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The Brazil Risk Dashboard features the Brazil Risk monthly score and tracks a select set of five indicators that reveal trends in overall country risk on a monthly basis. The variable set includes the Misery Index, the formal employment index, the Central Bank’s Index of Economic Activity (IBC-Br), the monthly homicide rate, and presidential approval.

Measuring Brazil’s risk for decision makers and investors can be a tricky. Investment analysts can factor in dozens of economic, fiscal and political variables to numerically score country risk. Inflation, interest rate hikes, or presidential approval can frame decision making over investments, negotiations, and partnership prospecting. Of course, reality and expectations intersect to shape the evolution of country risk and its interpretations by political risk analysts.

BrazilWorks provides a monthly Brazil Risk score to track overall economic and political stability, especially in light of the incoming Bolsonaro government and the dense reform agenda. The Brazil Risk is composed of five key variables that taken together provide a framework for understanding the evolution of risk and forecasting the direction of economic and political development. However, a note of caution; not all the variables are measured and reported each month, so the score reflects the most recently reported measures, trends, and then the tabulation of the overall score.

Methodology

Each of the five monthly indicators is scored on a discrete scale:

0 for poor performance;

1 for stable performance;

and 2 for improved performance.

The scores are totaled for a measure on a scale of 0 to 10 with the former representing the absence of economic and political stability (higher country risk) and the latter representing economic expansion and political stability (lower country risk).

Risk Scale

Low - 8-10

Moderate - 5-7

High - 3-4

Very High - 0-2

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The April 2019 Brazil Risk Score Is 4: Represents High Country Risk

·       Misery Index/Poor Performance

·       Formal Employment Index/Stable Performance

·       Economic Activity Index/Stable Performance

·       Homicide Rate/Improved Performance

·       Presidential Approval/Poor Performance

The April 2019 Brazil Risk Score of 4 and represents a measurable decline from the March score, largely because of the uptick in unemployment and decrease in presidential approval. The homicide rate continues to show a measurable decline to achieve improved performance with Globo’s Violence Monitor showing declines for January and February of 2019. The Central Bank’s Economic Activity Index reports the February measure with a slight decline but well within a stable variation and reflective of Brazil’s fragile recovery from the recession (2015-2017). Last, the presidential approval rating, as measured by Ibope, has declined from 68 to 66, taking together both excellent and regular ratings. For now we score approval as poor with a negative outlook.

The score of 4 returns returns the BrazilWorks Brazil Risk score to the average since July and represents a downgrade from the March 2019 moderate score of 6. The series mean average since July 2018 is 4.80.

Monthly Brazil Risk

 
 

Misery Index

Misery Index

The misery index is an economic indicator, created by economist Arthur Okun. The index helps determine how the average citizen is doing economically and it is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate. The unemployment measure is taken from Instituto Brasileiro de Geografia e Estatistica (IBGE) and is calculated as the percent of the economically active population that is unemployed. We use the inflation IPCA indicator as measured by the Instituto Brasileiro de Geografia e Estatistica. IPCA is a measure of price movements by the comparison between the retail prices from consumption of families with a purchasing power of up to forty minimum wages. The purchase power of the BRL is dragged down by inflation. The IPCA is a key indicator to measure inflation and changes in purchasing trends. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country. Brazil’s misery index has declined since June 2018, pushed by historically low levels of inflation but coupled to above average unemployment levels, but began to increase in the first quarter of 2019 behind increases in unemployment.

Formal Employment Index

Formal Employment Index

The Brazilian Central Bank tracks formal employment with data from the Ministry of Labor and scores an index based on December 2001 = 100. In Brazil, formal employment is defined as employment relationships that result when an employer signs the Carteira de Trabalho of an employee. The signed Carteira de Trabalho activates the registration of the employment for the purposes of recognized labor and employment rights, including the minimum wage, paid vacation, FGTS employment benefits guarantee fund, 40 hour work week, and unemployment and disability insurance. For more information on formal employment in Brazil read Michele Romanello and Flávio de Oliveira-Gonçalves, “The Transition of Brazilian Workers to Formality: evidence from duration anlaysis.” Brazil’s economic recovery is still fragile and shallow, but formal employment has made modest gains in the past six months. The Central Bank has not updated this measure since February 2019 but IBGE reports stable formal employment growth over the first quarter of 2019.


Economic Activity Index

Central Bank’s Economic Activity Index

The Index of Economic Activity of the Central Bank (IBC-Br) can be understood as a preview of the gross domestic product (GDP). The index is a composite score of the monthly evolution of a set of proxy variables measuring agricultural, industrial and service sector production as well as sales taxes. The index is formulated to inform the formation of monetary policy. The index shows very modest production expansion through much of the last half of 2018 but has not improved in the first quarter of 2019, remaining stable but also reflecting the fragile economic recovery now underway.

Monthly Homicides Per 100,000

The Homicide Rate

The Homicides Per 100,000 habitants is a ratio measure of the calculated number of homicides per 100,000 each month. The measure is reported by Monitor da Violência and published by Globo (G1) in cooperation with the Núcleo de Estudos da Violência da USP e o Fórum Brasileiro de Segurança Pública. The rate is a monthly measure of violent, intentional deaths. Brazil’s homicide rate, violence and criminality became a major issue in the 2018 elections and rank high on the list of concerns and policy priorities voiced by representative samples of Brazilians. The homicide rate serves as a general proxy variable for the broader level of public security. Brazil’s annual homicide rate exceeds 30 per 100,000, placing it among the top twenty countries in the world. In 2018 the monthly average homicide rate was 1.9 per 100,000. The GLOBO Monitor reports modest, but sustained decreases from last year’s monthly average measured for January and February of 2019. At this point, theses decreases represent the largest positive impacts on Brazil’s risk score.

Presidential Approval

Presidential Approval

The presidential approval rate measures the proportion of respondents in a representative sample claiming that the president’s performance is excellent or good. The chart above includes the performance of former President Michel Temer (2018), the candidacy of Jair Bolsonaro up to November of 2018, Bolsonaro’s transition performance in December of 2018, and his presidential approval thereafter. In this graph the December 2018 measures the approval for the transition team of incoming President Jair Bolsonaro (PSL) as observed by the CNI poll in mid-December of 2018. The January, February, March and April 2019 ratings come from IBOPE and represent the addition of both the Excellent/Good and Regular measures. The rate serves as a proxy variable for a broader understanding of political performance and stability in Brazil. President Bolsonaro’s rate of excellent and regular approval remains relatively high but his excellent score is dropping while his measures of poor approval are rising. This trend drives a negative outlook in the short term.