economy very hot in 2026 were not pushed. So we had a few programmes. The most notable one is some tax exemption to everyone that makes up to 5,000 reais, which is around $1,000 a month. But there was a lot of talk about increasing extra real wage gains in the minimum wage. There were talks about increasing the social security net, the boost of transfers, and he has not done that. So it's a little bit moderate. We are not out of the woods yet. We're still a few months from the election and sometimes people get a very creative at these times, but it doesn't seem as bad as previous election cycles and not as bad as what people expected a few months ago.

Joaquin Thul:
What are the key dates we should be looking for this year? That's probably some deadline for candidates to appear. Apparently Tarcisio de Freitas is the governor of Sao Paulo. He's not going to run. What should we be looking for this year.

Tiago Berriel:
At this point, what we've been hearing is that Tarcisio is going to run for the governorship of Sao Paulo. He's not going to run for president. He's very loyal to Bolsonaro. Bolsonaro has decided that he wants his son Flavio to run and since he decided that Flavio has been increasing his performance in the polls, so he's showing himself as a viable candidate, seems that there's some chance that he will make it so he won't give up. So that's it. So if he doesn't give up, Tarcisio is not going to run. So I think the two main candidates are going to be Lula on the left and Flavio on the right. And that makes the timeline for getting out of resigning, being government to run less important because Tarcisio is not going to be an issue. That should be by the end of March, beginning of April.

But since this has changed, I think that we are kind of having a more consolidate scenario. We're going to have probably a third candidate or fourth that are going to be alternatives in the right to the Bolsonaro son, but it seems very unlikely that they would overcome get to the second round. Right? Flavio is a great candidate for the first round. They get the 2025 Bolsonaro people that really support Bolsonaro no matter what. So once you start from these levels, you're probably going to get to the second round. And then the second round is Lula against Bolsonaro. It's a rejection election. Both guys have a 50% rejection, almost 50% rejection rate. So it's kind of a flip of a coin because a lot of people hate one or the other or both. So it's tough. It's very hard to predict. It's going to be very polarised and very competitive. So we'll have to wait and see.

Joaquin Thul:
So it seems to be, from an investor point of view, it seems to be like this election will not generate that many fireworks or that many headlines then. So I guess in terms of the outlook for the country, are there any risks in terms of that could derail this positive outlook? Are there anything that you think that could pose any challenges or is this the year where Brazil finally delivers?

Tiago Berriel:
I think the risk is a more populistic shift during the electoral year that the politicians feel obliged to deliver afterwards. I think it's a rare combination. I don't think it's likely that's going to happen, but it's always a risk, right? Election processes in Brazil historically are very unpredictable. People get stabbed like Bolsonaro in 2022, and that changed the election. One of the candidates had a plane crash in 2014 and that changed the elections. So weird things happen. So the way it evolves I think is something that we should have a look very carefully, don't get too emotional, but pay attention to what people are promising and if they plan to deliver it, which is sometimes a tough job, but the risk is we turn to a Populistic trend in politics, which is not the baseline scenario, but it's not zero probability.

Joaquin Thul:
Good, good. And in a year of a World Cup attention will be diverted halfway through the year anyway. Good, good, good, good. Well, last question then, I cannot let you go before asking you, do you think Brazil do well in the World Cup?

Tiago Berriel:
Oh man, I don't think we are with a good team this time. No, no. I'm more optimistic with the Brazilian economy than with the Brazilian national team, which is very unfortunate.

Joaquin Thul:
That's a firm statement from a Brazilian that is something

Tiago Berriel:
Yeah. Maybe I'm too pessimistic. But the guys here are not too excited this time.

Joaquin Thul:
Good. I think we're running out of time, so we're going to have to stop here. Thank you Tiago so much for your time today.

Tiago Berriel:
Thank you, Joaquin. It was a pleasure.

Joaquin Thul:
Thank you. So that wraps us up for today. Thank you for listening to be on the benchmark, the EFG podcast, and we'll speak to you again very soon.

 

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