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 the tabulation of the overall score.
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).
Low - 8-10
Moderate - 5-7
High - 3-4
Very High - 0-2
The June 2019 Brazil Risk Score Is 4: Represents High Country Risk
· Misery Index/Stable Performance
· Formal Employment Index/Stable Performance
· Economic Activity Index/Poor Performance
· Homicide Rate/Stable Performance
· Presidential Approval/Stable Performance
The June 2019 Brazil Risk Score of 4 represents a one-point increase from the May score due to low inflation’s contribution to the Misery Index, stable formal employment creation, stable homicide numbers, and stable presidential approval. The misery rate is stable behind very low inflation coupled to high but stable unemployment rates. After a modest adjustment of the March monthly homicide rate, the most recent measure reported, April 2019, is stable and continues below the high rates measured in 2018. The Central Bank’s Economic Activity Index reports the most recent measure, again for April 2019, with a consecutive slight decline, further reflecting the possibility that the economy may have contracted in the first quarter of 2019. Last, the June 27 CNI/Ibope presidential approval public opinion poll shows stable presidential approval even though it appears that the rejection rate is inching up over 30% and now registers 32%. Taken together, the excellent and regular ratings remain above 60% and register 64% in this recent poll. While some news outlets emphasize the gradual uptick in President Jair Bolsonaro’s rejection rate, the combined measure of excellent and regular provides a better benchmark for comparative historical purposes. While we expect the rejection rate to continue to show modest increases, the challenge for the president is to stay above 50% for the long run.
Overall, Brazil’s high-risk stems from high unemployment and contracting economic activity.
President Bolsonaro’s emphasis on fighting crime provides him with some reason to cheer the lower monthly homicide rates as compared with the 2018 average of 1.90 homicides per 100,000. Although it should be noted that the trend of falling homicides (although they remain very high in comparative perspective) began in the second half of 2018, well before the new government took office. Also, the president’s approval will likely vary in tandem with economic performance. At this point, it is likely that presidential approval will continue to fall in the second half of 2019 given the dismal performance of the economy and widespread unemployment.
The score of 4, HIGH, brings the BrazilWorks Brazil Risk score just below the average since the inauguration of President Jair Bolsonaro and his administration. The average for January to June 2019 is 4.6%.
Monthly Brazil Risk
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 purchasing 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 higher rates of unemployment and 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 level. The Misery Index rose in the first quarter of 2019 behind increases in unemployment. Inflation remains very low, keeping this index score stable.
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. The Central Bank has not updated this measure since March 2019 but IBGE reports stable formal employment growth over the first quarter of 2019. While unemployment measures have increased in early 2019, formal job creation is stable and the CAGED data show a measurable increase for April that the Central Bank’s Formal Employment Index has not yet captured in its reporting.
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. The Central Bank’s index shows a slight decline for March that continues a stable, but slightly negative trend that emerged in late 2018. Overall, the small monthly declines add up to reflect a very shallow recovery, and possibly push Brazil into recession during the first quarter of 2019.
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 improvement compared with 2018 but the March number represents a slight increase, but within a stable range of 1.39 to 1.60 for 2019.
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 June 2019 measure of 64.0% is reported from the June 27, 2019 CNI/Ibope survey. The rate serves as a proxy variable for a broader understanding of political performance and stability in Brazil. President Bolsonaro’s combined rate of excellent and regular approval remains relatively high but his poor performance rating has inched up from 20% in February of 2019 to 32% by June.