Brazil economic and political challenges

The economic and political challenges faced by Brazil have been immeasurably complicated by the political scandal surrounding Petrobras, alleged campaign finance irregularities and, more recently, assertions that the government's fiscal management may have violated the Fiscal Responsibility Law.

With an investment budget that peaked at nearly 10% of total investment in Brazil, a shock to Petrobras is a shock to the economy. The scandal-related financial pressure on Petrobras and key business partners to slash spending has been a major blow to the economy. 

"But the paralysis of economic policy formation is likely to prove even more consequential. And there is a good chance that Brazilian politics may be facing an extended period of 'muddle through', in which President Rousseff manages to avoid impeachment, but fails to regain the political initiative required to advance a positive legislative agenda, in particular the fiscal consolidation that is required to put the public finances on a sustainable footing", argues Barclays.