Until a few years ago, international as well as domestic conditions contributed to Brazil’s success story. Terms of trade evolved favourably as Chinese demand caused commodity prices to boom, and Brazil enjoyed benign external financing conditions thanks to international investor confidence in its ‘holy trinity’ macroeconomic policy framework (a commitment to well-managed public finances, a floating exchange rate and inflation targeting). Strong household consumption constituted the main domestic growth driver as it was supported by strong employment, credit expansion and redistributive measures introduced by the Lula da Silva administration.

However, weakening external demand and the unwinding of the commodity boom have led to an economic slowdown as from early 2011. Real GDP growth fell from 7.5% in 2010 to 2.5% in 2013, and things have only worsened since then. Investors are now worried about subdued competitiveness and waning adherence to the ‘holy trinity’ policy framework, while households are anxious about rising unemployment and higher interest rates which are pushing up their debt burden.

The confidence crisis has had multiple impacts: a stagnating economy (and a recession is in the cards for 2015), deteriorated public finances, surging inflation, a drop in the exchange rate, a deepening of the current account deficit and ballooning external debt. This worsening of fundamentals implies that solvency risk in Brazil has significantly increased, thus prompting Credendo Group to downgrade its MLT political risk classification from category 3 to category 4.